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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
Commission File No. 333-25521
UNIFI COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3097640
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
900 Chelmsford Street
Lowell, Massachusetts 01851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 551-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 14% Senior Notes
due 2004
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 18, 1998 the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $16,723,132*.
As of March 18, 1998, 3,871,681 shares of the Registrant's Common Stock,
$.01 par value per share, were issued and outstanding.
* There is no established trading market for the Registrant's capital
stock. The foregoing calculation was made assuming a fair market value of
$3.11, which was the fair market value of the Registrant's Common Stock as
determined by its Board of Directors at their last meeting prior to the
date of this Annual Report on Form 10-K solely for purposes of granting
"incentive" stock options under the Internal Revenue Code of 1986, as
amended.
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UNIFI COMMUNICATIONS, INC.
FORM 10-K
TABLE OF CONTENTS
RECENT DEVELOPMENTS................................................. 3
PART I............................................................. 4
Item 1. BUSINESS................................................... 4
RISK FACTORS............................................... 16
Item 2. PROPERTIES................................................. 26
Item 3. LEGAL PROCEEDINGS.......................................... 26
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 26
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS........................................ 26
Item 6. SELECTED FINANCIAL DATA.................................... 31
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION................................... 33
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ F-1
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................ 68
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 68
Item 11. EXECUTIVE COMPENSATION.................................... 70
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................ 74
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 76
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8K........................................ 78
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DUE TO CIRCUMSTANCES DESCRIBED HEREIN, AN INVESTMENT IN THE COMPANY'S
SECURITIES INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS." UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY" REFER TO UNIFI
COMMUNICATIONS, INC. AND ITS CONSOLIDATED SUBSIDIARIES.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. STATEMENTS CONTAINED IN THIS
DOCUMENT THAT ARE NOT BASED ON HISTORICAL FACT ARE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "PROJECT," "ESTIMATE,"
"ANTICIPATE," "CONTINUE" OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE
NEGATIVE OF THOSE TERMS. CERTAIN STATEMENTS (E.G., "RISK FACTORS") SET FORTH IN
THIS DOCUMENT CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTAINED IN THE
FORWARD-LOOKING STATEMENTS.
RECENT DEVELOPMENTS
Ability of the Company to Continue as a Going Concern; Need for Additional
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Financing. The report of the Company's independent public accountants on the
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Company's consolidated financial statements included in this Annual Report on
Form 10-K contains an explanatory fourth paragraph expressing substantial doubt
about the Company's ability to continue as a going concern. The Company will
require substantial additional financing prior to August 1998 in order to
continue operations beyond July 1998. See "Risk Factors--Ability of the Company
to Continue as a Going Concern; Audit Opinion Containing Explanatory Paragraph"
and "--Need for Additional Financing," and "Management's Discussion and Analysis
of Financial Condition and Results of Operation--Liquidity and Capital
Resources."
Certain Changes in the Board of Directors, Management and Stock
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Ownership. On March 13, 1998, two of the Company's directors--Mr. Lim Eng and
Ms. Chua Sock Koong--resigned from such positions. Mr. Lim also resigned from
his position as Vice President and Chief Operating Officer of the Company. On
March 14, 1998, SingTel Global Services Pte. Ltd., a principal stockholder of
the Company and a wholly-owned subsidiary of Singapore Telecommunications
Limited, sold all of its Series G Convertible Preferred Stock of the Company to
Douglas J. Ranalli, Chairman of the Board of Directors and Chief Executive
Officer of the Company. As a result of this transaction, Douglas J. Ranalli
owns approximately 63% of the total issued and outstanding voting capital stock
of the Company (as of March 18, 1998), and approximately 41% of the total voting
capital stock of the Company on a fully-diluted basis as of such date (including
all warrants and options to purchase capital stock of the Company exercisable
within 60 days). See "Certain Relationships and Related Transactions--
Resignation of SingTel Representative Directors and Sale of Series G Preferred
Shares to Douglas J. Ranalli."
On March 16, 1998, the Board of Directors elected Mark F. Ranalli, a Vice
President of the Company (prior to March 17, 1998) and the brother of Douglas J.
Ranalli, the Company's Chairman, President (prior to March 17, 1998) and Chief
Executive Officer, as a director.
On March 17, 1998, John B. Beinecke resigned as a director of the Company.
See "Certain Relationships and Related Transactions--Resignation of John B.
Beinecke from the Board of Directors." Also on such date, the Board of
Directors designated Mark F. Ranalli as the President of the Company, and
Timothy J. Martel as the Executive Vice President and Chief Operating Officer of
the Company. Douglas J. Ranalli continues to be the Chairman of the Board of
Directors, Chief Executive Officer, Acting Chief Financial Officer and Acting
Vice President of Research and Development of the Company.
Default under Warrant Shares Registration Rights Agreement. The Company
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presently is in default of its obligations under the Warrant Shares Registration
Rights Agreement executed in connection with the Company's sale on February 21,
1997 of Units consisting in the aggregate of $175 million in face amount of 14%
Senior Notes due 2004 and 175,000 Warrants to purchase an aggregate of 4,816,818
shares (the "Warrant Shares") of the Company' Common Stock, $.01 par value per
share, at an exercise price per share of $0.25. The Warrant Shares
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Registration Rights Agreement required the Company to have filed a registration
statement pursuant to the Securities Act of 1933, as amended, with the
Securities and Exchange Commission relating to the issuance of the Warrant
Shares by the Company upon exercise of the Warrants and to have caused such
registration statement to become effective on or before March 1, 1998. The
Company has not as of the date of this Annual Report on Form 10-K filed such
required registration statement, primarily because the Company during the first
quarter of 1998 has been re-evaluating its business and growth strategy and its
liquidity and capital resource needs for 1998 and thereafter, and believed that
it could not make the disclosures required in such registration statement in
compliance with the requirements of federal securities laws until the conclusion
of such re-evaluation. The Company has not received notice from any Warrant
holders that is in default under the Warrant Shares Registration Rights
Agreement, nor has it sought a waiver from the Warrant holders of such default.
The Warrant Shares Registration Rights Agreement provides that, in the event of
such a default by the Company, in addition to other remedies the Warrant holders
may have, the Company is liable for liquidated damages in the amount of $.001
per week per Warrant for the first 90 day period of such default, which amount
shall increase by an additional $.001 per week per Warrant for each successive
90-day period during which such default continues, up to a maximum of $.005 per
week per Warrant. If the Company files the required registration statement and
causes it to become effective no later than May 30, 1998, the Company will be
liable for a maximum liquidated damages amount of $2,275. If the Company files
such registration statement and causes it to become effective after May 30 but
prior to August 29, 1998, the Company will be liable for a maximum liquidated
damages amount of $6,825. The Company intends either to file the required
registration statement and use its best efforts to cause it to become effective
as soon thereafter as possible, or to seek a waiver from the Warrant holders
with respect to such required filing, as soon after the date hereof as
practicable. The Company does not believe that its default under the Warrant
Shares Registration Rights Agreement will have a material adverse effect on the
Company's business or financial condition, but there can be no assurance to that
effect.
PART I
ITEM 1. BUSINESS
OVERVIEW
UNIFI Communications, Inc. ("UNIFI" or the "Company") believes that it is a
leading provider of international enhanced facsimile transmission and delivery
services. The Company has developed the Intelligent Delivery Network or IDN, 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 an
international point-to-point facsimile delivery service that is secure, easy to
use, more efficient, and more reliable than the direct dial services provided by
the world's conventional long-distance carriers. In many cases, the Company's
Intelligent Delivery Network services are also less expensive than traditional
direct-dial long distance services.
The growth of the Company as a result of the success of its core
international enhanced fax service utilizing the Intelligent Delivery Network
earned the Company the distinction of being recognized (i) as the 10th fastest
growing technology company in New England in the 1997 New England Fast 50 awards
program sponsored by Deloitte & Touche LLP and Hale and Dorr LLP; (ii) as the
20th (out of 500) fastest growing privately-held US company by Inc. Magazine in
their 1997 Inc. 500 report; and (iii) the 47th (out of 500) fastest growing US
private or public technology company by Deloitte & Touche LLP in their 1997 Fast
500 report. Each such award was made on the basis of the Company's aggregate
revenue growth over the period from 1992 through 1996.
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 Corporation, ORIX Corporation and affiliates of Singapore
Telecommunications
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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
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.
In February 1997, the Company sold units consisting of Senior Notes and Warrants
to purchase shares of the Company's Common Stock for an aggregate price of $175
million. The Company has used the net proceeds from this financing to continue
expansion of the Company's Intelligent Delivery Network and to develop new
services utilizing the IDN. As of December 31, 1997, the Company had
approximately 12,009 corporate customers (excluding non-revenue trial accounts
and operations in China), of which approximately 776 were added in the fourth
quarter of 1997. UNIFI's revenues for the year ended December 31, 1997 were
$43.8 million, compared to $25.2 million and $10.6 million for the 1996 and
1995, respectively.
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
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store-and-forward technology transmits fax documents up to 16 times more
efficiently than the circuit-switched technology utilized by most of 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,
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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 1.0% monthly churn it has experienced in each of the
last twenty-four months ending December 31, 1997) among customers of its core
international point-to-point facsimile service. 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
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United States, Japan, the United Kingdom, Australia, France, Germany, Hong Kong
,Korea and Taiwan. In addition, the Company conducts operations in Singapore,
China and Indonesia pursuant to agreements with local entities. UNIFI's
investment in a global sales and account management organization of 337 people
(as of March 1, 1998) 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 base (as
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of December 31, 1997) of approximately 12,009 customers (excluding non-revenue
trial accounts and operations in China and Indonesia). The Company's account
base grew by 274 in October 1997, 366 in November 1997, and 136 in December 1997
(in each case including a substantial number of non-revenue trial accounts).
However, the Company primarily handles its customers' international fax
transmission requirements 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 development of an interface
to the Intelligent Delivery Network through customers' existing electronic mail
applications and direct connection to desktop messaging software packages.
The Company will be required to obtain substantial additional financing to
continue operations beyond July 1998. See "Risk Factors--Need For Additional
Financing" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." Assuming that the
Company obtains the required financing, the Company intends to continue its
growth by increasing utilization of the
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Intelligent Delivery Network through the development and offering of new value-
added services, primarily a desktop computer-based fax service and an enhanced
version of the Company's broadcast fax service, and by continuing to expand and
enhance the Intelligent Delivery Network. Since its inception, the Company has
made a significant investment in the establishment and operation of the
Intelligent Delivery Network. The Company believes it can increase both its
revenues and its gross margins by offering new value-added services. The
discussions below concerning the Company's business strategy are predicated upon
the obtaining of significant additional debt and/or equity financing prior to
the end of July 1998, and represent the Company's beliefs as to the most
profitable service offerings and strategies for the Company if such financing is
obtained. If the Company's current projections as to revenues, expenses, and
cash flow from operations between the date of this Annual Report on Form 10-K
and July 1998 are inaccurate in any material respect, or if the Company incurs
significant unforeseen expenses during such period, then the Company will
require additional financing prior to July 1998 and, if such financing is not
obtainable by the Company, may become unable to continue operations or become
insolvent prior to July 1998.
BUSINESS STRATEGY
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, conventional fax machines (9,600 bps or 14,400 bps) generate data
at an average rate of less than approximately 7,000 bps or 10,000 bps,
respectively. 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 either allowed
to pass through and be carried by the user's normal carrier or, if the user is
also a customer of the Company's domestic fax resale service (currently offered
only in the United States and Australia), the call is routed to a carrier whose
facilities are resold by the Company. If, however, the call is bound for an
international 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 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,
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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
machine-to-fax machine 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.
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,
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.
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NODE ARCHITECTURE
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 $25,000. 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 $150,000 and $75,000, 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. One-way nodes
are installed in locations where the traffic volume is sufficient to result in a
lower cost of delivery than that available using third party "direct dial
international" service. However, given sufficient traffic, routes serviced by
one-way nodes are more efficient than routes that are completely "off-net"
(requiring delivery to the local PSTN by means of a third party long distance
carrier).
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
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
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reliable, obviating the need for on-site Company personnel. Routine maintenance
is centrally performed from the Company's offices in Lowell; 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.
At December 31, 1997, the Company operated 33 nodes in 18 countries. Of
these, 24 are two-way nodes and 9 are one-way nodes.
TELECOMMUNICATION SERVICE PROVIDERS
The Company's network 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 also utilizes satellite service among its nodes in Marlboro,
Massachusetts and several cities in Western Europe pursuant to an agreement with
Orion Atlantic, L.P. ("Orion"). 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. 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. However, Orion
charges the Company a minimum monthly fee for each satellite dish utilized by
the Company (13 at March 18, 1998), and presently such monthly minimum charge
exceeds the charges that would be payable with respect to the actual
transmissions made by the Company using such satellite services.
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 18 countries.
Traffic destined for delivery outside of the 18 countries (including Singapore)
where the Company has nodes must currently be completed by costly, conventional
long-distance carriers (so-called off-net traffic). The Company has made
arrangements with a number of international switched service providers including
AT&T, WorldCom and Teleglobe in the United States and Hong Kong Telecom to carry
off-net traffic. The Company's carrier relations manager chooses the carrier
based upon the lowest cost to the required destination.
As telecommunications transmission rates offered by carriers throughout the
world continue to decline in the wake of global deregulation of telecom
services, the Company plans increasingly to employ dynamic least-cost routing
strategies in the management of transmissions sent over the Intelligent Delivery
Network. The Company believes that such strategies will allow it to control
network operating costs by routing each transmission over the lowest cost
vendor. The Company's ability to effectively use least-cost routing will depend
to a significant degree on the Company's ability to identify least-cost carriers
and to establish and maintain service agreements with such carriers, as well as
on the avialable capacity of the Company's network equipment connected to each
carrier.
9
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SERVICES
The Company currently offers three types of fax service that utilize the
Intelligent Delivery Network: (i) FI-Direct, an international enhanced point-
to-point (i.e., fax machine-to-fax machine) facsimile transmission and delivery
service, (ii) FI-Broadcast, an enhanced single-point origin to multi-point
destination facsimile transmission and delivery service, and (iii) Public
Network Interface, a service by which other telecommunications service providers
with existing customer bases may connect their transmission facilities to the
Intelligent Delivery Network for the purpose of receiving the Company's enhanced
facsimile services with respect to their customers' transmissions. In addition,
in certain markets the Company offers domestic enhanced and non-enhanced point-
to-point fax services using the IDN or on a resale basis. The Company also
provides certain non-fax services, including resale of switched voice
telecommunications on a wholesale basis and resale of retail voice transmission
capacity. Additionally, the Company is presently developing a desktop computer-
based fax service, which will allow customers to access the Intelligent Delivery
Network and receive the Company's value-added fax services directly from their
desktop computers. The Company believes that its desktop computer-based fax
service and its enhanced broadcast fax service will represent significantly
increasing portions of its total revenues commencing in 1999. During 1998, the
Company expects revenues from its FI-Direct service to continue to represent the
largest percentage of its total revenues, with an increasing percentage
represented by voice resale services.
Fax Services
------------
FI-Direct. This is the Company's original enhanced international point-to-
---------
point facsimile transmission and delivery service. Customers access the
Intelligent Delivery Network by means of the FaxLink autodialer attached to a
facsimile machine. Revenue from the sale of FI-Direct accounted for the
Company's growth from $475,000 in total consolidated revenue for the year ended
December 31, 1992 to $25.2 million in total consolidated revenue for the year
ended December 31, 1996, and represented 89.9% of the Company's total
consolidated revenue of $43.8 million in 1997. The Company's rapid revenue
growth during 1992 through 1996 has earned the Company the distinction of being
recognized (i) as the 10th (out of 500) fastest growing technology company in
New England in the 1997 New England Fast 50 awards program sponsored by Deloitte
& Touche LLP and Hale and Dorr LLP; (ii) as the 20th (out of 500) fastest
growing privately-held US company by Inc. Magazine in their 1997 Inc. 500
report; and (iii) the 47th (out of 500) fastest growing US private or public
technology company by Deloitte & Touche LLP in their 1997 Fast 500 report.
However, the Company has determined that the costs of providing FI-Direct
service will not permit the Company to earn sufficient gross margins to achieve
future profitability. Consequently, the Company intends to significantly reduce
its efforts in marketing, selling and supporting FI-Direct to new customers
commencing in 1998, in favor of such efforts with respect to other services of
the Company. The Company therefore expects FI-Direct revenues to remain at 1997
levels or to decline in absolute terms during 1998 and thereafter, although the
Company expects revenues from FI-Direct in 1998 will continue to represent the
largest percentage of the Company's total revenues.
FI-Broadcast. The Company's broadcast fax service allows customers to send
------------
a single fax to many destinations, both domestic and international. Customers
may initiate broadcast faxes over the Intelligent Delivery Network from their
fax machines or desktop computers. Alternatively, customers may take advantage
of the UNIFI Full Service Broadcast Bureau, by which the Company manages all
aspects of the customer's broadcast faxing, including list entry, list
maintenance and fax transmission and delivery. The Company earned its first
commercial revenues from FI-Broadcast in the third quarter of 1997. The
Company's current commercial version of FI-Broadcast contains limited features
and functionality and does not have the delivery tracking and status features of
FI-Direct. The Company believes that such limitations will limit the market
acceptance of, and revenues from, such version. The Company is presently
developing an enhanced version of FI-Broadcast that will contain additional
features and functionality, including delivery tracking and status. However,
such enhanced version is not expected to be completed and released until after
the Company completes development and release of its desktop computer-based fax
service, and there can be no assurance that such enhanced version will be
completely developed or released at all, or that the Company's planned
enhancements will result in greater market acceptance of, or revenues from, such
version over the present version.
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Domestic Fax-to-Fax Services. As a complement to its core international
----------------------------
enhanced fax service, the Company in 1997 began offering domestic fax service in
the United States, the United Kingdom, and Australia. The Company provides
these domestic fax services on a resale basis using facilities leased from third
party carriers. The volume of fax traffic the Company is able to deliver over
such carriers' facilities enables the Company to obtain significant discounts on
the charges associated with such transmissions, and to pass these discounts on
to customers. The Company does not expect to earn significant gross margins from
its domestic fax services, but believes that such services will significantly
expand the number of businesses to which the Intelligent Delivery Network will
appeal.
Public Network Interface. In order to increase traffic flows through the
------------------------
Intelligent Delivery Network and thereby lower the Company's unit service costs,
the Company during 1997 developed access protocols to the Intelligent Delivery
Network that enable certain third-party facsimile service providers, including
affiliates of PSTN carriers, to connect their facilities to the IDN for the
purpose of providing their customers with the efficiency and reliability of the
Company's international facsimile transmission and delivery services. The
Company is able to offer competitive rates to such connecting parties as a
result of the large volume of traffic they deliver to the Intelligent Delivery
Network, and the resulting increase in the Company's overall volume of network
traffic permits the Company to take advantage of volume-based discounts offered
by certain of the Company's third-party telecommunications service providers.
At December 31, 1997, the Company had 2 PNI customers in Taiwan. Because the PNI
service provided by the Company involves significant capital expenditures for
each customer, during 1998 the Company intends to seek additional PNI customers
only in select markets and only after concluding that the revenues from each new
customer will return the Company's capital investment and result in a positive
cash flow for the Company within a relatively short period of time.
Consequently, there can be no assurance that revenues from PNI services will not
decline in 1998 both in absolute terms and as a percentage of the Company's
total revenues.
Desktop Computer-Based Fax Service. The Company is developing a desktop
----------------------------------
computer-based fax service ("Desktop Service") that will allow customers to
connect their local area network ("LAN") based e-mail application software
directly to the Intelligent Delivery Network. Using this service, customers will
be able to originate fax documents directly from their desktop computers without
having to print the documents on paper for faxing through a stand-alone fax
machine and without having to purchase and maintain an expensive third party fax
server system. Delivery tracking and status reports will be available to the
individual user by means of an Internet-based connection to the Company's
network.
Access Through Fax Server. The Company began development of its Desktop
-------------------------
Service to permit access to the Intelligent Delivery Network through a
customer's LAN fax server. Fax servers consist of computer hardware and
software that render electronically stored documents into facsimile formats and
route the faxes over the PSTN for delivery to a stand-alone fax machine. During
the second half of 1996 and the first half of 1997, the Company entered into
agreements or letters of intent with a number of fax server providers to develop
interfaces between the Intelligent Delivery Network and such providers' fax
server systems. However, in the course of its development of the fax server
integrated Desktop Service, the Company determined that the potential for market
success of this service would be greatly increased if it were independent of
particular fax server systems and did not require a customer to purchase a fax
server system at all. Consequently, commencing in the second half of 1997, the
Company has focused its Desktop Service development efforts on a version of the
service that does not depend upon the customer having or purchasing a separate
fax server system. The Company will still have the ability to provide access to
the Intelligent Delivery Network through a customer's fax server system via
custom-developed interfaces, for customers who desire to continue using their
extant fax servers, but the Company believes that the version of its Desktop
Service that does not require a customer-owned fax server system will account
for the largest percentage of future revenues from such service.
Access through E-mail. The Company's Desktop Service currently under
---------------------
development will permit a customer to originate a fax transmission over the
Intelligent Delivery Network from the customer's existing electronic mail ("e-
mail") application. The Company believes that most companies using a LAN
infrastructure utilize e-mail applications, but that many companies have not
purchased separate fax server systems or use fax server systems purchased many
years ago that have become obsolete. For large companies, the purchase
11
<PAGE>
of a new fax server system or the upgrading of an older system, and the
integration of the fax server system with the other LAN software and hardware
elements, and the associated user training and recurrent maintenance
requirements, all represent a significant investment decision. Fax servers also
require the maintenance by the individual user of a separate address database
for fax recipients. Moreover, the Company believes that many fax server systems
experience increasing reliability problems as more individual users within an
organization are connected to the system. The Company's Desktop Service will
eliminate the necessity of a customer-owned fax server system and allow users of
most common e-mail applications (such as Lotus' cc:mail and Microsoft's MS Mail)
to originate fax document transmissions over the Intelligent Delivery Network
directly from their e-mail applications. The Company's service will use a
modified version of Control Data Systems, Inc.'s Mail*Hub software that will
reside on the Company's network nodes and translate disparate messaging
protocols employed by different e-mail applications into a common protocol for
management by the Intelligent Delivery Network. The Company's Desktop Service
will allow users of most common e-mail applications to communicate with the
Intelligent Delivery Network without requiring the customer to purchase and
install any additional software or customize its existing software. Fax
documents originated by a user of the Desktop Service will be rendered into
facsimile format at the receiving Intelligent Delivery Network node by means of
fax server software installed in the Company's network. The user will be able to
obtain real-time tracking and status reports of his or her fax by means of an
Internet-based connection to the Company's network. Users will not require
training in use of a separate fax server software application, and companies
will not have to invest in the purchase and maintenance of enterprise-wide fax
server systems. The Company believes that the ease of use and customer cost
savings associated with its Desktop Service will be very attractive to large
organizations, and will enable the Company to price such service at a premium
over prevailing basic telecommunications rates. However, the Company does not
expect to commercially release a version of its Desktop Service until September
1998, and there can be no assurance that the Company will be able to
successfully complete development of the Desktop Service and commercially
release it by such date or at all. In addition, despite the Company's beliefs as
to the likely market demand and pricing structure of the Desktop Service, there
can be no assurance that such market demand will materialize or that the Company
will earn sufficient revenues and/or gross margins from provision of such
service to enable the Company to become profitable and generate sufficient cash
flow from operations to repay its debt obligations, including the Senior Notes.
OTHER SERVICES
Voice Resale Services. The Company has executed an agreement with a third
---------------------
party resale carrier to act as a private intermediate carrier of such third
party's international voice telecommunications transmissions. The Company
receives such third party's transmissions at the Company's network facilities in
the United States and delivers the transmissions to destinations outside of the
United States using the Company's network either to the PSTN, in countries where
the Company is licensed to connect directly to the local PSTN, or to other
carriers who are so licensed. The Company intends in 1998 to offer public resale
carriage of wholesale voice telecommunications transmissions upon obtaining the
licenses and government approvals required in the United States and in other
jurisdictions where the Company desires to offer such service. The Company
believes that it can earn a positive gross margin from the revenues from such
services based on the volume discounts it will receive from the underlying
facilities providers. However, there can be no assurance that the Company will
be able to obtain the required licenses and government approvals, either in the
United States or elsewhere, on a timely basis or at all. See "Risk Factors--
Regulation." Moreover, the resale telecommunications market is highly
competitive. There can be no assurance that the Company will obtain enough
customers for its planned resale service and/or sufficient transmission minutes
from such customers to recover its third party facilities leasing costs or to
earn a positive cash flow from the revenues associated with such service. The
Company has been in negotiations with SingTel, an affiliate of a principal
stockholder of the Company, for an arrangement by which SingTel would agree to
supply significant voice telecommunications transmission minutes to the Company
for resale by the Company. However, owing to the recent changes in the
Company's relationship with SingTel, there can be no assurance that the Company
will successfully conclude such an arrangement during 1998 or at all. See
"Certain Relationships and Related Transactions--Resignation of SingTel
Representative Directors and Sale of Series G Preferred Shares to Douglas J.
Ranalli."
12
<PAGE>
GROWTH AND PROFITABILITY STRATEGY
CAUTIONARY STATEMENTS WITH RESPECT TO FORWARD LOOKING STATEMENTS. THIS
----------------------------------------------------------------
DISCUSSION OF THE COMPANY'S GROWTH AND PROFITABILITY STRATEGY CONTAINS "FORWARD
LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF
1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. 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 INCLUDE: (I) THE FAILURE OR INABILITY OF
THE COMPANY TO OBTAIN SIGNIFICANT ADDITIONAL DEBT OR EQUITY FINANCING PRIOR TO
AUGUST 1998, OR SOONER IF THE COMPANY'S CURRENT PROJECTIONS OF OPERATING
EXPENSES AND CASH FLOWS FROM OPERATIONS ARE INACCURATE IN ANY MATERIAL RESPECT;
(II) THE FAILURE OR INABILITY OF THE COMPANY TO COMPLETE DEVELOPMENT AND
COMMERCIAL RELEASE DURING 1998 OR THEREAFTER OF ITS DESKTOP COMPUTER-BASED FAX
SERVICE; (III) THE LACK OF SUFFICIENT MARKET DEMAND FOR THE COMPANY'S DESKTOP
COMPUTER-BASED FAX SERVICES; (IV) THE FAILURE OR INABILITY OF THE COMPANY TO
CHARGE A SUFFICIENT PRICE FOR ITS DESKTOP COMPUTER-BASED FAX SERVICES TO
GENERATE POSITIVE CASH FLOW FROM OPERATIONS; (V) THE INABILITY OF THE COMPANY TO
COMPLETE ENHANCEMENTS TO ITS BROADCAST FAX SERVICE OR THE FAILURE OF SUCH
ENHANCED BROADCAST SERVICE TO GAIN SUFFICIENT MARKET ACCEPTANCE; (VI) THE
FAILURE OR INABILITY OF THE COMPANY TO OBTAIN IN A TIMELY FASHION OR AT ALL THE
LICENSES AND GOVERNMENT APPROVALS REQUIRED FOR THE COMPANY TO RESELL VOICE
TELECOMMUNICATIONS TRANSMISSIONS ON A PUBLIC BASIS; AND (VII) THE FAILURE OR
INABILITY OF THE COMPANY'S PROPOSED VOICE RESALE SERVICES TO GAIN MARKET
ACCEPTANCE.
UNIFI's goals are to increase both its total revenues and its gross margins
associated with revenues. UNIFI's expects to increase total revenues by
completing development and commercial release of its Desktop Service and an
enhanced version of its broadcast fax service, by maintaining to the extent
practicable its current revenues from its core FI-Direct service, and by
reselling voice telecommunications on a wholesale basis. UNIFI's strategy for
increasing gross margins is twofold: (i) to concentrate its resources on the
development, enhancement, marketing, sale and support of services, such as
Desktop Services and broadcast fax services, which the Company expects will
return higher gross margins than returned by its core FI-Direct service, and
(ii) to reduce operating costs associated with all of the Company's revenues
through employment of effective least-cost routing in the transmission and
delivery of faxes, slowing of personnel growth, and by incremental expansion of
the Intelligent Delivery Network into countries where the Company determines a
point of presence will reduce its transmission and delivery costs.
UNIFI's revenue growth to date has been based almost entirely on its FI-
Direct service, which involves international point-to-point traffic originating
solely from stand-alone fax machines. When the Company commenced offering FI-
Direct in 1992, worldwide basic telecommunications rates were relatively high,
and the Company found that through the efficiency of its network and the value-
added features of FI-Direct service, the Company could keep its FI-Direct rates
at or below prevailing basic carrier rates. The Company believed that so long
as its rates were at or below then-prevailing basic carrier rates, the Company
could expand the scope of its operations and continue to add customers and
traffic volume in each year at a declining marginal cost until the gross margins
from the Company's total revenues generated sufficient cash flow to cover all of
the Company's operating expenses. However, owing primarily to the unforeseen
rapid decline in worldwide telecommunications rates resulting from recent
deregulatory initiatives in many countries, the Company has been required to
successively lower its FI-Direct charges to customers. As a consequence,
despite increasing total revenues and transmission volume from FI-Direct in each
year of operations, the costs to the Company of providing FI-Direct have
remained high relative to such revenues, and the Company has been unable to
realize sufficient gross margins to enable the Company to achieve profitability
from this service.
Desktop and Broadcast Services. Therefore, the Company intends during
-------------------------------
1998 and thereafter to refocus its business operations on the development and
provision of services that the Company believes will result in higher revenue to
cost ratios and that have a greater potential for future revenue growth than FI-
Direct service. The Company believes that its desktop computer-based fax
service will appeal to many large multinational and domestic business
organizations who desire to substitute desktop computer-based faxing for
traditional faxing from stand-alone machines, in order to increase productivity,
without being required to invest in expensive third party fax
13
<PAGE>
server systems. The Company expects that it will be able to charge a premium for
this service over basic carrier transmission rates due to the high value-added
content of such desktop service. In addition, the Company believes that it will
be able to utilize third party sales channels to market and sell such service,
thereby reducing the need for additional sales personnel and the associated
expenses of such personnel. Also, the Company believes that its proposed
enhancements to its existing broadcast fax service will expand the market appeal
of such service and will result in greater revenues from such service. Both the
desktop computer-based fax service and the enhanced broadcast service are
expected to utilize a significant portion of the Company's existing network
infrastructure.
Expectations for 1998 and 1999. Because the desktop computer-based fax
------------------------------
service is not expected to be completed and commercially introduced until
September 1998, and the proposed enhancements to the Company's broadcast fax
service will not be completed and released until after completion and release of
the desktop service, the Company does not anticipate material revenues from such
services in 1998. During 1998, the Company intends to maintain its existing FI-
Direct revenues to the extent practicable, without incurring significant
additional expenses required in order to increase such revenues or to replace
customers lost to churn, and to augment such revenues from voice resale service,
PNI service and its existing broadcast fax service. However, the Company
believes that revenues from these services during 1998 will not materially
increase relative to total 1997 revenues and may even decline. The Company
expects to earn significant revenues from its desktop service and enhanced
broadcast fax service commencing in 1999. During 1998, therefore, the Company
expects to continue to record net operating losses and net cash outflows from
the provision of FI-Direct, and the gross margins expected from FI-Direct and
from its voice resale services, its PNI service and its existing broadcast fax
service are not expected to result in positive EBITDA on a consolidated basis in
1998.
There can be no assurance that the Company's expectations for 1998 and 1999
will result. The Company will require significant additional financing prior to
August 1998 (based on current projections) in order to continue operations
beyond such date and complete development of its desktop service and its
enhanced broadcast fax service. The Company's FI-Direct revenues in 1998 could
decline more rapidly than the Company expects, or the Company could be unable to
obtain the required licenses and government approvals for voice resale service,
or the market demand for the Company's voice resale service, PNI service and/or
existing broadcast fax service could be lower than currently projected. If the
completion and commercial release of the desktop fax service is materially
delayed beyond September 1998, then the revenue and earnings growth from such
service during 1999 could be materially less than currently projected. In such
event, the Company's projected financial condition and results of operation for
1999 would be materially adversely affected.
MARKETING AND CUSTOMER SERVICE
UNIFI has marketed, sold and supported its core FI-Direct service primarily
through its own sales and marketing and customer service forces. As the Company
expanded the scope of its operations in 1996 and 1997 and opened new offices in
European and Asian markets, the Company added significant numbers of sales and
customer service personnel, from a total of 151 at December 31, 1995 to 367 at
December 31, 1996 to 321 at December 31, 1997. The Company's direct sales force
of Account Executives, each with primary marketing responsibility for a defined
geographical territory, historically focused their FI-Direct sales efforts on
making in-person and telephone sales calls to medium and large business that
transmit at least 15 pages of international facsimiles per day. Upon
commencement of service by a new customer, the customer becomes the
responsibility of a single Account Manager, who provides customer support
services such as helping the customer install the FaxLink and training customer
personnel in the use of FI-Direct.
As the Company grew rapidly in recent years, the number of Account
Executives and Account Managers grew rapidly as well to support the Company's
customer growth. The growth in the Company's sales and customer support
personnel contributed to the unfavorable cost structure of FI-Direct.
Commencing in 1998, as the Company begins to refocus its business operations
away from the sale of FI-Direct service in favor of its desktop computer-based
service and its broadcast fax service, the Company intends to employ third party
sales channels to a greater degree than before. Such third party sales channels
will enable the Company to reach a greater number of potential
14
<PAGE>
customers for its new services in a shorter period of time than if the Company
relied on direct selling methods, and will reduce the need for the Company to
increase its expenses associated with increasing numbers of direct sales
personnel. The Company will continue to rely on its direct sales force for a
significant portion of sales of its new services. However, the Company believes
that the sales and marketing methods and techniques that proved highly
successful with FI-Direct will be less relevant to sales and marketing of its
desktop computer-based fax service and its broadcast fax service. Consequently,
the Company in the first quarter of 1998 has commenced a process of identifying
those of its sales personnel who demonstrate the ability and willingness to
develop the sales and marketing skills the Company believes will be required to
successfully market such new services, and to train such personnel in such new
skills.
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 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 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.
While the Company believes that it enjoys certain competitive advantages in
its markets, 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 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 the Company's services will not be duplicated by existing or potential
competitors. See "Risk Factors-Competition."
RECENT DEVELOPMENTS -- CHINA
As reported in the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997, the Company was informed in August 1997 that the
international private line telecommunications circuit connecting its network
facilities in Guangzhou, China to its network facilities in Hong Kong had been
terminated by action of the Guangzhou PTT based on the conclusion by such
authority that the
15
<PAGE>
Company's China business partner--Datanet--was operating beyond the scope of its
VAN license. Datanet was responsible under agreements with the Company for the
procurement and maintenance of such circuit. During the fourth quarter of 1997,
the Company established alternate delivery connections for delivery of
international faxes carried by the Company's network into China. During the
first quarter of 1998, the Company was informed that Chinese authorities had
revoked Datanet's VAN license. The principal effect of such action on the
Company is that its operating and license agreements with Datanet, by which
Datanet operated the Company's business in China in exchange for certain
revenue-based payments to the Company, terminated, and the Company presently
does not conduct business operations in China. The Company still maintains a
Chinese subsidiary, but is prevented under Chinese law from obtaining the
licenses required to operate a value-added telecommunications network business
in China. Until the Company identifies a suitable new business partner in China
with the proper licenses, or until the Chinese government amends its current
regulations to permit the Company's Chinese subsidiary to operate a value-added
telecommunications network business, the Company's services cannot be marketed
or provided to customers in China. Consequently, the Company does not expect to
receive any revenue from operations in China during 1998.
RISK FACTORS
In addition to the matters set forth in the foregoing discussion of the
Company's business, the operations and financial performance of the Company are
substantially affected by the risks described below.
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-K 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 FORM 10-K. 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 (EXCEPT WHEN AND AS REQUIRED BY APPLICABLE
LAW). 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.
ABILITY OF THE COMPANY TO CONTINUE AS A GOING CONCERN; AUDIT OPINION CONTAINING
EXPLANATORY PARAGRAPH
The Company's Consolidated Financial Statements included herein, and
upon which the Company's independent public accountants have expressed their
opinion, have been prepared assuming that the Company will continue as a going
concern. The Company's financial condition raises substantial doubt about its
ability to continue as a going concern. This substantial doubt has been
disclosed in the auditor's report on the Company's Consolidated Financial
Statements included herein. The descriptions of the business, financial
condition and results of operations of the Company set forth herein and the
Company's Consolidated Financial Statements included herein, however, have been
prepared on a going concern basis. They do not include any adjustments that
might result from the outcome of the uncertainties relating to the Company's
ability to continue as a going concern, including, without limitation,
adjustments to the carrying value of assets and liabilities or the amount and
classification of liabilities that would be necessary if the Company were not
considered to be a going concern. Any such adjustments would have a material
adverse effect on the Company's reported financial condition and results of
operations. See the Consolidated Financial Statements included elsewhere in
this Form 10-K for further discussion of the presentation of such Consolidated
Financial Statements.
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NEED FOR ADDITIONAL FINANCING
The Company will be required to obtain substantial additional debt
and/or equity financing (which may include secured equipment financing) (the
"Additional Financing") prior to August 1998 in order to continue operations
beyond such date and to continue development of new services. The failure or
inability of the Company to obtain Additional Financing by the required date
could result in the insolvency of the Company or require the Company to
materially reduce and restructure its present operations and development efforts
in order to avoid insolvency. However, there can be no assurance that
Additional Financing will be available to the Company on favorable terms or at
all or that the Company, even if it obtains Additional Financing, 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 addition, the
Company is restricted by the terms of the Senior Note Indenture as to the types
and amounts of additional indebtedness the Company may incur.
If the Company obtains Additional Financing, the Company expects to
continue to make significant expenditures for the foreseeable future to fund
service research and development activities, continued expansion and enhancement
of the Intelligent Delivery Network and other operations. The Company has not
presently determined the amount of Additional Financing required in order to
sustain operations until the Company begins to earn positive cash flow from
operations. There can be no assurance that any Additional Financing the Company
is able to obtain in 1998 will be sufficient to fund the Company's operating and
capital needs until such time as the Company begins to earn sufficient positive
cash flow. 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 its capital resources otherwise prove to be
insufficient, the Company may be required to seek further 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 expansion or
enhancement of the Intelligent Delivery Network or the development of new
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."
HISTORICAL AND ANTICIPATED OPERATING LOSSES; NEGATIVE CASH FLOW FROM OPERATIONS;
ACCUMULATED DEFICIT
Since inception, the Company 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 $17.4 million, $47.5 million and $57.9 million for the years
ended December 31, 1995, 1996 and 1997, respectively, and net cash outflow
before financing of approximately $20.4 million, $43.2 million, $111.6 million,
respectively, for such years. As of December 31, 1997, the Company's
accumulated deficit was $161.2 million. 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. See "-Substantial Leverage; Ability to Service Indebtedness," "-Need
for Additional Financing" and "Management's Discussion and Analysis of Results
of Operations and Financial Condition and Results of Operation-Liquidity and
Capital Resources."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
The Company is highly leveraged. At December 31, 1997, the Company
had approximately $218 million in aggregate principal face value amount of
indebtedness outstanding. In addition, the Company has recorded a substantial
deficiency of earnings to fixed charges in all fiscal years since inception. The
Senior Notes Indenture permits the Company and its subsidiaries to incur
additional indebtedness to fund the expansion of the Company's network limited
and for other permitted purposes and to secure such indebtedness with liens on
the assets of the
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Company and its subsidiaries. The Company will be required to obtain substantial
additional debt or equity financing prior to August 1998 to complete development
of new services, continue expansion 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,
to complete development of new services, 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 make the interest payment on the Senior Notes on
September 1, 1999, or on each March 1 and September 1 thereafter, or to repay
its indebtedness (including the Senior Notes) at maturity, it could attempt to
refinance such indebtedness; 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 its
indebtedness 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 Senior Notes Indenture and could cause a default
under agreements governing other indebtedness of the Company. See "-Need for
Additional Financing," "-Historical and Anticipated Operating Losses; Negative
Cash Flow from Operations; Accumulated Deficit" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
The degree to which the Company is leveraged could have important
consequences for holders of Common Stock and the Senior Notes, including (i)
making it more difficult for the Company to satisfy its obligations with respect
to its indebtedness, (ii) increasing the Company's vulnerability to general
adverse economic and industry conditions, (iii) limiting the Company's ability
to obtain additional financing, to continue expansion of the Intelligent
Delivery 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 Senior Notes 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. Certain of the Company's borrowings,
including the Senior Notes, are subject to cross-default provisions whereby a
default under one such borrowing (whether by the Company or a subsidiary of the
Company) would constitute a default under others. 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.
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 primarily 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,
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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 where the Company determines that
such deployments will result in lower operating costs. 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."
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, in expanding the intelligent delivery network 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.
UNCERTAINTY OF MARKET ACCEPTANCE; POTENTIAL LACK OF CUSTOMER DEMAND; POTENTIAL
INADEQUATE GROSS MARGINS
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 Additional Financing can be obtained
prior to August 1998, the extent to which prospective customers will switch from
their current fax service to the Company's and the extent to which consumers
will accept the Company's new desktop computer-based fax service when
commercially introduced. The Company's viability 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 new services will be
significant and that the gross margins associated with the revenues from such
new services will be sufficient to fund the Company's operating and capital
needs, including the requirement to make scheduled interest payments on the
Senior Notes and to repay all of its indebtedness (including the Senior Notes)
at maturity. The Company began providing enhanced international point-to-point
fax-to-fax services in 1992, and broadcast fax services in 1997. The Company's
new desktop computer based fax services are currently under development and,
therefore, the market acceptance and customer demand for such services, and the
gross margins expected from revenues earned from such services, are uncertain.
Failure to gain market acceptance for the Company's desktop computer-based fax
services, or the failure to earn sufficient gross margins from such services,
would have a material adverse effect on the Company's prospects, business,
financial condition and results
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of operations. 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, customer demand for, and gross margins expected from, the
Company's new 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 and broadcast fax services. The Company also faces
potential competition from Internet-based and other alternatives to fax
services. Further, the Company's contemplated new desktop computer-based fax
service will likely face competition from computer and software firms such as
Microsoft Corporation ("Microsoft") and IBM. 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 , Microsoft, IBM
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 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.
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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.
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 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 enhanced international point-to-point fax service and
broadcast service are currently being commercially marketed. However, certain
of its planned document delivery services are in various stages of development.
See "Business- Services--Desktop Computer Based Services." The Company's desktop
computer-based fax services are being network tested but the Company does not
expect such services to be commercially available until September 1998. 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
service to generate revenue or operating profits. Future operational problems
or the inability to obtain Additional Financing 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 Senior Notes.
DEPENDENCE ON THIRD-PARTY CARRIERS
Currently, the Company does not own any telecommunications lines. 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
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Company, and include, or may include in the future, WorldCom, AT&T, 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. The Company believes
that its existing third-party carriers will continue to provide services to the
Company; however, there can be no assurance to that effect. Moreover, in
certain locations, the Company would have no practical alternative to the
relevant existing third-party carriers.
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
network redundancy, 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, Worldcom, AT&T (USA),
Teleglobe, Orion and Telstra (Australia) are the primary providers of
telecommunications services to the Company and accounted for 24%, 19%, 10% and
5%, respectively, of the Company's expenditures on telecommunications services
in December 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 telecommunications carriers are short-term
contracts. There can 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
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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. The
alternatives to many of the Company's sole sourced components would require
modifications to other elements of the Company's systems and may not be
available to the Company in the short run. 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 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.
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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 enhanced 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.
The Company's planned resale of international voice telecommunications
transmissions will subject it to regulation by the Federal Communications
Commission ("FCC") and will require the Company to obtain certifications from,
and file tariffs with, the FCC. There can be no assurance that the Company will
obtain such certifications from the FCC on a timely basis or at all. In
addition, such international resale activities could subject the Company to
certification requirements in non-US jurisdictions, and there can be no
assurance that the Company will be able to obtain such certifications on a
timely basis or at all. If the Company elects to offer its resale voice
services domestically in the United States, then the Company may be required to
obtain certifications from, and file tariffs with, certain state government
authorities, and there can be no assurance that the Company will be able to
obtain such certifications on a timely basis or at all.
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.
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.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS
A significant portion of the Company's current operations are
conducted and located outside of the United States, and the Company may
determine in the future to expand operations into additional locations outside
of the United States. 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
24
<PAGE>
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--Recent Developments--China."
With respect to currency fluctuations, the Company has experienced
significant increases in its costs of revenue as a percentage of revenue in
certain Asian markets in which the Company operates during the fourth quarter of
1997 and the first quarter of 1998, as many such countries have experienced
severe currency devaluations against the US dollar during such periods. Most
of the Company's costs of revenues and capital expenditures are incurred and
payable in US Dollars, whereas revenues from the Company's services are payable
in local currencies. In general, the Company does not execute hedge
transactions to reduce its exposure to foreign currency exchange rate risks.
Accordingly, the Company has experienced, and may continue to 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. Certain countries in which
the Company conducts operations, including Korea, have imposed, or may in the
future impose, restrictions on the removal or conversion of local or foreign
currency.
RISKS RELATED TO POTENTIAL FUTURE ACQUISITIONS
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. 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.
CONTROL OF THE COMPANY
Douglas J. Ranalli, founder, Chairman of the Board of Directors, Chief
Executive Officer, Acting Chief Financial Officer and Acting Vice President of
Research and Development of the Company, beneficially owns approximately 63%
(41% on a fully diluted basis) of the outstanding voting securities of the
Company. Mr. Ranalli and the Company's other directors and executive officers
control approximately 69% (47% on a fully diluted basis) of the voting power
represented by the Company's outstanding shares of capital stock. Accordingly,
those stockholders will continue to have the ability, if acting in concert, to
influence the outcome of elections of matters presented for approval by the
stockholders of the Company. Such concentration of ownership may have the effect
of preventing a change in control of the Company. See "Security Ownership of
Certain Beneficial Owners and Management."
IMPACT OF YEAR 2000 ISSUE
An issue exists for all companies that rely on computers as the year 2000
approaches. The "Year 2000" problem is the result of the past practice in the
computer industry of using two digits rather than four to identify the
applicable year. This practice will result in incorrect results when computers
perform arithmetic operations, comparisons or data field sorting involving years
later than 1999. The Company anticipates that it will
25
<PAGE>
be able to test its entire system using its internal programming staff and
outside computer consultants and intends to make any necessary modifications to
prevent disruption to its operations. It is not presently known whether costs in
connection with any such modifications will be material. Moreover, if such
modifications are not completed in a timely manner, the Year 2000 problem may
have a material adverse impact on the operations of the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of Year 2000 Issue."
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 900 Chelmsford
Street, Lowell, Massachusetts 01851. The Company leases approximately 109,000
square feet pursuant to a lease which expires on December 7, 2002, and the
Company has rights of first refusal with respect to certain additional space in
the premises. UNIFI also maintains four branch offices in three states ranging
in size from 400-5,000 square feet. Additionally, the Company maintains offices
for its subsidiaries in Japan, Hong Kong, China, Australia, Korea, the United
Kingdom, France and Germany. Each of the Company's foreign offices is
approximately 5,000-10,000 square feet. The Company believes that the Lowell
facility will be adequate for its currently projected needs.
ITEM 3. 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
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
There is no established public trading market for any equity security
of the Company, including the Company's Common Stock. The Company has no current
plans to list any of its equity securities, including the Common Stock, on any
exchange or any other trading system.
On March 18, 1998, there were approximately 165 holders of record of
the Company's Common Stock.
Dividend Policy
The Company has not declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain earnings, if any, to support its
capital improvement and growth strategies and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Payment of future
dividends, if
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<PAGE>
any, will be at the discretion of the Company's Board of Directors after taking
into account various factors, including the Company's financial condition,
operating results, current and anticipated cash needs and plans for capital
improvements and expansion. In addition, the Senior Notes Indenture contains
restrictive covenants that, among other things, limit the payment of dividends
or the making of distributions on equity interests.
Recent Sales Of Unregistered Securities
Set forth below is information regarding all securities sold by the
Registrant between January 1 and December 31, 1997. Further included is the
consideration, if any, received by the Registrant for such securities, and
information relating to the section of the Securities Act of 1933, as amended
(the "Securities Act"), and the rules of the Securities and Exchange Commission
under which exemption from registration was claimed. None of these securities
were registered under the Securities Act. Except as described below, no sale of
securities involved the use of an underwriter and no commissions were paid in
connection with the sales of any securities.
On January 1, 1997, the Registrant sold 22 shares of Common Stock at a
price per share of $1.05 pursuant to the exercise of an employee stock option.
Such sale was made in reliance on the exemption provided by Rule 701 under the
Securities Act.
On January 10, 1997, the Registrant sold 319 shares of Common Stock at a price
per share of $1.05 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Rule 701 under the
Securities Act.
On January 31, 1997, the Registrant sold 181 shares of Common Stock at a price
per share of $1.05 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Rule 701 under the
Securities Act.
On February 17, 1997, the Registrant sold 2,425 shares of Common Stock at a
price per share of $0.35 pursuant to the exercise of an employee stock option.
Such sale was made in reliance on the exemption provided by Rule 701 under the
Securities Act.
On February 21, 1997, the Registrant sold 175,000 Units consisting in the
aggregate of $175,000,000 in original principal amount of 14% Senior Notes and
Warrants to purchase an aggregate of 4,816,818 shares of Common Stock. The
Registrant received aggregate gross proceeds of $175,000,000 from the sale of
the Units. The Warrants are exercisable at any time and from time to time
through March 1, 2007 at an exercise price per share of $0.25 (subject to
adjustment for certain stock splits, stock dividends, dilutive issuances and the
like). The Registrant sold all of the Units to Smith Barney Inc. pursuant to
the exemption contained in Section 4(2) of the Securities Act. Smith Barney
Inc., acting as underwriter, resold such Units to certain investors in reliance
upon Rule 144A under the Securities Act. Smith Barney, Inc. received a
commission in connection with such sale of approximately $5.9 million.
On February 21, 1997, the Registrant issued a warrant for the purchase of up to
2,000,000 shares of Common Stock to SingTel Global Services Pte. Ltd. ("ST
Global"), a principal stockholder of the Company and a wholly-owned subsidiary
of Singapore Telecommunications Limited ("SingTel"). The warrant was issued in
consideration for the agreement by ST Global, SingTel and SingTel (Netherlands
Antilles) Pte N.V. to modify certain provisions of their stock purchase, credit
and other agreements with the Registrant in connection with the sale by the
Company of the Units. The warrant is exercisable at any time and from time to
time through March 1, 2007 at an exercise price per share of $1.83 (subject to
adjustment for certain stock splits, stock dividends, dilutive issuances and the
like). The Registrant issued the warrant to ST Global in reliance upon the
exemption contained in Section 4(2) of the Securities Act.
On February 25, 1997, the Registrant sold 1,418 shares of Common Stock at a
price per share of $0.35, and 1,608 shares of Common Stock at a price per share
of $1.05, pursuant to the exercise of employee stock options. Such sales were
made in reliance on the exemption provided by Rule 701 under the Securities Act.
27
<PAGE>
On March 3, 1997, the Registrant sold 114 shares of Common Stock at a price per
share of $1.05 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Rule 701 under the Securities
Act.
On March 14, 1997, the Registrant sold 3,995 shares of Common Stock at a price
per share of $1.05 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Rule 701 under the
Securities Act.
On March 31, 1997, the Registrant sold 2,316 shares of Common Stock at a price
per share of $0.35, and 57 shares of Common Stock at a price per share of $1.05,
pursuant to the exercise of employee stock options. Such sales were made in
reliance on the exemption provided by Rule 701 under the Securities Act.
On April 1, 1997, the Registrant issued a 14% Convertible Term Note in original
principal amount of $2,049,315 and a warrant to purchase 56,406 shares of Common
Stock to Control Data Systems, Inc ("CDS"). The Convertible Term Note was
issued in exchange for a prior 10% Convertible Term Note issued by the
Registrant to CDS on December 31, 1996 in original principal amount of
2,000,000. The 14% Convertible Term Note is convertible into shares of Common
Stock at the option of the holder in the event the Registrant effects an initial
public offering of shares of Common Stock at a conversion price per share equal
to the lesser of $15.00 or the price per share to the public at which Registrant
sells Common Stock in such initial public offering. The warrant is exercisable
at any time and from time to time prior to April 1, 2007 at an exercise price
per share of $0.25 (subject to adjustment for certain stock splits, stock
dividends, dilutive issuances and the like). The issuances of the 14%
Convertible Term Note and the warrant to CDS were made in reliance on the
exemption contained in Section 4(2) of the Securities Act.
On April 8, 1997, the Registrant sold 95 shares of Common Stock at a price per
share of $1.05 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Rule 701 under the Securities
Act.
On May 16, 1997, the Registrant sold 1,694 shares of Common Stock at a price per
share of $0.35 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Rule 701 under the Securities
Act.
On June 2, 1997, the Registrant sold 321 shares of Common Stock at a price per
share of $1.05 and 677 shares of Common Stock at a price per share of $2.15,
pursuant to the exercise of employee stock options. Such sales were made in
reliance on the exemption provided by Rule 701 under the Securities Act.
On June 4, 1997, the Registrant sold 199 shares of Common Stock at a price per
share of $2.15 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Rule 701 under the Securities
Act.
On June 8, 1997, the Registrant sold 582 shares of Common Stock at a price per
share of $2.15 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Rule 701 under the Securities
Act.
On June 9, 1997, the Registrant sold 162 shares of Common Stock at a price per
share of $1.05 and 260 shares of Common Stock at a price per share of $2.15,
pursuant to the exercise of employee stock options. Such sales were made in
reliance on the exemption provided by Rule 701 under the Securities Act.
28
<PAGE>
On June 12, 1997, the Registrant sold 191 shares of Common Stock at a price per
share of $2.15 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Rule 701 under the Securities
Act.
On June 16, 1997, the Registrant sold 224 shares of Common Stock at a price per
share of $2.15 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Rule 701 under the Securities
Act.
On June 18, 1997, the Registrant sold 229 shares of Common Stock at a price per
share of $1.05 and 290 shares of Common Stock at a price per share of $2.15,
pursuant to the exercise of employee stock options. Such sales were made in
reliance on the exemption provided by Rule 701 under the Securities Act.
On June 25, 1997, the Registrant sold 172 shares of Common Stock at a price per
share of $2.15 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Rule 701 under the Securities
Act.
On June 30, 1997, the Registrant sold 1,000 shares of Common Stock at a price
per share of $0.35, 1,230 shares of Common Stock at a price per share of $1.05
and 218 shares of Common Stock at a price per share of $2.15, pursuant to the
exercise of employee stock options. Such sales were made in reliance on the
exemption provided by Rule 701 under the Securities Act.
On July 14, 1997, the Registrant sold 227 shares of Common Stock at a price per
share of $1.05 and 237 shares of Common Stock at a price per share of $2.15,
pursuant to the exercise of employee stock options. Such sales were made in
reliance on the exemption provided by Rule 701 under the Securities Act.
On July 21, 1997, the Registrant sold 1,000 shares of Common Stock at a price
per share of $0.35 and 12,000 shares of Common Stock at a price per share of
$1.05, pursuant to the exercise of employee stock options. Such sales were made
in reliance on the exemption provided by Section 4(2) of the Securities Act.
On July 29, 1997, the Registrant sold 442 shares of Common Stock at a price per
share of $1.05 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Section 4(2) of the Securities
Act.
On July 31, 1997, the Registrant sold 990 shares of Common Stock at a price per
share of $1.05 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Section 4(2) of the Securities
Act.
On August 24, 1997, the Registrant sold 15 shares of Common Stock at a price per
share of $1.05 pursuant to the exercise of an employee stock option. Such sale
was made in reliance on the exemption provided by Section 4(2) of the Securities
Act.
On August 27, 1997, the Registrant sold 171 shares of Common Stock at a price
per share of $1.05 and 208 shares of Common Stock at a price per share of $2.15,
pursuant to the exercise of employee stock options. Such sales were made in
reliance on the exemption provided by Section 4(2) of the Securities Act.
On September 8, 1997, the Registrant sold 1,000 shares of Common Stock at a
price per share of $0.35 pursuant to the exercise of an employee stock option.
Such sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On September 15, 1997, the Registrant sold 119 shares of Common Stock at a price
per share of $2.15 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On September 16, 1997, the Registrant sold 83 shares of Common Stock at a price
per share of $1.05 and 303 shares of Common Stock at a price per share of $2.15,
pursuant to the exercise of employee stock options. Such sales were made in
reliance on the exemption provided by Section 4(2) of the Securities Act.
29
<PAGE>
On September 23, 1997, the Registrant sold 1,000 shares of Common Stock at a
price per share of $0.35 and 2,541 shares of Common Stock at a price per share
of $1.05, pursuant to the exercise of employee stock options. Such sales were
made in reliance on the exemption provided by Section 4(2) of the Securities
Act.
On October 1, 1997, the Registrant sold 189 shares of Common Stock at a price
per share of $2.15 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On October 10, 1997, the Registrant sold 1,818 shares of Common Stock at a price
per share of $0.35 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On October 15, 1997, the Registrant sold 2,500 shares of Common Stock at a price
per share of $2.30 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On October 27, 1997, the Registrant sold 205 shares of Common Stock at a price
per share of $2.15 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On November 11, 1997, the Registrant sold 4,607 shares of Common Stock at a
price per share of $1.65 pursuant to the exercise of an employee stock option.
Such sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On November 14, 1997, the Registrant sold 508 shares of Common Stock at a price
per share of $2.15 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On November 17, 1997, the Registrant sold 119 shares of Common Stock at a price
per share of $2.15 and 330 shares of Common Stock at a price per share of $2.25,
pursuant to the exercise of employee stock options. Such sales were made in
reliance on the exemption provided by Section 4(2) of the Securities Act.
On November 24, 1997, the Registrant sold 2,568 shares of Common Stock at a
price per share of $0.35 and 11,732 shares of Common Stock at a price per share
of $1.05, pursuant to the exercise of employee stock options. Such sales were
made in reliance on the exemption provided by Section 4(2) of the Securities
Act.
On November 26, 1997, the Registrant sold an aggregate of 420 shares of Common
Stock at a price per share of $2.15 pursuant to the exercise of employee stock
options. Such sales were made in reliance on the exemption provided by Section
4(2) of the Securities Act.
On November 28, 1997, the Registrant sold 297 shares of Common Stock at a price
per share of $2.15 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On November 29, 1997, the Registrant sold 124 shares of Common Stock at a price
per share of $2.15 pursuant to the exercise of an employee stock option. Such
sale was made in reliance on the exemption provided by Section 4(2) of the
Securities Act.
On December 15, 1997, the Registrant sold 1 share of Common Stock at a price of
$2.15 pursuant to the exercise of an employee stock option. Such sale was made
in reliance on the exemption provided by Section 4(2) of the Securities Act.
On December 30, 1997, the Registrant sold an aggregate of 2,451 shares of Common
Stock at a price per share of $0.35, an aggregate of 7,238 shares of Common
Stock at a price per share of $1.05, and an aggregate of 594 shares
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of Common Stock at a price per share of $2.15, pursuant to the exercise of
employee stock options. Such sales were made in reliance on the exemption
provided by Section 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The Summary Consolidated Statements of Operations Data for the five
years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the Summary
Consolidated Balance Sheet Data as of December 31, 1993, 1994, 1995, 1996 and
1997 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 Form 10-K. The Summary
Consolidated Statement of Operations Data and Summary Consolidated Balance Sheet
Data for the years ended December 31, 1994 and 1993 has been derived from
audited Consolidated Financial Statements of UNIFI that are not included in this
Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31
1993 1994 1995 1996 1997
---------- ---------- ---------- --------- ----------
Consolidated Statement of Operations (amount in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Data:
Revenues $ 3,943 $ 6,952 $ 10,665 $ 25,218 $ 43,857
------- -------- -------- -------- ---------
Cost of Revenues 2,792 4,179 7,232 23,842 37,945
Cost of Revenues - Depreciation 187 477 608 3,628 4,275
------- -------- -------- -------- ---------
Total Cost of Revenues 2,979 4,656 7,840 27,470 42,220
Gross Margin 964 2,296 2,825 (2,252) 1,637
Operating Expenses:
Selling, General and Administration 3,859 9,269 13,949 31,231 41,136
Research and Development 1,294 1,486 4,701 11,283 13,510
Depreciation and Amortization 335 1,240 1,622 2,751 4,923
------- -------- -------- -------- ---------
Total Operating Expenses 5,488 11,995 20,272 45,265 59,569
Loss from Operations (4,524) (9,699) (17,447) (47,517) (57,932)
Interest Income - 16 721 155 5,534
Interest Expense (209) (602) (411) (2,499) (28,436)
------- -------- -------- -------- ---------
Loss before minority interest (4,733) (10,285) (17,137) (49,861) (80,834)
Minority Interest in Fax Japan (1) - 1,525 2,480 948 -
------- -------- -------- -------- ---------
Net Loss $(4,733) $ (8,760) $(14,657) $(48,913) $ (80,834)
------- -------- -------- -------- ---------
Basic Net Loss Per Common Share (2) $(1.42) $(2.64) $(4.26) $(13.04) $(21.21)
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Weighted Average Common Shares 3,323 3,323 3,437 3,752 3,812
Outstanding
Other Financial Data:
EBITDA (3) (4,002) (6,441) (12,016) (40,035) (43,200)
Capital Expenditures (4) 2,162 4,486 5,883 22,558 10,683
Interest Expense (204) (602) (411) (2,499) (28,436)
<CAPTION>
1993 1994 1995 1996 1997
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and Cash Equivalents 180 4,447 11,124 4,538 50,687
Restricted Cash and Investments (5) 1,092 35,803
Working Capital (Deficiency) (2,583) (1,376) 6,633 (25,936) 53,257
Total Assets 2,578 9,980 25,378 41,184 130,502
Long-term Debt 2,437 1,675 9,703 46,613 212,046
Shareholders' Equity (Deficit) (3,173) (892) 8,871 (42,507) (111,910)
</TABLE>
- --------
(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. Although
management uses EBITDA to measure the earnings trends of the Company and
potential acquisition candidates without the impact of interest expense, income
tax expense, and depreciation, amortization and other non-cash items, investors
should consider interest expense, income tax expense, and depreciation,
amortization and other non-cash items when evaluating EBITDA. 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, $2,420,000 and $202,000 in
1993, 1994, 1995, 1996 and 1997, respectively.
(5) The amount shown for December 31, 1997 includes approximately $35
million of funds that are held as escrow funds in short-term and long-term
restricted investments pursuant to the Senior Notes Indenture. See Note 3 to
the Company's Consolidated Financial Statements.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Scope of Operations. UNIFI is a rapidly growing multinational
-------------------
telecommunications company that primarily provides value-added international
point-to-point fax document transmission and delivery services and broadcast fax
services. In certain markets, the Company also provides domestic point-to-point
fax services. During the fourth quarter of 1997, the Company commenced
provision of private intermediate carriage of voice transmissions for a single
US customer, and anticipates entering the market for retail and wholesale voice
transmissions as a resale carrier during 1998 upon obtaining the required
licenses. UNIFI provides its enhanced fax services by means of its proprietary
Intelligent Delivery Network, consisting of network facilities (nodes, or
"points-of-presence") in locations throughout the world connected by private
leased telecommunications circuits. 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. At
December 31, 1997, UNIFI had approximately 12,009 customers worldwide (excluding
non-revenue trial accounts and operations in China), and conducted operations in
the United States, Canada, the United Kingdom, Australia, France, Germany, Hong
Kong, Korea and Taiwan either directly or through wholly owned subsidiaries.
UNIFI's operations in Japan are conducted by UNIFI Communications Japan Inc., a
63% owned subsidiary of UNIFI. In China, the Company's wholly owned subsidiary
operated through an intercompany operating agreement with a local entity, but
such operations were terminated during the first quarter of 1998. See "Business
- -- Recent Developments." In Singapore, the Company's services are provided by
an affiliate of Singapore Telecommunications Limited pursuant to an intercompany
operating agreement between the Company and such affiliate. In addition, in
1997 UNIFI entered into an agreement with a company in Indonesia pursuant to
which such company shall have the exclusive right (subject to certain
conditions) to market and sell the Company's services in Jakarta, Indonesia in
exchange for certain payments to UNIFI. However, due to the economic crisis in
Indonesia and the currency devaluations that commenced in the fourth quarter of
1997, the Company and such Indonesian company have agreed to indefinitely
suspend the performance by such company of its marketing, sales and business
development obligations under such agreement until such time as the Indonesian
economy stabilizes, and consequently the Company does not expect to receive
significant payments from such company in respect of such activities during
1998.
Financing. From inception through March 1995, the Company funded its
---------
operations and net operating losses by means of several rounds of private equity
and debt financings. In February 1994, after receiving $10 million in financing
from ORIX and Nichimen (the Company's original partners in UNIFI Communications
Japan, Inc.), 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 commitments. In February 1997, the Company received net proceeds of
$105 million from the sale of UNIFI Units consisting of $175 million in
aggregate principal amount of 14% Senior Notes due 2004 and warrants to purchase
an aggregate of 4,816,818 shares of common stock, of which $46 million was
placed into a restricted escrow account for the sole purpose of funding the
first four interest payments on the Senior Notes. UNIFI has utilized such
financings to expand the Intelligent Delivery Network, 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. At March 18, 1998, the Company had approximately $39
million in unrestricted cash available to it, representing the remaining balance
of the net proceeds (other than the restricted portion thereof) from the sale of
the Senior Notes. The Company does not have a significant source of liquidity or
capital resources other than such remaining net proceeds. The Company will
require significant additional financing prior to August 1998 in order to
continue operations beyond such date. There can be no assurance that the Company
will be able to obtain such additional financing on terms favorable to the
Company or at all. See "Management's Discussion and Analysis--Liquidity and
Capital Resources."
Revenues. The Company derives its revenues primarily from monthly customer
--------
charges based on the actual number of minutes (or fractions thereof) of fax
document transmissions made by customers. The Company also charges its
customers a monthly network access charge (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. UNIFI does
33
<PAGE>
not require its customers to enter into long-term contracts. However, UNIFI has
experienced monthly churn rates of less than approximately 1% (calculated on a
revenue-weighted basis) in each of the 12 months ending December 31, 1996 and
1997. 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, particularly with respect to its core FI-Direct service. Despite such
competitive pressures, the Company's consolidated total revenues grew by 74% in
the year ended December 31, 1997 from $25.2 million to $43.8 million.
Cost Structure. The Company's principal operating costs are sales and
--------------
customer service personnel, third party telecommunications transmission costs
and research and development expense. Sales and customer service expenses
correspondingly increased from $24.8 million during 1996 to $30.1 million during
1997. However, as a percentage of total revenues, sales and customer service
expenses decreased from 98.4% in 1996 to 68.7% in 1997. The Company during the
first quarter of 1998 has determined to further reduce its sales and customer
service personnel, as part of the Company's strategy to refocus the Company's
business development efforts away from the marketing, sale and provision of FI-
Direct service toward the marketing, sale and provision of the Company's desktop
computer-based fax service (currently under development) and its broadcast
service. See "--Overview--Strategy." In February 1998, the Company eliminated
approximately 105 sales and customer service positions worldwide and in
connection therewith terminated 95 employees in such positions. In addition,
the Company has implemented a policy of not replacing employees lost to
attrition (except in identified critical areas). As a result of these
restructuring activities, the Company expects that if it obtains the required
additional financing and if it realizes in 1998 the revenues expected from its
desktop computer-based fax services (currently under development), its costs of
revenues as a percentage of total revenues will continue to decline during 1998.
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. In the United States and Canada,
the Company bears these local access costs only in a portion such markets 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 long-distance fax 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 terminating network node to the final destination via
the local PSTN. All transmissions 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 whom 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
fax 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 (2 in 1992, 3 in 1993, 4 in 1994,
ten in 1995, 23 as of December 31, 1996 and 33 as of December 31, 1997)
dependence on expensive long-distance charges has adversely affected the
Company's results of operations. Approximately 22% of all fax document
deliveries for February 1998 were off-net. In some cases, the Company is
obligated to pay its third party long-distance carriers certain minimum monthly
amounts in exchange for securing discounted rates. For example, the Company's
agreement with WorldCom requires the Company to pay a minimum charge of $500,000
per month. The Company enters into such arrangements on the basis of its
projections as to customer traffic patterns and volumes, but there can be no
assurance that the Company's utilization of its carriers' services will equal or
exceed the required minimum commitment in any month. If the Company's
projections as to customer traffic patterns and
34
<PAGE>
volumes are inaccurate in any material respect in any month, the Company's total
costs during such month may significantly increase as a percentage of its total
revenues for such month.
Strategy. From its inception through 1997, the Company's principal
--------
strategy was twofold: to expand the scope of its business operations and its
customer base by establishing operations in major markets in Europe and Asia,
and to expand the Intelligent Delivery Network by adding nodes throughout the
world in order to increase the percentage of its fax traffic that is on-net,
thereby improving the Company's gross margins by reducing variable costs,
primarily third-party carrier long-distance (or "off-net") costs. The Company
believed that it would only attain sufficient gross margins from its services by
generating large volumes of FI-Direct transmissions over its network and by
operating a network with sufficient points-of-presence throughout the world that
the percentage of its customers' fax transmissions that were delivered on-net
would reduce the Company's total transmission and delivery costs. In pursuit of
this strategy, the Company in 1995, 1996 and 1997 invested heavily in the start-
up of new operating units outside of the United States and in expanding the
number of Intelligent Delivery Network nodes. As a result of these activities,
the Company's total headcount grew from 269 at December 31, 1995, to 653 at
December 31, 1996, to 615 at December 31, 1997, while total cost and operating
expenses (excluding depreciation and amortization) increased from $25.9 million
in 1995, to $66.4 million in 1996, to $92.6 million in 1997. Capital
expenditures on network and infrastructure equipment were $4.0 million in 1995,
$7.6 million in 1996 and $4.5 million in 1997. The Company did achieve
significant increases in its gross margin during 1997 over 1996 by following
this strategy: consolidated gross margin (excluding depreciation and
amortization) was approximately 5.5% in 1996 and approximately 13.5% in 1997, an
improvement of 145%, even though total revenues grew by only 74% in 1997 over
1996. In December 1996, the Company's on-net to off-net traffic ratio was
approximately 64%, and was approximately 77% in December 1997, an improvement of
20%. However, despite these improvements, the Company has continued to record
substantial operating and net losses in each year since inception. Despite
significant increases in total minutes of FI-Direct transmissions from
approximately 26.6 million minutes in 1996 to approximately 60.9 million minutes
in 1997, the worldwide decline in basic telecommunications rates during these
periods has resulted in slower than expected revenue growth from FI-Direct. The
Company does not believe that revenues from FI-Direct will continue to increase
at levels sufficient to generate a sustaining gross margin. While the Company
intends to preserve as much of its existing FI-Direct revenue base as
practicable during 1998 and thereafter, the Company believes that it must
allocate the greater part of its financial and human resources to the
development and provision of services that utilize the Company's existing
substantial investment in network infrastructure and which the Company believes
will not be as sensitive to continued declines in basic telecommunications
rates. The Company intends during 1998 and thereafter to focus efforts and
resources away from further expansion of its FI-Direct service and toward the
development, enhancement, marketing, sale and provision of its broadcast and
desktop computer-based fax services. In addition, the Company intends to engage
in the resale of voice telecommunications facilities upon obtaining the required
licenses. The Company expects to provide these resale services through a
combination of equipment owned by the Company and facilities leased from other
providers and carriers. At December 31, 1997, the Company engaged in the
private resale of voice facilities for a single US customer. The Company
expects that the gross margins associated with the revenues from these voice
services will contribute to the achievement of a sustaining total gross margin.
However, there can be no assurance that the Company's broadcast and desktop
computer-based fax services will gain sufficient market acceptance or will
generate sufficient revenues for the Company to achieve a sustaining gross
margin, or that the Company will obtain the required licenses to provide resale
voice services or that the revenues and/or gross margins associated with such
voice services will materially contribute to the Company's total consolidated
gross margin. Moreover, the Company cannot presently estimate whether its
existing network infrastructure will be sufficient, both qualitatively and
quantitatively, to support its desktop computer-based fax services and its
broadcast fax services at the transmission levels required for the Company to
earn sustaining levels of revenues and gross margin. Consequently, there can be
no assurance that the Company will not be required to continue making
significant cash outlays during 1998 and thereafter for the expansion and/or
enhancement of the Intelligent Delivery Network.
The foregoing forward looking statements, like all 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 forward looking statements are dependent on
assumptions about many factors including, among others, the obtaining by the
Company of significant additional financing prior to August 1998, the demand for
the Company's existing FI-Direct and broadcast fax services, timely deployment
and market acceptance
35
<PAGE>
of the planned new desktop computer-based fax services, competition from
existing telecommunications providers and others, 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
discussions are qualified in their entirety by the cautionary statements set
forth herein under the caption "Risk Factors." In addition, the statements
herein by the Company respecting estimates of future results and trends are made
assuming that the Company obtains significant additional financing prior to
August 1998.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues grew 74% to $43.8 million in 1997 from $25.2 million in
- --------
1996. This increase was primarily a result of an increase in fax document
traffic from approximately 22.7 million minutes in 1996 to approximately 68.1
million minutes in 1997. The increase in traffic was due to the increase in the
number of UNIFI's customers from approximately 8,400 at December 31, 1996 to
approximately 12,009 at December 31, 1997. This increase in new customers
resulted primarily from addition of approximately 3,200 new customers by the
Company's non-US operating units during 1997 and the acquisition in the fourth
quarter of 1997 of approximately 800 customers upon the Company's acquisition of
the fax business of SingCom (Australia) Pty. Limited. See "Certain
Relationships and Related Transactions--Acquisition of Fax International
Australia Pty. Limited and Fax Business of SingCom (Australia) Pty. Limited."
Revenues derived from international markets were approximately $31.9 million in
1997 compared to $15.2 million in 1996. During 1997, the Company derived ten
percent or more of its consolidated revenues from operations in North America
(excluding Canada), Japan, and Hong Kong, and from the operations of the
Company's Singapore affiliate, as follows:
<TABLE>
<CAPTION>
Revenues as Percentage of UNIFI Total Consolidated Revenues for
Year Ended December 31,
UNIFI CI Unit 1997 1996 1995
- ------------- ------ ------ ------
<S> <C> <C> <C>
North America 27.2% 39.8% 75.0%
Japan 18.6% 26.6% 24.1%
Hong Kong 11.5% 5.4% 0.0%
Singapore 11.6% 13.7% 0.9%
</TABLE>
The Company expects that revenues from its North America operations will
continue to represent ten percent or more of the Company's total consolidated
revenues for the foreseeable future, primarily because of the significant size
of the market for telecommunications services in North America and because the
Company's line of desktop computer-based fax services, currently under
development, will be deployed initially in North America. Due to the Company's
change in business strategy for 1998 and thereafter (see "--Overview--
Strategy"), the
36
<PAGE>
Company cannot presently estimate whether the other markets listed above or any
other of the Company's markets will continue to represent 10% or more of the
Company's total revenues in 1998. The Company anticipates that its revenues from
Singapore may decline both in absolute and percentage terms during 1998 as a
result of the decision by Singapore Telecommunications Limited to concentrate
its efforts and resources on business developments in its primary home telecom
market. See "Certain Relationships and Related Transactions--Resignation of
SingTel Representative Directors and Sale of Series G Perferred Shares to
Douglas J. Ranalli." However, there can be no assurance that adverse political,
regulatory or market conditions in any of the Company's geographic markets will
not develop and adversely affect the Company's revenues derived from such
markets. In particular, the Company believes that the economic crises and
currency devaluations affecting certain of the Company's Asian markets may
result in declines in revenues from such markets during 1998. Moreover,
following deployment of the Company's line of desktop-computer-based fax
services, the Company believes that the percentages of its total revenues
derived from Asian markets may decline relative to percentages of total revenues
derived from North American and European markets, as the Company's initial
deployment efforts with respect to such services will be concentrated in North
America and Europe and as the Company intends to cease expansion of its FI-
Direct customer base in all markets during 1998.
Revenues from the Company's core FI-Direct service were approximately $39.4
million in 1997, representing 90% of the Company's consolidated 1997 revenues,
as compared to $20.1 million (80% of consolidated 1996 revenues ) in 1996. The
number of active customers increased to approximately 12,009 (excluding the
People's Republic of China) at December 31, 1997, as compared to 8,400 at
December 31, 1996. The Company expects that its revenues from FI-Direct will
not materially increase or even decline during 1998 in both absolute and
percentage terms, as the Company ceases efforts to expand its FI-Direct revenue
base, including efforts to replace customers lost to churn, in favor of such
efforts with respect to its desktop computer-based fax services and its
broadcast fax services. The Company's desktop computer-based fax services are
currently under development and are not expected to be commercially introduced
until September 1998. Consequently, the Company presently cannot estimate its
future revenues from such services. Nor can the Company estimate the extent to
which its revenues from FI-Direct will decline during 1998. As a result, the
Company cannot presently estimate whether its total 1998 revenues will increase
or decrease relative to 1997.
Cost of Revenues. Cost of revenues increased 53% to $42.2 million in 1997
----------------
from $27.5 million in 1996. This increase resulted primarily from the increased
level of FI-Direct transmission minutes in 1997. Cost of revenues as a
percentage of revenues decreased to 96% in 1997 from 109% in 1996. The Company
is not presently able to calculate the cost of revenues as a percentage of
revenues with respect to each of the markets listed above that accounted for
more than 10% of the Company's total revenues during 1997. However, the Company
believes that with respect to its Asian markets, because a significant portion
of its cost of revenues in each such market are incurred and paid in US Dollars
while revenues from such markets are received in local currencies, the economic
crises and currency devaluations affecting many Asian countries commencing in
the fourth quarter of 1997 resulted in a material increase to the Company's cost
of revenues as a percentage of revenues from such markets.
Three principal components comprise the Company's cost of revenues: third-party
telecommunications provider costs, costs of personnel who operate the
Intelligent Delivery Network and provide the value-added delivery features
associated with the Company's services, and capital costs of network equipment
and facilities. The decline in costs of revenues as a percentage of total
revenues during 1997 reflects a decline of each component as a percentage of
revenues over comparable 1996 figures, primarily because 1996 represented a
period of significant investment by the Company in expansion of the Intelligent
Delivery Network into new countries and significant increases in
telecommunications provider costs and personnel expense as the Company's
worldwide customer base grew in response to the start-up of new operating units
in additional countries. In addition, the Company's total revenues during 1997
increased by a greater percentage than did the cost of revenues over the
comparable 1996 figures. During 1997, especially the third and fourth quarters,
the rate of expansion of the Intelligent Delivery Network slowed versus 1996,
and the Company reduced its third party telecommunications provider costs by
employing least-cost traffic routing techniques and negotiating favorable rates
with its largest providers. The Company's cost of revenues as a percentage of
total revenues in 1998 and thereafter will depend largely upon the Company's
growth in total revenues during such period. If the Company's total revenues
during 1998 do not materially exceed those of, or decline relative to, 1997,
then the Company's cost of revenues for 1998 may not
37
<PAGE>
decline and may even increase as a percentage of total 1998 revenues. However,
the Company expects that, commencing in 1999, as the Company's desktop computer-
based fax service and its enhanced broadcast fax service gain market acceptance
and account for a greater percentage of the Company's total revenues, the
Company's cost of revenues as a percentage of total revenues will decline
relative to 1997 levels.
Selling, General and Administrative Expenses. Selling, general and
--------------------------------------------
administrative expenses (including customer service expenses) increased by 32%
to $41.1 million in 1997 from $31.2 million in 1996. As a percentage of revenue,
selling, general and administrative expenses declined to 94% in 1997 from 124%
in 1996. Of these amounts, sales and customer service expenses increased by 21%
to $30.1 million in 1997 compared to $24.8 million in 1996, while general and
administrative expenses increased by 72% to $11.0 million in 1997 versus $6.4 in
1996. The increase in sales and customer service expense during 1997 was
primarily the result of increased monthly operating costs related to the opening
of new offices in 1996 and 1997. The increase in 1997 general and
administrative expenses was due to increased administrative and overhead costs
associated with UNIFI's expansion of the Intelligent Delivery Network during the
second half of 1996 and the first half of 1997. In general terms, the Company
expects that selling, general and administrative expenses will continue to
decline as a percentage of total revenues in 1998. However, if the Company's
total revenues do not continue to grow significantly or decline during 1998, or
if the Company is required to increase the absolute levels of sales and customer
support expenses in 1998 to support its release of new desktop computer-based
fax services, then selling, general and administrative expenses could increase
as a percentage of total 1998 revenues.
Research and Development Expenses. Research and development expenses
---------------------------------
increased 19% to $13.5 million in 1997 from $11.3 million in 1996. This
increase resulted primarily from an increase in research and development
personnel from 92 at December 31, 1996 to 107 at December 31, 1997 to support
the development of new services, primarily the Company's broadcast fax service
and its desktop computer-based fax service. Research and development expense as
a percentage of revenues declined to 31% in 1997 from 45% in 1996. The Company
expects research and development expenses to continue to decline as a percentage
of total revenues in 1998. However, there can be no assurance that the Company
will not be required to increase its absolute levels of research and development
expenses in order to complete development of its desktop computer-based fax
services, to enhance its broadcast fax services, or to develop new services that
the Company determines are required in order to remain competitive. In addition,
if the Company's total revenues during 1998 do not continue to grow or if
revenues decline relative to 1997, then research and development expenses as a
percentage of total revenues could increase.
Depreciation and Amortization Expenses. Depreciation and amortization
--------------------------------------
expenses associated with the Company's internal computer systems, equipment,
furniture and the like increased by 81% to $4.9 million in 1997 from 2.7 million
in 1996. This increase was due primarily to the purchase by the Company in late
1996 of new office equipment and furniture in connection with the relocation of
the Company's world headquarters to Lowell, Massachusetts in December 1996, as
well as the purchase of additional computer equipment to support personnel added
during 1997.
Interest Income. Interest income increased to $5.5 million in 1997
---------------
from $0.2 million in 1996, due to the Company's receipt of interest during 1997
on the net proceeds from the sale of $175 million in Senior Notes on February
21, 1997. The Company expects interest income to decline in 1998 as the Company
continues to apply the net proceeds received from the Senior Note sale.
Interest Expense. Interest expense increased to $28.4 million in 1997
----------------
from $2.5 million in 1996. This increase was primarily a result of the debt
incurred by the Company on February 21, 1997 upon the sale of the Senior Notes
and, to a lesser extent, the accrual of interest in respect of borrowings during
1995 and 1996 under the Company's debt facilities with SingTel (Netherlands
Antilles) Pte. N.V., an affiliate of SingTel ("SingTel NA").
38
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. 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.
Cost of Revenues. Cost of revenues increased 252% to $27.5 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 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.
Selling, General and Administrative Expenses. Selling, general and
--------------------------------------------
administrative expenses (including customer service expenses) increased by 124%
to $31.2 million in 1996 from $13.9 million in 1995. As a percentage of
revenue, selling, general and administrative expenses declined to 124% in 1996
from 131% in 1995. Of these amounts, sales and customer service expenses
increased 118% to $25.7 million in 1996 from $11.8 million in 1995, while
general and administrative expenses increased 56% to $4.2 million in 1996 from
$2.7 million in 1995. The increase in sales and customer service expenses 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% in 1995. The increase in general and
administrative expenses in 1996 resulted primarily from increased administrative
and overhead costs associated with UNIFI's expansion of the Intelligent Delivery
Network.
Research and Development Expenses. Research and development expenses
---------------------------------
increased 140% to $11.3 million in 1996 from $4.7 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
45% in 1996 from 44% in 1995.
Interest Income. 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. 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 facilities with SingTel NA to fund its operations and
the continuing expansion of the Intelligent Delivery Network.
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 services. As a result of
operating losses, cash used in operating activities amounted to $66.6 million in
1997, $22.5 million in 1996 and $14.4 million in 1995. Cash used in investing
activities was $45.0 million in 1997, $20.7 million in 1996 and $6.0 million in
1995. In 1995 and 1996, these investment uses of cash largely consisted of the
purchase of equipment utilized in the build-out of the Intelligent Delivery
Network. In 1997, $34.6 million of cash used in investing activities related to
the funding of a restricted escrow account out of the net proceeds to the
Company from the sale in February 1997 of the Senior Notes, from which the
Company is required to make the first four interest payments on the Senior
Notes.
39
<PAGE>
The portion of cash used in purchasing network related equipment during
1997 [$10.5 million] represents a decline in such investment usage of cash
compared to 1996, and reflects the fact that 1996 represented a period of
significant network expansion for the Company. UNIFI has historically financed
its cash requirements for operations and investments primarily through private
sales of debt and equity securities as well as equipment financing arrangements
and other borrowings, most recently the sale of $175 million in aggregate
principal amount of Senior Notes in February 1997. Net cash provided by
financing activities were $158.8 million in 1997, $38.2 million in 1996 and
$26.7 million in 1995. There is no further borrowing capacity under the
Company's existing loan agreements with SingTel NA. Under the Indenture
pursuant to which the Senior Notes were issued by the Company in 1997, the
Company is permitted to incur certain additional indebtedness under certain
conditions and restrictions.
UNIFI does not have a significant source of liquidity other than the
remaining net proceeds from its sale in February 1997 of the Senior Notes
(excluding the approximately $34.5 million of U.S. Government Securities held in
escrow that will be used to fund the next two interest payments on the Senior
Notes). At March 18, 1998, the Company had approximately $39.0 million in
unrestricted cash available to it. The report of the independent public
accountants on the Company's consolidated financial statements for and as of the
year ended December 31, 1997 contains an explanatory fourth paragraph addressing
the significant uncertainty regarding the Company's ability to continue
operating as a going concern unless it is able to raise sufficient capital to
fund operations through the end of 1998. The Company believes that it will
require significant additional funds in order to continue its operations as
presently conducted beyond July 1998. The Company is actively exploring ways in
which it can raise the required funds within the required time under the
provisions of the Indenture. However, there can be no assurance that the Company
will be able to raise such funds prior to exhaustion of its existing cash
resources, on terms favorable to the Company or at all. Furthermore, there can
be no assurance that the amount of additional indebtedness the Company is
permitted to incur under the Indenture will be sufficient to satisfy the
Company's needs for additional funding beyond July 1998 or thereafter, even if
the Company is able to raise such funds. Failure of the Company to obtain
sufficient additional funds prior to exhaustion of its existing cash resources
could result in the insolvency of the Company or require the Company to
materially reduce and restructure the scope of its operations in order to avoid
insolvency. Should the Company be unable to obtain sufficient additional funds
for operations, there can be no assurance that the Company will be able to
effectively reduce and restructure its business activities prior to insolvency.
Moreover, if the Company's current projection of future cash flows from
operations is inaccurate in any material respect, the Company's remaining
unrestricted cash could be exhausted prior to the Company's current projections,
which could result in the Company's insolvency. See "Risk Factors-Need For
Additional Financing; and-Substantial Leverage."
The Company is highly leveraged and has substantial financial
commitments. As of December 31, 1997, the Company had current liabilities of
approximately $30.4 million and long term debt of approximately $212.0 million
(including the Senior Notes received at a discount of approximately $10.2
million). Included in current liabilities is the present value of the Company's
minimum lease payments under capital leases of approximately $1.0 million. In
addition, the Company's total minimum payments under its operating leases was
approximately $9.8 million at December 31, 1997. Approximately $7.3 million of
such operating lease payments are for the four years ending December 31, 2001.
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.
Holders of secured indebtedness will have priority over the holders of Senior
Notes in right of payment to the extent of the value of the assets securing such
indebtedness. The Company is required to make its first interest payment on the
Senior Notes from its own funds on September 1, 1999. The ability of the
Company and its subsidiaries to make this and other scheduled payments with
respect to the Senior Notes, and with respect to other indebtedness, will depend
upon, among other things, the Company's ability to obtain additional funds, 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;
40
<PAGE>
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 Senior 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 Financing."
IMPACT OF YEAR 2000 ISSUE
The Company's business operations depend to a significant extent on
computer-based systems. The Company's Intelligent Delivery Network, by which
the Company provides its services to customers, employs computer hardware and
software, as do the Company's internal business and accounting systems. In
addition, most or all of the Company's key suppliers and customers employ
computer systems in the provision of their services or business to the Company.
All such computer systems are at risk from the Year 2000 Issue, meaning that
such systems and their associated software may not have been designed to
properly manage and process date-related information for dates from and after
January 1, 2000. It is possible that such systems, of the Company, its
suppliers and customers, will malfunction when required to process date-related
data with respect to such dates. Any such malfunction in the Company's computer
systems or in the computer systems of its key customers and suppliers could have
a material adverse effect on the Company's business or results of operations.
Such a malfunction in the Company's Intelligent Delivery Network could prevent
the Company from providing its revenue-generating services to customers until
such malfunction was corrected. A malfunction in the Company's internal systems
could prevent the Company from timely and properly issuing invoices to its
customers for services provided or from preparing timely and accurate financial
statements.
The Company is presently conducting an audit of its computer systems as
well as those of certain of its key suppliers and customers in order to
determine whether and to what extent such systems face a Year 2000 problem and,
if so, to determine the expected costs to the Company from correction of such
problem (with respect to its own systems) and the expected effects on the
Company of a failure to correct such problems by the required date. There can
be no assurance that the Company will timely identify any or all of such
potential Year 2000 problems in its own systems or those of others. If the
Company identifies significant Year 2000 problems in its own systems, there can
be no assurance that the Company will not be required to expend significant
financial and/or human resources in correction of such problems. The Company
currently has made no estimate of, nor established a reserve for, any such
potential costs. Diversion of financial and/or human resources to correction of
Year 2000 problems could materially adversely affect the Company's ability to
continue development of new services or expansion of its network. Moreover,
there can be no assurance that the Company will be able to obtain the services
of qualified third parties to assist the Company in the timely identification
and correction of Year 2000 problems.
41
<PAGE>
ITEM 8. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements of UNIFI Communications, Inc. and Subsidiaries
Report of Independent Public Accountants.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997.......... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997................................ F-4
Consolidated Statements of Stockholders' Deficit for the Years Ended
December 31, 1995, 1996 and 1997................................. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997................................. F-6
Notes to the Consolidated Financial Statements........................ F-7
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, 1996 and 1997, and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1997. 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, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has experienced significant
operating losses over the past three years and has substantial accumulated and
stockholders' deficits December 31, 1997. The Company's financial position and
operating results raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Arthur Andersen LLP
-------------------------------
Arthur Andersen LLP
Boston, Massachusetts
February 19, 1998 (except for the matters discussed in Notes 4 and 18 for as to
which the date is March 17, 1998)
F-2
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
1996 1997
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 4,538 $50,687
Restricted cash and cash equivalents 1,092 1,183
Restricted investments - 22,729
Accounts receivable, less reserves of
approximately $184 and $294 in
1996 and 1997, respectively 4,701 7,965
Accounts receivable from principal
stockholder - 309
Prepaid expenses and other current assets 811 750
--------- ---------
Total Current Assets 11,142 83,623
--------- ---------
Property and equipment, net 24,824 25,452
--------- ---------
Long-term restricted investments - 11,891
Minority interest in Fax Japan 1,000 -
Deferred financing costs, net 2,764 8,319
Other assets, net 1,454 1,217
--------- ---------
$ 41,184 $ 130,502
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of notes payable $ 2,777 $ 3,519
Current portion of notes payable to
Principal Stockholder 4,232 845
Current portion of capital lease obligations 1,483 976
Advances from principal stockholder 4,318 312
Accounts payable 13,660 4,615
Accrued expenses 10,608 20,099
--------- ---------
Total Current Liabilities 37,078 30,366
--------- ---------
Long-Term Debt, net of current portion:
Senior Notes Payable - 165,506
Capital lease obligations, net of current portion 1,821 968
Notes payable, net of current portion 3,433 1,968
Notes payable to principal stockholder 41,359 43,604
--------- ---------
Total Long-Term Debt, net of current portion 46,613 212,046
--------- ---------
COMMITMENTS (Note 13)
Stockholders' Deficit:
Convertible Preferred Stock, $1.00 par value,
24,715,000 shares authorized; 13,575,030 and
issued and outstanding in 1996 and 1997,
(preference in liquidation of $41,029,390
at December 31, 1997) 13,515 13,515
Common Stock, $0.01 par value, 50,000,000 shares
authorized; 3,786,025 and 3,862,021 issued and
outstanding in 1996 and 1997, respectively 38 39
Additional paid-in capital 23,664 35,877
Accumulated deficit (80,286) (161,120)
Cumulative translation adjustment 562 (221)
--------- ---------
Total Stockholders' Deficit (42,507) (111,910)
--------- ---------
$ 41,184 $ 130,502
========= =========
</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
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996, AND 1997
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Revenues $ 10,665 $ 25,218 $ 43,857
---------- ---------- ----------
Cost of revenues 7,232 23,842 37,945
Cost of revenues--depreciation 608 3,628 4,275
---------- ---------- ----------
Total cost of revenues 7,840 27,470 42,220
---------- ---------- ----------
Gross Margin 2,825 (2,252) 1,637
---------- ---------- ----------
Operating Expenses:
Selling, general and administrative 13,949 31,231 41,136
Research and development 4,701 11,283 13,510
Depreciation and amortization 1,622 2,751 4,923
---------- ---------- ----------
Total operating expenses 20,272 45,265 59,569
---------- ---------- ----------
Loss from operations (17,447) (47,517) (57,932)
Interest income 721 155 5,534
Interest expense (411) (2,499) (28,436)
---------- ---------- ----------
Loss before minority interest (17,137) (49,861) (80,834)
Minority interest in Unifi Japan 2,480 948 -
Net loss $ (14,657) $ (48,913) $ (80,834)
========== ========== ==========
BASIC NET LOSS PER COMMON SHARE $ (4.26) $ (13.04) $ (21.21)
========== ========== ==========
DILUTED NET LOSS PER COMMON SHARE $ (4.26) $ (13.04) $ (21.21)
========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 3,437,464 3,752,089 3,811,747
========== ========== ==========
</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' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(In Thousands, except share and per share data)
<TABLE>
<CAPTION>
CONVERTIIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
NUMBER $1.00 NUMBER $0.01 PAID-IN
OF SHARES PAR VALUE OF SHARES PAR VALUE CAPITAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 6,307 $ 6,307 3,324 $33 $ 9,126
Compensation expense
from vesting of
restricted stock - - - - -
Sale of Series G
convertible preferred
stock, net of issuance
costs of $75 8,570 8,570 - - 21,350
Repurchase of convertible
preferred stock and common
stock warrants (1,738) (1,738) - - (5,648)
Conversion of subordinated
debentures of stockholders 376 376 - - 1,038
Exercise of common stock
options - - 373 4 127
Cumulative translation
adjustment - - - - -
Net loss - - - - -
-------- -------- ------ ---- -------
BALANCE, DECEMBER 31, 1995 13,515 13,515 3,697 37 25,993
Exercise of common stock
options and warrants - - 89 1 64
Deemed dividend on
acquisition of SingCom from
principal stockholder - - - - (2,393)
Cumulative translation
adjustment - - - - -
Net loss - - - - -
-------- -------- ------ ---- -------
BALANCE, DECEMBER 31, 1996 13,515 13,515 3,786 38 23,664
Exercise of common stock
options - - 76 1 78
Warrants issued with
senior notes - - - - 10,212
Warrants issued with notes
payable to principal
stockholder - - - - 1,700
Warrants issued with
notes payable - - - - 110
Compensation expense on
stock options - - - - 113
Cumulative translation
adjustment - - - - -
Net loss - - - - -
-------- -------- ------ ---- -------
BALANCE, DECEMBER 31, 1997 13,515 $ 13,515 3,862 $39 $35,877
======== ======== ====== ==== =======
<CAPTION>
CUMULATIVE TOTAL
ACCUMULATED DEFERRED TRANSLATION STOCKHOLDERS'
DEFICIT COMPENSATION ADJUSTMENT EUITY
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ (16,716) $ (2) $ 361 $ (891)
Compensation expense
from vesting of
restricted stock - 2 - 2
Sale of Series G
convertible preferred
stock, net of issuance
costs of $75 - - - 29,920
Repurchase of convertible
preferred stock and common
stock warrants - - - (7,386)
Conversion of subordinated
debentures of stockholders - - - 1,414
Exercise of common stock
options - - - 131
Cumulative translation
adjustment - - 338 338
Net loss (14,657) - - (14,657)
--------- ---- ------ ---------
BALANCE, DECEMBER 31, 1995 (31,373) - 669 8,871
Exercise of common stock
options and warrants - - - 65
Deemed dividend on
acquisition of SingCom from
principal stockholder - - - (2,393)
Cumulative translation
adjustment - - (137) (137)
Net loss (48,913) - - (48,913)
--------- ---- ------ ---------
BALANCE, DECEMBER 31, 1996 (80,286) - 562 (42,507)
Exercise of common stock
options - - - 79
Warrants issued with
senior notes - - - 10,212
Warrants issued with notes
payable to principal
stockholder - - - 1,700
Warrants issued with
notes payable - - - 110
Compensation expense on
stock options - - - 113
Cumulative translation
adjustment - - (783) (783)
Net loss (80,834) - - (80,834)
--------- ---- ------ ---------
BALANCE, DECEMBER 31, 1997 (161,120) $ - $ (221) $(111,910)
========= ==== ====== =========
</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
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(14,657) $(48,913) $(80,834)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 2,230 6,378 10,653
Amortization of discounts on debt - - 927
Minority Interest in Unifi Japan (2,480) (948) -
Write-off of minority interest in Unifi Japan - - 1,000
Compensation expense related to the issuance of common stock and options 2 - 113
Gain on disposal of property, and equipment - - (115)
Changes in assets and liabilities, net of effect from the acquisition of SingCom-
Accounts receivable (1,093) (2,459) (3,685)
Accounts receivable from principal stockholder (100) 100 (309)
Prepaid expenses and other current assets (174) 324 16
Accounts payable 432 10,249 (8,849)
Accrued expenses 1,428 8,423 13,509
Advances from principal stockholder - 4,318 994
-------- -------- --------
Net cash used in operating activities (14,412) (22,528) (66,580)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment (5,153) (20,138) (10,481)
Proceeds from sale of property and equipment - - 443
Increase in other assets (804) (680) (340)
Cash acquired in purchase of SingCom - 162 -
Increase in restricted investments - - (34,620)
-------- -------- --------
Net cash used in investing activities (5,957) (20,656) (44,998)
-------- -------- --------
Cash flows from financing activities:
Payments on capital lease obligations (1,309) (1,469) (1,563)
Proceeds from issuance of convertible subordinated
debentures to stockholders 811 - -
Repayment of convertible subordinated debentures to
stockholders (1,778) - -
Proceeds from notes payable to stockholders 1,000 - -
Repayments on notes payable to stockholders (1,010) - -
Proceeds from issuance of notes payable 3,058 6,786 307
Repayment on notes payable (2,241) - (685)
Proceeds from borrowings under notes payable with
principal stockholder 8,357 32,810 -
Payments under notes payable with principal
stockholder - - (2,626)
Deferred financing costs (2,845) - -
Proceeds from borrowings under line of credit with a bank 350 - -
Repayment on revolving line of credit with a bank (350) - -
Net Proceeds from issuance of Senior Notes - - 163,275
Payments for repurchase of convertible preferred stock and
common stock warrants (7,386) - -
Proceeds from exercise of common stock options and warrants 131 65 79
Proceeds from sale of convertible preferred stock 29,920 - -
-------- -------- --------
Net cash provided by financing activities 26,708 38,192 158,787
EFFECTS OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 338 (502) (969)
INCREASE IN RESTRICTED CASH AND CASH EQUIVALENTS - (1,092) (91)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,677 (6,586) 46,149
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,447 11,124 4,538
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 11,124 $ 4,538 $ 50,687
======== ======== ========
</TABLE>
The accompanying footnotes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) OPERATIONS
UNIFI Communications, Inc. and subsidiaries (the Company) was incorporated on
September 20, 1990. The Company provides business-to-business domestic and
international enhanced fax document delivery and voice transmission 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 during 1997, as described in Note 3, the
Company continues to fund significant operating losses while seeking additional
capital.
The Company's Consolidated Financial Statements have been prepared assuming that
the Company will continue as a going concern. The Company's financial condition
raises substantial doubt about its ability to continue as a going concern. The
Company has incurred losses of approximately $161 million since inception and
has funded these losses principally through the issuance of debt and equity
securities. The Company has a stockholders' deficit of $112 million as of
December 31, 1997, and is dependent on raising additional capital in the short
term to satisfy its ongoing capital needs and to continue its operations. The
Company believes that its existing cash resources will be sufficient to fund its
current level of operations prior to August 1998. Management continues to
pursue additional funding from various investment partners in order to maintain
the strategy of expanding operations in major markets and to develop and enhance
new products and services. However, no assurance can be given that such
financing will in fact be available to the Company or that the Company will be
able to develop and deploy new products. If the Company is unable to obtain
financing on acceptable terms in order to maintain operations through the next
fiscal year, it could be forced to curtail or discontinue its operations. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
(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 eight wholly owned subsidiaries and majority-owned UNIFI
Communications Japan (UNIFI Japan) (formerly Fax International Japan, Ltd., 63%
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, UNIFI Japan, to two Japanese corporations for approximately
$7,600,000. These shares represented 49% of the voting interest in UNIFI Japan,
and as long as the Company owns greater than 50% of the voting interest of UNIFI
Japan, the Company has control of the Board of Directors. On May 27, 1997, the
Company was notified by ORIX Corporation (ORIX), a minority stockholder of UNIFI
Japan that it had elected to exercise its special exit right under the
stockholders' agreement. On June 25, 1997, UNIFI Japan entered into an
agreement with ORIX to purchase all 80 shares of UNIFI Japan stock held by ORIX
and its affiliates for an aggregate purchase price of approximately $1.00. As
a result of the repurchased shares, the relative ownership interest in UNIFI
Japan held by the Company and the remaining minority stockholder are 63% and
37%, respectively, as of December 31, 1997.
The accounts of UNIFI Japan are consolidated, and the minority ownership is
treated as a minority interest. Accordingly, the accompanying consolidated
balance sheets and statements of operations for the year ending
F-7
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
December 31, 1995 and 1996 reflect 49% of UNIFI Japan's loss as a minority
interest. At December 31, 1996, the cumulative losses allocated to the minority
interest exceeded the minority interest's investment. The remaining minority
interest had 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,
1996 is presented as an asset. The extent of the cumulative loss allocated to
the minority interest exceeds the basis of their investment. The debt will not
be repaid until the minority interest basis is recovered. For the years ended
December 31, 1996 and 1997, minority interest loss of UNIFI Japan exceeded the
$1,000,000 guaranteed debt, therefore, the Company recorded an additional loss
related to the minority stockholder of approximately $148,000 and $439,000 for
the years ended December 31, 1996 and 1997, respectively. As a result of the
repurchase of ORIX shares and the uncertainty regarding the realizability of
minority interest, the Company expensed in the statement of operations for the
year ended December 31, 1997 the previously capitalized minority interest of
$1,000,000, which is included in selling, general and administrative expense.
The Company also has an operating agreement with UNIFI Japan that requires the
Company to perform certain services for UNIFI Japan in exchange for a management
fee equal to 5% of UNIFI Japan's gross revenues and a stockholders' agreement
with the two Japanese corporations. The agreement required the minority interest
to provide loans of up to approximately $2,000,000 to UNIFI Japan, if requested
by UNIFI Japan. In connection with obtaining 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 amounts would not be material to the
financial statements. At December 31, 1997, the remaining minority stockholder
continues to provide loans to UNIFI Japan under the original stockholders'
agreement.
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, consolidations and mergers,
liquidations and other events, as defined, required a 2/3 Board approval. This
agreement also provides the minority stockholder 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 UNIFI Japan; right of first refusal on
equity financings of UNIFI Japan; 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 UNIFI Japan's stock by all stockholders and provides a
special exit right to the minority stockholder to sell all, but not less than
all, of the stock owned back to the Company as defined.
(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.
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,
requires disclosures for certain investments as either trading, held-to-
maturity, or available-for-sale. The Company has recorded short-term restricted
and long-term restricted investments on the face of the balance sheets as held-
to-maturity. These restricted investments consist of U.S. government securities
held to pay interest payments on the Senior Notes (see Note 3) and are carried
at amortized costs. The Company has approximately $34,620,000 of restricted
investments at December 31, 1997.
F-8
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(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 a straight-line basis, as follows:
Description Estimated Useful Life
----------- ---------------------
Equipment 3 - 6 years
Equipment under capital lease Life of lease
Furniture and fixtures 3 - 15 years
Leasehold improvements Life of lease
The Company charged to cost of revenue depreciation expense of approximately
$608,000, $3,528,000 and $2,751,000 operations depreciation and amortization
expense of approximately $1,622,000, $2,751,000 and $4,923,000 for the years
ended December 31, 1995, 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 for the year ended December 31, 1996.
(e) Deferred Financing Costs
Deferred financing costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
(In Thousands)
1996 1997
------- -------
<S> <C> <C>
Deferred financing costs $ 3,282 $ 3,282
Deferred Senior Note offering costs 576 7,300
------- -------
3,858 10,582
Less Accumulated amortization 1,094 2,263
------- -------
$ 2,764 $ 8,319
======= =======
</TABLE>
Deferred financing costs consist of costs related to securing the Singapore
Telecommunication's financing described in Note 4 and the Senior Notes Payable
described in Note 3. The deferred financing costs are being amortized using the
straight-line method over five years and the deferred Senior Note offering costs
are being amortized using the effective interest rate method over seven years.
(f) Revenue Recognition
Revenues are recorded in the period in which the related service is provided.
F-9
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(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 are 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 are translated using a weighted average of exchange rates in
effect during the year. The resulting translation adjustments are excluded from
the net loss of the Company and are accumulated as a separate component of
stockholders' deficit. Foreign currency transaction gains or losses are
reflected in the consolidated statement of operations and are not material.
i) Management Estimates
The preparation of financial statements in conformity with general 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, short term investments, long
term investments, senior notes payable and notes payable. The estimated fair
value of these financial instruments approximates their carrying value.
(k) Net Loss per Common Share
SFAS No. 128, Earnings per share, requires disclosure about computing and
presenting earnings per share. Basic net loss per common share is computed
based upon the net loss available to common stockholders and the weighted
average number of common shares outstanding during the period. Diluted net loss
per share is the same as basic net loss per common share since the shares of
stock issuable pursuant to stock options, warrants and upon the conversion of
the preferred stock are not considered as their effect would be antidilutive.
The Company had 3,063,531 shares of stock options and 7,749,219 of warrants that
were excluded from the net loss per common share computation at December 31,
1997.
(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 disclosures 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 equivalents, restricted cash
equivalents, short-term investments, long-term investments and accounts
receivable. The Company places its cash, cash equivalents and 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. No one customer constituted 10% or more of consolidated
revenues for the year ended December 31, 1997. To reduce risk, the Company
routinely assesses the financial strength of its customers
F-10
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
and, as a consequence, believes that its account 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 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) Long-Lived Assets
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, requires disclosures of an impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. The Company has evaluated its long-lived assets
and has determined that no material adjustment is necessary.
(o) Restricted Cash and Cash Equivalents
The Company has approximately $1,183,000 of short-term restricted cash at
December 31, 1997. The short-term restricted cash consists of cash equivalents
held with a bank for security on certain notes payable held by the Company's
Japanese subsidiary.
F-11
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(p) Noncash Investing and Financing Activities
The following table summarizes the supplemental disclosures of the Company's
noncash transactions for the year indicated below:
<TABLE>
<CAPTION>
1995 1996 1997
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS (In Thousands)
<S> <C> <C> <C>
In connection with the acquisition of SingCom (Note 5):
Fair value of assets acquired - $(1,255) -
Deemed dividend - (2,393) -
Liabilities assumed - 1,061 -
Issuance of promissory note - 2,749 -
-------- ------- -------
Cash acquired $ - $ 162 $ -
======== ======= =======
Conversion of convertible subordinated debentures to
Series D and Series F convertible preferred stock $ 1,414 $ - $ -
======== ======= =======
Acquisition of property and equipment under capital lease
obligations $ 730 $ 2,420 $ 202
======== ======= =======
Conversion of advances from principal stockholder to Senior Notes $ - $ - $ 5,000
======== ======= =======
Conversion of notes payable and accrued interest into term note $ - $ - $ 2049
======== ======= =======
Discount on debt issued in connection with the issuance of common stock
warrants $ 12,021 $ - $ -
======== ======= =======
Conversion of accrued interest on notes payable to principal
stockholder $ - $ - $ 3,763
======== ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 570 $ 352 $14,064
======== ======= =======
</TABLE>
(q) New Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income which is effective for the fiscal years
beginning after December 15, 1997. The Company has not yet assessed the impact
of adopting this new accounting standard. Comprehensive income is defined as
the change in equity of a business enterprise during a period from transactions
and other events and circumstances from nonowner sources
In June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information which is effective for fiscal year beginning
after December 15, 1997 and early adoption is encouraged. SFAS No. 131 requires
certain financial and supplementary information to be disclosed on an annual
and interim basis for each reportable segment of an enterprise. Unless
impracticable, companies would be required to restate prior information upon
adoption.
F-12
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(r) Reclassifications
Certain prior year account balances have been reclassified to be consistent with
the current year's presentation.
(3) SENIOR NOTES PAYABLE
On February 21, 1997, the Company sold 175,000 units for $175,000,000, each
unit consisting of $1,000 principal amount of 14% Senior Notes due March 1, 2004
and one warrant to purchase 27.524674 shares of the Company's common stock, at
an exercise price per share of $0.25. Warrants representing the right to
repurchase a total of 4,816,818 shares of common stock were issued. Interest is
due semi-annually on March 1 and September 1 of each year beginning September 1,
1997. The sale of the units resulted in net proceeds to the Company of
approximately $105,000,000, after offering expenses and the payment of certain
obligations and including approximately $46,000,000 which has been escrowed for
certain Senior Note interest payments.
The Senior 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, as defined, each
noteholder will have the right to require the Company to repurchase the Senior
Notes at 101% of face value, plus accrued interest. The Agreement contains
certain restrictive operating covenants, including restrictions on payment of
dividends, incurrence of additional indebtedness, mergers, and sales by the
Company of its assets. The Company was in compliance with its covenants at
December 31, 1997.
Each warrant is 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 on March 1, 2007. In
addition, in the event that the Company does not consummate an initial public
offering (IPO) of its equity securities, resulting in gross proceeds to the
Company of at least $35,000,000, by September 1, 1999, the Company will be
required to issue additional warrants to the holders of the Senior Notes in an
amount equal to 8% of the Company's then outstanding fully diluted common stock.
If an IPO has not occurred by March 1, 2002, the Company will be required to
repurchase the Warrants at their then fair market value, as defined. The
Company has valued these Warrants using the Black-Scholes method and has reduced
the face value of the Senior Notes by approximately $10,200,000. The discount
will be amortized over the life of the Senior Notes, seven years.
On July 28, 1997, the Company commenced an exchange offer for the Senior Notes,
pursuant to which holders of the Senior Notes were permitted to exchange the
Senior Notes for Senior Notes of like tenor that were registered under the
Securities Act of 1933, as amended. During the Company's exchange offer, which
closed on September 3, 1997, the entire $175,000,000 in original principal
amount of privately placed Senior Notes were exchanged by the holders for
registered Senior Notes. At December 31, 1997 the carrying value of the Senior
Notes is approximately $166,000,000 and the accrued interest is approximately
$8,167,000.
(4) SINGAPORE TELECOMMUNICATIONS FINANCING
On April 10, 1995, the Company sold to SingTel Global Services Pte., Ltd.
(SingTel Global) (the principal stockholder) 8,570,000 shares of Series G
convertible preferred stock for $3.50 per share for aggregate gross proceeds of
approximately $30,000,000 (see Note 18). The rights, preferences and privileges
of the Series G Preferred Stock are described in Note 11(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
F-13
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
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, as amended on February 14, 1997 by a debt restructuring
agreement (the Debt Restructuring Agreement), under which the Company may borrow
up to a maximum of $25,000,000. All amounts drawn under the credit facility are
due on the later of (i) March 1, 2005 or (ii) the date on which the Senior
Notes discussed in Note 3, are paid, defeased, redeemed or otherwise satisfied
in full (the Senior Note Payment Date) (Provided that if the Senior Notes are
repaid in full prior to March 1, 2005, borrowings under the credit and asset
facilities will become due 91 days after the Senior Notes payment date). The
interest rate under the credit facility is 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. The Company has reached the
maximum borrowing capacity of $25,000,000. There is a total of $29,110,000 of
principal and accrued interest outstanding under the credit facility at December
31, 1997.
SingTel NA had also provided the Company with $15,000,000 of financing, as
amended on February 14, 1997 by the Debt Restructuring Agreement, to purchase
certain types of fixed assets. The Debt Restructuring Agreement to the asset
facility provides for an 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. The Company has reached the maximum borrowing capacity
of $15,000,000. There is a total $16,012,000 of principal and accrued interest
outstanding under the asset facility at December 31, 1997.
Under the term of the Debt Restructuring Agreement, the Company is required to
adhere to certain operating covenants. At December 31, 1997, the Company was in
compliance with its covenants.
In addition, on February 21, 1997 the Company granted SingTel a warrant to
purchase 2,000,000 shares of the Company's Common Stock at an exercise price of
$1.83. The value ascribed to this warrant, using the Black-Scholes valuation
method, is approximately $0.85 per warrant share. The Company recorded a
discount on the SingTel NA debt of approximately $1,700,000 in respect of this
warrant, which will be amortized to interest expense over the remaining life of
the SingTel NA debt. The unamortized discount on notes payable to principal
stockholder at December 31, 1997 was approximately $1,518,000.
On March 14, 1998, SingTel Global sold all of its shares of Series G convertible
preferred stock to Mr. Douglas J. Ranalli, Chairman and Chief Executive Officer
of the Company, and in connection therewith the Series G stock purchase
agreement and the stockholders' agreement were terminated. See Note 18.
(5) ACQUISITION OF SINGCOM FAX BUSINESS
On September 29, 1997, the Company acquired all of the issued and outstanding
capital stock of Fax International Australia Pty. Limited, an Australian
corporation ("FIA") for an aggregate purchase price of approximately $1,500. On
September 30, 1997, FIA, using funds provided by the Company, purchased certain
assets and assumed certain liabilites of SingCom (Australia) Pty. Limited, an
Australian corporation ("SingCom") relating to its fax business. The aggregate
purchase price paid by FIA for SingCom's fax business assets was approximately
$2.5 million, of
F-14
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
which two-thirds was paid in cash at closing and the remaining one-third is
payable two and one-half years following the closing. SingCom and the selling
shareholders of FIA are affiliates of SingTel. These transactions were
consummated pursuant to a letter of intent between the Company and SingTel and
are effective as of April 1, 1996. On and as of such date, by agreement with
SingTel, the Company assumed operational control of FIA and the fax business of
SingCom. In connection with these transactions, at the closing the Company paid
approximately $1.4 million to SingTel in repayment of certain indebtedness of
SingCom to SingTel respecting SingCom's fax business. Because the Company
obtained effective control of the operations of SingCom's fax business as of
April 1, 1996, the operations of SingCom's fax business are included in the
consolidated financial statements of the Company 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 accounting treatment of
entities under common control. The excess of the purchase price over the book
value of the assets acquired has been charged to stockholders' deficit 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.
Under the agreement between FIA and SingCom, FIA is required to pay SingCom a
total of $1,296,494 (Australian) or approximately $845,000 based upon December
31, 1997 conversion rate, or before March 31, 2000. The outstanding principal
balance of approximately $845,000 is recorded as short term debt at December 31,
1997.
(6) ADVANCES FROM PRINCIPAL STOCKHOLDER
Pursuant to a series of letter agreements, SingTel had made advances to the
Company of $13,350,000 under the Company's intercompany operating agreement with
SingTel of which $312,000 was outstanding as of December 1997. 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 by SingTel to the Company under the
intercompany operating agreement. Accrued interest related to the advances was
approximately $6,800 at December 31, 1997. SingTel had canceled approximately
$6.8 million of such indebtedness in exchange for 5,000 Senior Note units and
the payment of approximately $1.8 million in cash upon the closing of the Senior
Note offering discussed in Note 3.
(7) RELATED PARTY TRANSACTIONS
The Company has entered into agreements with certain stockholders, which provide
credit facilities 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
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, and 4 for the terms of these transactions.
During 1995, the Company initiated a Stock Buyback Program, whereby the Company
purchased various preferred stock and warrant holders rights for $3.50 per share
(see Note 12).
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.
F-15
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(8) NOTES PAYABLE
In September 1995, the Company issued notes payable totaling $3,057,802 to two
Japanese banks. The notes are collaterized by 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, 1997, there is approximately $2,066,000 outstanding under the note
payable. The foreign exchange impact on these notes payable are immaterial at
December 31, 1997.
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, 1997, the outstanding balance was approximately, $1,338,000. 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 were 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. During 1996, the Company purchased $2,600,000 of equipment from
this company. The equipment has been capitalized and is being depreciated over
three years. On April 1, 1997, the Company agreed to exchange the original note
plus accrued interest for a new convertible term note and a warrant to purchase
56,406 shares of the Company's common stock at an exercise price per share of
$0.25. The value ascribed to the warrant, using the Black-Scholes valuation
method, is approximately $1.94 per warrant share. The Company recorded a
discount on the term note of approximately $110,000 in respect of this warrant,
which will be amortized to interest expense using a straight-line method over
five years. The new convertible term note bears interest at 14% per annum and
matures on April 1, 2000. Accrued interest is paid semi-annually on October 1
and April 1. At December 31, 1997, the outstanding balance on the note was
approximately $1,967,000. Accrued interest payable on the convertible note was
approximately $71,000 at December 31, 1997.
On January 3, 1997, the Company entered into a note payable for $308,000 with a
leasing company. The note bears interest at 12% per annum and expires on
January 2, 2000. Principal and interest payments of $10,254 are paid monthly.
At December 31, 1997, the outstanding principal balance was approximately
$116,000.
The maturities of notes payable as of December 31, 1997 are as follows (In
Thousands):
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1998 $3,519
1999 1
2000 1,967
------
$5,487
</TABLE>
F-16
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(9) 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 February
2000. The future minimum lease payments under capital lease obligations for
respective years ending at December 31 are as follows (In Thousands):
<TABLE>
<S> <C>
1998 $1,042
1999 979
2000 12
------
Total minimum payments 2,033
Less--Amount representing interest 89
------
Present value of minimum lease payments 1,944
Less--Current portion of capital lease obligations 976
------
Long-term capital lease obligations,
net of current portion $ 968
======
</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, 1996 and 1997, 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.
(10) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
(In Thousands)
<S> <C> <C>
Equipment $23,900 $33,427
Equipment under capital lease 7,572 7,074
Furniture and fixtures 693 726
Leasehold improvements 2,640 2,740
------- -------
34,805 43,967
Less--Accumulated depreciation and amortization 9,981 18,515
------- -------
$24,824 $25,452
======= =======
</TABLE>
(11) 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.
F-17
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
At December 31, 1997, the Company has available net operating loss
carryforwards in the United States of approximately $112,300,000 for financial
reporting purposes expiring at various dates through 2012. 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 by the Company. The Company also has available United States
federal tax credit carryforwards of approximately $486,000 expiring through the
year 2012. UNIFI Communications, Japan has available net operating loss
carryforwards of approximately $11,300,000 for Japanese tax purposes as of
December 31, 1997, expiring at various dates through 2002. The company also has
foreign net operating loss carryforwards in France, Germany, United Kingdom,
Hong Kong, China, Australia, Korea and Taiwan of approximately $5,800,000,
$6,400,000, $5,000,000, $6,700,000, $580,000,$5,700,000, $2,350,000, and
$600,000 respectively, at December 31, 1997. The Company has recorded a full
valuation allowance against all net operating losses and credit carryforwards
due to the uncertainties surrounding the realization of these assets.
The United States Tax Reform Act of 1986 contains provisions that may limit the
Company's U.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 change in the 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 as of December 31, 1996 and 1997 are as
follows:
<TABLE>
<CAPTION>
1996 1997
-------- -------
(In Thousands)
<S> <C> <C>
Depreciation $ 793 $ 1,869
License fee amortization - 385
Accrued expenses 888 748
Allowance for bad debt 39 158
Net federal and state operating loss carryforwards 21,500 43,685
Foreign net operating loss carryforwards 8,600 14,800
Credit carryforwards 263 486
-------- --------
32,083 62,131
-------- --------
Less -- Valuation Allowance (32,083) (62,131)
-------- --------
Net deferred tax asset $ - $ -
======== ========
</TABLE>
F-18
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(12) STOCKHOLDERS' EQUITY (DEFICIT)
(a) Convertible Preferred Stock
<TABLE>
<CAPTION>
PAR VALUE
1996 1997
(In Thousands)
<S> <C> <C>
Series A, $1.00 par value--authorized--975,000
shares issued and outstanding--743,000 in 1996
and 1997 $ 743 $ 743
Series B, $1.00 par value--authorized--2,700,000
shares issued and outstanding--1,381,038 in 1996
and 1997 1,381 1,381
Series C, $1.00 par value--authorized--650,000
shares issued and outstanding--481,560 in 1996
and 1997 481 481
Series D, $1.00 par value--authorized--2,600,000
shares issued and outstanding--2,145,220 in 1996
and 1997 2,145 2,145
Series E, $1.00 par value--authorized $150,000
shares issued and outstanding--0 in 1996
and 1997 0 0
Series F, $1.00 par value--authorized--500,000
shares issued and outstanding--194,212 in 1996
and 1997 195 195
Series G, $1.00 par value--authorized--8,570,000
shares issued and outstanding--8,570,000 in 1996
and 1997 8,570 8,570
------- -------
$13,515 $13,515
======= =======
</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.
On February 21, 1997, the Company filed a Certificate of Amendment to its
Certificate of Incorporation, as amended, with the Delaware Secretary of State.
The amendment eliminated the Company's authorized but unissued Series H
Convertible Preferred Stock, $1.00 par value per share and authorized 8,570,000
shares of new Series I Convertible Preferred Stock, $1.00 par value per share.
At December 31, 1997, no shares of Series I Convertible Preferred Stock were
issued and outstanding.
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.
F-19
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
VOTING RIGHTS
The holders of the Preferred Stock shall be entitled to vote on all maters 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 Preferred Stock are entitled to a
preference of $1.00 per share ($2,124,038 in aggregate at December 31, 1997)
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, 1997) 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 ($38,183,012) in aggregate at December 31, 1997,
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, 1997, 24,715,000 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 5,575,000 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 fair market value of the Company's common stock as
determined by the Board of Directors.
F-20
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
In September 1997, the Company adopted an executive compensation plan (1997
Plan) whereby the Board of Directors, certain executives and managers of the
Company may receive incentive stock options based on individual performance.
The vesting terms of this 1997 Plan include (i) 50% vests when the stock
reaches $7.00 per share and individuals have 18 months of continued employment
from grant date and (ii) 50% vests when the stock reaches $10.50 per share and
the individual has 36 months of continued employment from the grant date. In
1997, 360,000 options were granted at fair market value under the 1997 Plan.
Stock option activity is summarized as follows for the three years ended
December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
SHARES OPTION PRICE OPTION PRICE
--------- ------------- ------------
<S> <C> <C> <C>
Outstanding, December 31, 1994 1,554,620 $ 0.35 $0.35
Granted 1,271,584 0.35 - 1.05 0.51
Canceled (116,714) 0.35 0.35
Exercised (373,489) 0.35 0.35
--------- ------------- -----
Outstanding, December 31, 1995 2,336,001 0.35 - 1.05 0.38
Granted 425,590 1.05 - 2.25 1.34
Canceled (176,856) 0.35 - 2.25 0.95
Exercised (53,236) 0.35 - 1.05 0.48
--------- ------------- -----
Outstanding, December 31, 1996 2,531,499 0.35 - 2.25 0.81
Granted 1,172,375 2.15 - 2.66 2.42
Canceled (564,347) 0.35 - 2.66 1.29
Exercised (75,996) 0.35 - 2.30 1.05
--------- ------------- -----
Outstanding, December 31, 1997 3,063,531 $0.35 - $2.66 $1.28
========= ============= =====
Exercisable, December 31, 1997 1,031,751 $0.35 - $2.66 $1.22
========= ============= =====
</TABLE>
F-21
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
The Company has continued to measure employee stock compensation cost using the
method of accounting prescribed in Accounting Principals Board (APB) No. 25.
According to SFAS No. 123 Accounting for Stock-Based Compensation, entities
electing to remain with the accounting required by APB No. 25 must make pro
forma disclosures of net loss and, if presented, earnings per share, as if the
fair value based method of accounting defined in the statement had been applied.
Therefore, the Company has computed, for pro forma disclosure purposes only, the
value of all options granted during 1996 and 1997 using the Black-Scholes option
pricing model and as prescribed by SFAS No. 123, using the following weighted
average assumptions for grants in 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Risk-free interest rate 5.63% - 6.95% 6.10% - 6.90%
Expected dividend yield - -
Expected life 7 years 7 years
Expected volatility 65% 65%
Weighted average value of grants $ 0.36 $ 0.87
Weighted average remaining contractual
life of options outstanding 8.70 years 7.04 years
Weighted average exercise price of 562,855,
960,172 and 1,031,751 options exercisable
at December 31, 1995, 1996 and 1997,
respectively $ 0.54 $ 1.22
</TABLE>
The total value of options granted during 1996 and 1997 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>
1996 1997
NET LOSS - (In Thousands)
<S> <C> <C>
As reported $(48,913) $(80,834)
Pro forma (49,089) (80,972)
BASIC AND DILUTED NET LOSS--
PER COMMON SHARE
As reported (13.04) (21.21)
Pro forma (13.08) (21.24)
</TABLE>
F-22
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(d) Warrants to Purchase Common Stock
The Company issued 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 all warrant activity for the three-year
period ended December 31, 1997:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
NUMBER OF PRICE PER AVERAGE
SHARES SHARE PRICE
<S> <C> <C> <C>
Outstanding, December 31, 1994 1,189,092 $0.30 - $3.50 $0.88
Warrants issued 286,552 0.35 0.35
Warrants canceled (574,149) 0.30 - 1.50 1.04
--------- ------------- -----
Outstanding, December 31, 1995 901,495 0.30 - 3.50 0.50
Warrants issued 30,000 0.01 0.01
Warrants exercised (35,500) 0.01 - 0.35 0.29
Warrants canceled (20,000) 1.00 1.00
--------- ------------- -----
Outstanding, December 31, 1996 875,995 0.35 - 1.05 0.59
Warrants issued 6,873,224 0.25 - 1.83 0.71
--------- ------------- -----
Outstanding, December 31, 1997 7,749,219 $0.25 - $3.50 $0.70
========= ============= =====
Exercisable, December 31, 1997 2,875,995 $0.25 - $3.50 $1.46
========= ============= =====
</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 21, 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 4.
The Company granted a warrant to purchase 4,816,818 shares of common stock at a
price of $.25 per share in connection with the Senior Note offering as described
in Note 3.
On April 1, 1997, the Company granted a warrant to purchase 56,406 shares of
common stock at a price of $.25 per share to a company in connection with the
conversion of the convertible-term note as described in Note 7.
All 1997 warrants granted are being valued using the Black-Scholes method and
amortized to interest expense over the life of the related debt.
F-23
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(13) COMMITMENTS
The Company and its subsidiaries lease equipment and 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, 1995,
1996 and 1997 amounted to approximately $838,000, $2,600,000 and $2,690,000,
respectively.
The minimum rental payments under the lease agreements for respective years
ending December 31 are approximately as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
(In Thousands)
<S> <C>
1998 $2,286
1999 1,779
2000 1,654
2001 1,572
2002 1,323
Thereafter 1,169
------
Total minimum payments $9,783
======
</TABLE>
(14) ACCRUED EXPENSES
Accrued expenses consisted of the following as of December 31, 1997:
<TABLE>
<CAPTION>
1996 1997
(In Thousands)
<S> <C> <C>
Accrued payroll and related costs $ 1,765 $ 2,884
Accrued telecommunications costs 3,211 3,589
Accrued equipment costs 1,675 1,396
Accrued interest 251 8,249
Accrued other expense 3,706 3,981
------- -------
Total $10,608 $20,099
======= =======
</TABLE>
(15) EMPLOYEE BENEFIT PLAN
On October 10, 1991, the Company adopted an employee benefit plan under Section
401(k) of the Internal Revenue Code. The UNIFI Communications, Inc. 401(k) Plan
(the 401(k) Plan) allows employees to make pretax contributions up to the
maximum allowable amount set by the Internal Revenue Code. Under the 401(k)
Plan, the company may match a portion of the employee contribution (but is not
obligated to) up to a defined maximum. The Company made no contributions to the
401(k) Plan for the years ended December 31, 1995, 1996 and 1997. The Company
may, but is not obligated to, provide profit sharing to employees. No profit
sharing contributions were awarded in 1995, 1996 and 1997.
F-24
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
(16) GEOGRAPHIC SEGMENT INFORMATION
A summary of the Company's operations by geographic location for the years ended
December 31, 1995, 1996 and 1997 is as follows (In Thousands):
<TABLE>
<CAPTION>
NORTH AMERICA EUROPE PACIFIC RIM ELIMINATIONS TOTAL
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Revenues $ 8,093 $ 1 $ 2,571 $ - $ 10,665
--------- -------- -------- -------- ---------
Loss from operations $ (11,956) $ (372) $ (5,119) $ - $ (17,447)
--------- -------- -------- -------- ---------
Identifiable assets $ 25,319 $ 441 $ 3,055 $ (3,437) $ 25,378
--------- -------- -------- -------- ---------
DECEMBER 31, 1996
Revenues $ 21,799 $ 1,273 $ 10,260 $ (8,114) $ 25,218
--------- -------- -------- -------- ---------
Loss from operations $ (31,900) $(7,206) $(8,411) $ - $ (47,517)
--------- -------- -------- -------- ---------
Identifiable assets $ 64,386 $ 3,135 $ 8,300 $(34,637) $ 41,184
--------- -------- -------- -------- ---------
DECEMBER 31, 1997
Revenues $ 17,054 $ 7,067 $ 19,736 $ - $ 43,857
--------- -------- -------- -------- ---------
Loss from operations $(38,228) $(9,373) $(9,320) $ (1,011) $ (57,932)
--------- -------- -------- -------- ---------
Identifiable assets $ 189,713 $ 7,757 $ 10,812 $(78,007) $ 130,502
--------- -------- -------- -------- ---------
</TABLE>
(17) LOANS TO WORLD VOICE
The Company has made unsecured loans to WorldVoice Inc. (a development stage
company) for the funding of operations of WorldVoice of $450,000 and $150,000
for the year ended December 31, 1996 and 1997, respectively. The Company has
accounted for the loans to WorldVoice for the year ended as development funding,
and accordingly, the Company has charged to operations the loans to WorldVoice
as the funds were utilized by WorldVoice. Included in research and development
expenses for the years ended December 31, 1996 and 1997 is $450,000 and
$150,000, respectively.
(18) SUBSEQUENT EVENT
On March 13, 1998, SingTel Global's representatives to the Company's Board of
Directors, Mr. Lim Eng and Ms. Chua Sock Koong, resigned as directors of the
Company. On March 14, 1998, SingTel Global, the largest stockholder of the
Company, sold 8,570,000 shares of the Series G Convertible Preferred Stock of
the Company to Douglas J. Ranalli, Chairman of the Board of Directors, President
and Chief Executive Officer of the Company, for an aggregate purchase price of
$8,570. The Series G Shares represented all of the issued and outstanding shares
of Series G Convertible Preferred Stock of the Company and were originally
purchased by SingTel Global from the Company in April 1995 for an aggregate
purchase price of approximately $30,000,000. In connection with the sale of the
Series G Convertible Preferred Stock, Mr. Ranalli, SingTel Global and the
Company agreed to terminate the Series G Convertible Preferred Stock Agreement
and Stockholders Agreement dated April 10, 1995, as amended. Additionally, the
liquidation preference as a result of the sale of the series G Convertible
Preferred Stock will be reduced by $30,000,000.
On March 17, 1998, John B. Beinecke resigned from the Company's Board of
Directors. Mr. Beinecke is a Vice President of Antaeus Enterprises, Inc. and a
partner of 420 Associates which together own an aggregate of 974,039 shares of
the Company's Common Stock and Preferred Stock (including warrants to purchase
Common Stock), or
F-25
<PAGE>
UNIFI COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(CONTINUED)
approximately 3.5% of the total issued and outstanding voting capital stock of
the Company on a fully diluted basis. Mr. Beinecke had served as a director of
the Company since 1994. Mr. Beinecke cited as his reason for resignation his
belief that the business and strategic decisions facing the Company in 1998 and
thereafter require expertise in the industry in which the Company operates which
Mr. Beinecke feels he does not possess.
F-26
<PAGE>
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages and positions of the directors and
executive officers of the Company as of the date of this Annual Report on Form
10-K. 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 36 Chairman of the Board of Directors, Chief Executive Officer, Acting Chief Financial Officer,
Acting Vice President of Research and Development
Mark F. Ranalli 32 Director, President of UNIFI Communications, Inc.
Thomas P. Sosnowski 61 Director, Vice President of Research
Timothy J. Martel 40 Executive Vice President and Chief Operating Officer
Steve Darrington 34 Vice President of Worldwide Customer Interaction
Shae J. Plimley 33 Vice President of Product Management
Alvorado Stoddard 42 President of North America Customer Interaction Unit
</TABLE>
- ---------------
Douglas J. Ranalli founded UNIFI in September 1990 and has been the
Chairman and CEO of the Company since that time. Mr. Ranalli was also the
Company's President from 1990 to March 17, 1998. In September 1997, Mr.
Ranalli became Acting Chief Financial Officer and the Acting Vice President of
Research and Development of the Company upon the resignation of the Company's
prior Vice President of Finance and Chief Financial Officer and its Vice
President of Technology, respectively. 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 and the brother of Mark Ranalli.
68
<PAGE>
Mark Ranalli has been a director of the Company since March 16, 1998
and on March 17, 1998 was named as the Company's President. Prior to being named
President, Mr. Ranalli held the positions of Vice President of Product Strategy
from September 1997 to March 1998 and Vice President of UNIFI North America from
June 1993 to September 1997. Prior to joining the Company in June 1993, Mr.
Ranalli worked at AT&T and Prudential Securities. Mr. Ranalli holds a B.S. in
Electrical Engineering from Stanford University and an MBA from The Amos Tuck
School at Dartmouth University. Mr. Ranalli is the brother of Douglas Ranalli.
Thomas P. Sosnowski has been a director of the Company since February
1992 and Vice President of Research of the Company since 1994. Prior to that
time, Dr. Sosnowski was the Vice President and Director of Engineering of the
Company from 1991 to 1992. Prior to joining the Company in 1991, Dr. Sosnowski
began his career at Bell Telephone Laboratories where he held positions in laser
systems and telecommunications research. Dr. Sosnowski later joined GTE
laboratories as a manager of telecommunication systems development and joined
Eikonix where he served as Director of Engineering. In 1986, Dr. Sosnowski
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 Reserve University. He is a senior member of
Institute of Electrical and Electronic Engineers, the author of more than 20
technical publications and a holder of 10 patents.
Timothy J. Martel was named as the Company's Executive Vice President
and Chief Operating Officer on March 17, 1998. Prior to such position, Mr.
Martel served as the Company's Vice President of Product Operations between
August 1996 and March 1998, and Vice President of Development between May 1995,
when he joined the Company and August 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.
Steve Darrington has been the Vice President of Customer Interaction
since August 1997. Prior to such time, Mr. Darrington held the position of
European Controller and Country Manager in the United Kingdom from July 1995 to
August 1997. Prior to joining the Company in July 1995, Mr. Darrington held
positions as a consultant with Venture Capitalists in New Zealand and Controller
of the Economist Newspaper in London from 1990 to 1995. Mr. Darrington holds a
B.A. in Business Studies from Leicester Business School and an MBA from the
Institute of Financial Management at Manchester Business School. Mr. Darrington
is a Chartered Certified Accountant.
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 Ranalli.
Alvorado Stoddard has been the President of the Company's North
America Customer Interaction Unit since September 1997. Prior to such time, Mr.
Stoddard was the Company's Executive Vice President of Worldwide Customer
Interaction since joining the Company 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.
69
<PAGE>
ITEM 11. 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 1997.
<TABLE>
<CAPTION>
OTHER RESTRICTED SECURITIES
NAME AND SALARY ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIAPL POSITION ($) BONUS $ COMPENSATION AWARD OPTIONS # PAYOUTS COMPENSATION
- ------------------ ------ ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas J. Ranalli,
Chief Executive
Officer(1)......... $150,000 -- -- -- -- -- --
Alvarado Stoddard,
Executive Vice
President-
Worldwide Customer
Interaction(2)..... $190,000 $110,000 -- -- 35,438 -- --
Lim Eng,
Vice President and
Chief Operating
Officer(3)......... $150,000 -- $110,473(4) -- -- -- --
Timothy J. Martel,
Vice President-
Product
Operations(5)...... $150,000 -- -- -- 67,500 -- --
Mark F. Ranalli,
Vice President-
Product
Strategy(6)........ $150,000 -- -- -- 27,490 -- --
</TABLE>
(1) Mr. Ranalli also served as the Company's President during 1997. On March
17, 1998, Mark F. Ranalli was designated as the Company's President.
(2) Mr. Stoddard held the position of Executive Vice President--Worldwide
Customer Interaction from January to September 1997. Since September 1997,
Mr. Stoddard has served as President of the North America Customer
Interaction Unit.
(3) Mr. Lim served as the Company's Vice President and Chief Operating Officer
during 1997 pursuant to an agreement between the Company and SingTel. Mr.
Lim resigned from such office on and as of March 13, 1998. See "Certain
Relationships and Related Transactions--Resignation of SingTel
Representative Directors and Sale of Series G Preferred Shares to Douglas J.
Ranalli."
(4) Represents amounts paid to Mr. Lim in respect of income taxes payable by him
with respect to his base salary, pursuant to an agreement between the
Company and SingTel.
70
<PAGE>
(5) Mr. Martel served as the Company's Vice President--Product Operations during
1997. On March 17, 1998, Mr. Martel was designated as the Company's
Executive Vice President and Chief Operating Officer.
(6) Mr. Ranalli served as the Company's Vice President--Product Strategy from
September through December 1997, and as Vice President, North America
Customer Interaction Unit from January through August 1997. Mr. Ranalli was
designated as the Company's President on March 17, 1998.
The following tables set forth individual grants of stock options by
the Company during 1997 to the executive officers named above.
OPTION GRANTS FOR 1997
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS
UNDERLYIING GRANTED TO
OPTIONS EMPLOYEES IN EXERCISE OR BASE EXPIRATION 5% 10%
NAME GRANTED (#) FISCAL YEAR PRICE ($/Sh) DATE ($) ($)
---- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Douglas J. Ranalli...... -- -- -- -- -- ---
Alvorado Stoddard....... 438 * $2.15 4/07 $ 592 $ 1,500
35,000(1) 3.0% $2.66 9/07 $ 58,550 $148,377
Lim Eng................. -- -- -- -- -- ---
Timothy J. Martel....... 2,500 * $2.15 4/07 $ 3,380 $ 8,566
65,000(1) 5.5% $2.66 9/07 $108,736 $275,558
Mark F. Ranalli......... 2,500 * $2.15 4/07 $ 3,367 $ 8,532
25,000(1) 2.1% $2.66 9/07 $ 41,821 $105,984
</TABLE>
* Less than 1%.
(1) Vesting is subject to certain performance-related criteria.
71
<PAGE>
The following table sets forth each exercise of options by the named
executive officers during 1997 and year-end value of stock options held by the
named executive officers.
AGGREGATED OPTION/EXERCISES IN THE LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
FISCAL OPTIONS AT FISCAL
SHARES YEAR-END (#) YEAR-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED $ UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Douglas J. Ranalli.... 0 $0 250,000 (0/250,000) $ 681,250 ($0 / $681,250)
Alvorado Stoddard..... 0 $0 105,438 (290/105,148) $ 76,370 ($278 / $76,092)
Lim Eng............... 0 $0 0
Timothy J. Martel..... 0 $0 129,415 (53,565/75,850) $ 159,195 ($108,529 / $50,666)
Mark F. Ranalli....... 0 $0 252,182 (76,336/175,846) $596,373 ($170,311 / $426,062)
</TABLE>
(1) There is no established trading market for the Registrant's Common Stock.
The values stated are based on a fair market value for the Registrant's
Common Stock of $3.11 per share, which was the fair market value of a share
of Common Stock as determined by the Registrant's Board of Directors at
their last meeting preceding the date of this Report for the purpose of
granting "incentive" options under the Internal Revenue Code of 1986, as
amended.
EMPLOYMENT AGREEMENT WITH DOUGLAS J. RANALLI
In connection with the investments by affiliates of SingTel, 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. On March 17, 1998, Mr. Ranalli voluntarily
relinquished the title of President and Mark F. Ranalli was designated as the
Company's President. Mr. Douglas Ranalli continues to serve as the Company's
Chairman and Chief Executive Officer, as well as its Acting Chief Financial
Officer and Acting Vice President--Research and Development.
72
<PAGE>
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 5,575,000 shares of
Common Stock authorized for grant under the 1993 Plan, 1,471,299 are currently
available for grant, as of February 24, 1998. 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 executive achievement grants, and
the other pool for the Company's Long-Term Retention policy, which provides an
annual grant to each employee with respect to service during the prior year
based on the employee's base salary paid during such prior 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 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, 72,099 shares were available for
grant, as of February 24, 1997. 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
In July 1997, the Company's Board of Directors created a compensation
committee to establish and/or approve the compensation of certain officers of
the Company, including executive officers (other than Mr. Douglas Ranalli). Mr.
Douglas Ranalli, President and Chief Executive Officer of the Company, Ms. Chua
and Mr. Beinecke served as members of the compensation committee. Prior to such
date, the Company did not use a compensation committee to determine executive
officer compensation. Ms. Chua and Mr. Beinecke resigned as directors of the
Company on March 13, 1998 and March 17, 1998, respectively. See "Certain
Relationships and
73
<PAGE>
Related Transactions--Resignation of SingTel Representative Directors and Sale
of Series G Preferred Shares to Douglas J. Ranalli." Consequently, Mr. Douglas
Ranalli is the sole member of the compensation committee as of the date of this
Annual Report. Payments to Mr. Ranalli are made in accordance with the terms of
his employment agreement. See "-Employment Agreement with Douglas J. Ranalli."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 18,
1998 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.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OWNERSHIP OF
NUMBER OF SHARES SHARES OF VOTING
BENEFICIAL OWNERSHIP(1) OF COMMON STOCK PREFERRED STOCK(2) STOCK(3)(4)
- ----------------------- ---------------- ------------------ ------------
<S> <C> <C> <C>
Douglas J. Ranalli...................... 2,350,950(5) 8,884,769(6) 40.9%
Thomas P. Sosnowski..................... 300,128(7) 135,269(8) 1.6%
Mark F. Ranalli......................... 289,434(9) 10,000(10) 1.1%
Steve Darrington........................ 11,410(11) -- *
Timothy J. Martel....................... 88,565(12) -- *
Shae J. Plimley......................... 675,698(13) 22,500(14) 2.5%
Alvorado Stoddard....................... 25,290(15) -- *
SingTel Global Services Pte. Ltd. ...... 2,000,000(16) -- 7.3%
All executive officers and directors
as a group (seven persons)............. 3,741,475 9,052,538 46.6%
</TABLE>
- ------------
* Less than one percent.
(1) The address of each person is c/o the Company, 900 Chelmsford Street,
Lowell, Massachusetts 01851.
(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
74
<PAGE>
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, and the exercise of all warrants and options that are or could
become exercisable within 60 days.
(4) The number of shares of Common Stock deemed outstanding on March 18, 1998
includes: (i) 3,871,681 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) 7,749,219 shares of Common Stock issuable
pursuant to outstanding warrants to purchase Common Stock exercisable
within 60 days, and (iv) 2,303,542 shares of Common Stock issuable pursuant
to outstanding options exercisable within 60 days.
(5) 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.
(6) Includes 70,000 shares of Series A Convertible Preferred Stock, 244,769
shares of Series B Convertible Preferred Stock and 8,570,000 shares of
Series G Convertible Preferred Stock, representing 9% , 18% and 100%,
respectively, of the outstanding shares of such series. Does not include
shares owned beneficially and of record by Ms. Plimley. Mr. Ranalli
acquired ownership of the shares of Series G Convertible Preferred Stock on
March 14, 1998 in a purchase and sale transaction with SingTel Global
Services Pte. Ltd. See "Certain Relationships and Related Transactions--
Resignation of SingTel Representative Directors and Sale of Series G
Preferred Shares to Douglas J. Ranalli."
(7) Includes 7,058 shares issuable pursuant to options that are or could become
exercisable within 60 days.
(8) 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.
(9) Includes 251,336 shares issuable pursuant to options that are or could
become exercisable within 60 days.
(10) Represents 10,000 shares of Series C Convertible Preferred Stock,
representing 2.08% of the outstanding shares of such series.
(11) Includes 11,410 shares issuable pursuant to options that are or could
become exercisable within 60 days.
(12) Represents 88,565 shares issuable pursuant to options that are or could
become exercisable within 60 days.
(13) Includes 192,228 shares issuable pursuant to options that are or 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.
(14) Represents 22,500 shares of Series B Convertible Preferred Stock,
representing 1.6% of the outstanding shares of such series.
(15) Represents 25,290 shares issuable pursuant to options that are or could
become exercisable within 60 days.
(16) Represents 2,000,000 shares issuable to SingTel Global pursuant to warrants
75
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RESIGNATION OF SINGTEL REPRESENTATIVE DIRECTORS AND SALE OF SERIES G PREFERRED
SHARES TO DOUGLAS J. RANALLI
On and as of March 13, 1998, Mr. Lim Eng and Ms. Chua Sock Koong
resigned as directors of the Company. On and as of March 14, 1998, SingTel
Global Services Pte. Ltd. ("ST Global"), a wholly-owned subsidiary of Singapore
Telecommunications Limited ("SingTel") and, prior to such date, the largest
stockholder of the Company, sold 8,570,000 shares of the Series G Convertible
Preferred Stock of the Company (the "Series G Shares") to Douglas J. Ranalli,
the founder, Chairman of the Board of Directors, President and Chief Executive
Officer of the Company, for an aggregate purchase price of $8,570, or $0.001 per
share. The Series G Shares represented all of the issued and outstanding shares
of Series G Convertible Preferred Stock of the Company and were originally
purchased by ST Global from the Company in April 1995 for a purchase price of
$3.50 per share, or approximately $30 million in the aggregate. In connection
with the sale by ST Global of the Series G Shares to Mr. Ranalli, ST Global and
the Company agreed to terminate the Series G Convertible Preferred Stock
Purchase Agreement between them dated as of April 10, 1995, as amended, and to
terminate the Stockholders Agreement among the Company, ST Global, Douglas J.
Ranalli and certain other shareholders of the Company dated as of April 10,
1995, as amended. Pursuant to the Stockholders Agreement, ST Global had the
right to appoint two members (three members in certain cases) of the Company's
Board of Directors. Mr. Lim and Ms. Chua had served as ST Global's
representatives to the Company's Board of Directors since April 1995. Mr. Lim
had served as the Company's Vice President and Chief Operating Officer since
April 1997, which office he also resigned on and as of March 13, 1998.
The Company believes that Mr. Lim and Ms. Chua resigned from their
respective offices in the Company, and that SingTel effected the sale of the
Series G Shares from ST Global to Mr. Ranalli, for two principal reasons.
First, the Company believes that SingTel's decision was motivated in part by
what the Company believes is a recent determination by SingTel to cease active
participation in certain of its international investments, of which the Company
was one, in favor of concentrating its resources and personnel on further
development of its core businesses in its home market. Authorities in Singapore
recently accelerated the date on which Singapore will fully deregulate its
telecommunications markets. Consequently, SingTel, the state-owned monopoly
provider of basic telecom services, will face a competitive environment sooner
than it had anticipated. As a result, the Company believes that SingTel is
taking actions to restrict further involvement of its resources and personnel in
certain ancillary international business activities, including the business of
the Company. Ms. Chua is SingTel's Chief Financial Officer, and Mr. Lim was an
officer of SingTel prior to joining the Company as its Chief Operating Officer
and is expected to resume his duties at SingTel following his resignation from
the Company. Second, the Company believes that SingTel's decision was motivated
in part by a recognition that the Company's task of obtaining required
additional financing would be made more difficult by the continued existence of
SingTel's control position within the Company. The Series G Shares represent
approximately 31% (at March 18, 1998) of the total voting power of the Company's
issued and outstanding capital stock on a fully diluted basis (including
warrants and options to acquire stock). In addition, pursuant to the Series G
Convertible Preferred Stock Purchase Agreement and the Stockholders Agreement,
ST Global had the right to control significant aspects of the Company's
operations and board of directors. The Company believes that SingTel determined
that the continued existence of such control position and management and board
rights would significantly impede the Company's efforts to obtain additional
third party financing, and SingTel indicated to the Company that it would not be
able to provide such additional financing to the Company. Consequently,
SingTel, the Company believes, elected to forfeit such control position and
rights in order to assist the Company in obtaining the required additional
financing and, derivatively, to increase the probability that SingTel would
realize value from its remaining stockholdings and be repaid the principal and
accrued interest of its loans to the Company.
After giving effect to the sale by ST Global of the Series G Shares to Mr.
Ranalli, ST Global continues to hold a warrant to purchase up to 2,000,000
shares of the Company's Common Stock at an exercise price per share of $1.83,
exercisable at any time or from time to time until March 1, 2007. Such warrant
was issued to ST Global in February 1997 in connection with SingTel's agreement
to restructure its debt and equity investment agreements
76
<PAGE>
upon the closing of the sale by the Company of the Senior Notes. Such warrant
shares represent approximately 7% of the total issued and outstanding voting
capital stock of the Company on a fully diluted basis as of March 18, 1998. In
addition, the Company owed an aggregate of approximately $45.5 million (as of
March 1, 1998) to SingTel (Netherlands Antilles) Pte N.V. ("SingTel NA"), an
affiliate of SingTel. Such amount represents the principal and accrued interest
of certain loans made to the Company by SingTel NA as part of the original
SingTel investment in the Company in April 1995 under a Credit Agreement and a
Term Loan Agreement--Equipment between the Company and SingTel NA. Such loans by
SingTel NA are subordinated in right of payment to the Senior Notes. Until the
Senior Notes are repaid in full, interest on the SingTel NA loans will accrue
and is not payable in cash.
In connection with the sale by ST Global of the Series G Shares to Douglas J.
Ranalli, SingTel NA agreed to amend its Credit Agreement and Term Loan
Agreement--Equipment with the Company to delete or modify certain provisions
relating to the Company's ability under such agreements to incur liens on its
assets and to the conditions under which the Company could be declared in
default of such agreements.
RESIGNATION OF JOHN B. BEINECKE FROM THE BOARD OF DIRECTORS
On March 17, 1998, John B. Beinecke resigned from the Company's Board of
Directors. Mr. Beinecke is a Vice President of Antaeus Enterprises, Inc. and a
partner of 420 Associates which together own an aggregate of 974,039 shares of
the Company's Common Stock and Preferred Stock (including warrants to purchase
Common Stock), or approximately 3.6% of the total issued and outstanding voting
capital stock of the Company on a fully diluted basis. Mr. Beinecke had served
as a director of the Company since 1994. Mr. Beinecke cited as his reason for
resignation his belief that the business and strategic decisions facing the
Company in 1998 and thereafter require expertise in the telecommunications
industry which Mr. Beinecke feels he does not possess.
ACQUISITION OF FAX INTERNATIONAL AUSTRALIA PTY. LIMITED AND FAX BUSINESS OF
SINGCOM (AUSTRALIA) PTY. LIMITED
On September 29, 1997, the Company acquired all of the issued and
outstanding capital stock of Fax International Australia Pty. Limited, an
Australian corporation ("FIA") for an aggregate purchase price of approximately
$1,500. On September 30, 1997, FIA, using funds provided by the Company,
purchased certain assets and assumed certain liabilites of SingCom (Australia)
Pty. Limited, an Australian corporation ("SingCom") relating to its fax
business. The aggregate purchase price paid by FIA for SingCom's fax business
assets was approximately $2.5 million, of which two-thirds was paid in cash at
closing and the remaining one-third is payable two and one-half years following
the closing. SingCom and the selling shareholders of FIA are affiliates of
SingTel. These transactions were consummated pursuant to a letter of intent
between the Company and SingTel and are effective as of April 1, 1996. On and
as of such date, by agreement with SingTel, the Company assumed operational
control of FIA and the fax business of SingCom. In connection with these
transactions, at the closing the Company paid approximately $1.4 million to
SingTel in repayment of certain indebtedness of SingCom to SingTel respecting
SingCom's fax business.
77
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) Financial Statements, Schedules and Exhibits
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).
+4.3 Specimen Certificate of 14% Senior Notes due 2004 (the "Exchange
Notes") (included in Exhibit 4.1).
+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.
+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 No. 1 to the Intercompany Operating Agreement dated
September 30, 1996 between UNIFI Communications, Inc. and
Singapore Telecommunications Limited.
+10.7 Amendment, dated as of February 21, 1997, to the Intercompany
Operating Agreement dated April 10, 1995, among UNIFI
Communications, Inc. and Singapore Telecommunications Limited.
78
<PAGE>
+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 First Amendment, dated as of February 5, 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 Second Amendment, dated as of February 21, 1997, of the Series G
Convertible Preferred Stock Purchase Agreement, dated as of April
10, 1995, between UNIFI Communications, Inc., SingTel Global
Services Pte Ltd, as amended.
+10.11 Amended Restated Registration Rights Agreement, dated as of April 10,
1995 among UNIFI Communications, Inc. and various investors named
therein.
+10.12 Amended, dated as of February 21, 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 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 10.25).
+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).
+10.24 Software License and Services Agreement dated September 20, 1996
between UNIFI Communications, Inc. and Control Data Systems, Inc.
79
<PAGE>
+10.25 $2,049,315 Convertible Term Note, dated as of April 1, 1997, of UNIFI
Communications, Inc. dated as of April 1, 1997, issued to Control Data
Systems, Inc.
+10.26 Warrant to purchase up to 50,406 shares of Common Stock of UNIFI
Communications, Inc., dated as of April 1, 1997, issued to Control
Data Systems, Inc.
*10.27 Share Sale Agreement (Fax International Australia Pty. Limited) dated
as of September 29, 1997 among UNIFI Communications, Inc., Graham
Bruce Darley and Sin Hang Boon.
*10.28 Agreement for Sale of Business dated as of September 30, 1997 between
SingCom (Australia) Pty. Limited and Fax International Australia Pty.
Limited.
*10.29 First Amendment to Lease, dated as of June 25, 1997, between UNIFI
Communications, Inc. and Cross Point Limited Partnership.
*10.30 Second Amendment to Lease, dated as of October 21, 1997, between UNIFI
Communications, Inc. and Cross Point Limited Partnership.
**10.31 Third Amendment, dated as of March 14, 1998, to Series G Convertible
Preferred Stock Purchase Agreement dated as of April 10, 1995, as
amended, among UNIFI Communications, Inc., SingTel Global Services
Pte. Ltd. and Douglas J. Ranalli.
**10.32 Second Amendment, dated as of March 14, 1998, to Stockholders
Agreement dated as of April 10, 1995, as amended, among UNIFI
Communications, Inc., SingTel Global Services Pte. Ltd., Douglas J.
Ranalli and Shelly Ranalli.
**10.33 Second Amendment, dated as of March 14, 1998, to Credit Agreement
dated as of April 10, 1995, as amended, among UNIFI Communications,
Inc. and SingTel (Netherlands Antilles) Pte. N.V.
**10.34 Second Amendment, dated as of March 14, 1998, to Term Loan
Agreement--Equipment dated as of April 10, 1995, as amended, among
UNIFI Communications, Inc. and SingTel (Netherlands Antilles) Pte.
N.V.
**11.0 Statement re: Computation of Net Loss per Common Shares
**23.1 Consent of Arthur Andersen, LLP
**27.0 Financial Data Schedule.
___________________________
* Previously filed with Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997 and incorporated herein by reference.
+ Previously filed with registrant's Registration Statement on Form S-4
(Registration No. 333-25521) and incorporated herein by reference.
**Filed herewith.
(B) There were no reports on Form 8-K filed during the fourth quarter of 1997.
80
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Act of
1934, the Registrant duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 30, 1998.
UNIFI COMMUNICATIONS, INC.
By: /s/ Douglas J. Ranalli
____________________________________
Name: Douglas J. Ranalli
Title: Chairman of the Board of Directors and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Douglas J. Ranalli
________________________________ Chairman of the Board of March 30, 1998
Douglas J. Ranalli Directors, Chief Executive
Officer (principal executive
officer) and Acting Chief
Financial Officer (principal
financial and accounting
officer)
/s/ Thomas P. Sosnowski
_______________________________ Director March 30, 1998
Thomas P. Sosnowski
/s/ Mark F. Ranalli
_______________________________ Director March 30, 1998
Mark F. Ranalli
81
<PAGE>
EXHIBIT 10.31
THIRD AMENDMENT TO
SERIES G CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
The parties to this Third Amendment to Series G Convertible Preferred Stock
Purchase Agreement, dated as of March 14, 1998, are UNIFI Communications, Inc.,
a Delaware corporation (the "Company"), SingTel Global Services Pte. Ltd. ("ST
-------
Global") a wholly-owned subsidiary of Singapore Telecommunications Limited, a
Singapore corporation with its registered office at 31 Exeter Road, Comcentre,
Singapore 239732, and Douglas J. Ranalli of Cambridge, Massachusetts.
RECITALS
A. The Company and ST Global are parties to a Series G Convertible
Preferred Stock Purchase Agreement dated as of April 10, 1995, as amended (the
"Agreement).
- ----------
B. On and as of the date hereof, ST Global has sold, and Douglas J.
Ranalli has purchased, all of the issued and outstanding Series G Convertible
Preferred Stock of the Company held by ST Global.
C. The parties desire that upon and as of the closing of such sale and
purchase of Series G Convertible Preferred Stock, the Agreement shall terminate
and be of no further force or effect.
The parties accordingly agree as follows:
1. Upon and as of the closing of the sale by ST Global to Douglas J.
Ranalli, and the purchase from ST Global by Douglas J. Ranalli, of the 8,570,000
shares of Series G Convertible Preferred Stock of the Company originally
purchased by ST Global from the Company under the Agreement, the Agreement shall
terminate and be of no further force or effect.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
-2-
IN WITNESS WHEREOF, the parties have executed this Third Amendment to
Series G Convertible Preferred Stock Purchase Agreement as of the date first
above written.
UNIFI COMMUNICATIONS, INC. SINGTEL GLOBAL SERVICES PTE LTD
By: /s/ Douglas J. Ranalli By: /s/ Chua Sock Koong
------------------------- -------------------------
Douglas J. Ranalli
President Title: Director
----------------------
/s/ Douglas J. Ranalli
----------------------------
Douglas J. Ranalli
<PAGE>
EXHIBIT 10.32
SECOND AMENDMENT TO
STOCKHOLDERS AGREEMENT
The parties to this Second Amendment to Stockholders Agreement, dated as of
March 14, 1998, are UNIFI Communications, Inc., a Delaware corporation (the
"Company"), SingTel Global Services Pte. Ltd., ("ST Global") a wholly-owned
- --------
subsidiary of Singapore Telecommunications Limited, a Singapore corporation with
its registered office at 31 Exeter Road, Comcentre, Singapore 239732, Douglas J.
Ranalli and Shelly Ranalli, each of Cambridge, Massachusetts.
RECITALS
A. The parties are parties to a Stockholders Agreement (the "Agreement")
---------
dated as of April 10, 1995, as amended by the First Amendment thereto dated as
of February 21, 1997.
B. ST Global is as of the date of this Second Amendment selling all of
its shares of Series G Convertible Preferred Stock of the Company to Douglas J.
Ranalli.
C. The parties desire that the Agreement terminate and be of no further
force or effect as to ST Global.
The parties accordingly agree as follows.
1. The Agreement is hereby terminated, effective as of the date first
above written, as to ST Global. Notwithstanding that ST Global may presently or
in the future hold shares of capital stock in the Company, from and after the
date hereof ST Global shall have no rights or obligations under the Agreement,
including without limitation the right to nominate members to the Company's
Board of Directors and the obligation to vote shares of the Company's capital
stock held by ST Global in favor of nominees to the Company's Board of Directors
of any other party to the Agreement or otherwise.
2. Except as amended hereby, the Agreement shall remain in full force and
effect as to all parties other than ST Global.
[REMAINDER OF PAGE LEFT BLANK INTENTIONALLY]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Second Amendment to
Stockholders Agreement as of the date first above written.
UNIFI COMMUNICATIONS, INC. SINGTEL GLOBAL SERVICES PTE LTD
By: /s/ Douglas J. Ranalli By: /s/ Chua Sock Koong
------------------------------------------ --------------------------
Douglas J. Ranalli
President Title: Director
------------------------
/s/ Douglas J. Ranalli /s/ Shelley Ranelli
------------------------------------------- --------------------------------
Douglas J. Ranalli Shelley Ranalli
<PAGE>
EXHIBIT 10.33
SECOND AMENDMENT TO
CREDIT AGREEMENT
The parties to this Second Amendment to Credit Agreement, dated as of March 14,
1998, are UNIFI Communications, Inc., a Delaware corporation (the "Borrower"),
--------
and SingTel (Netherlands Antilles) Pte N.V., a Netherlands Antilles corporation
having its registered office at Pietermaai 15 Willemstad, Curacao, Netherlands
Antilles ("SingTel N.A.").
------------
The parties are parties to a Credit Agreement (the "Agreement") dated as of
---------
April 10, 1995, as amended by the First Amendment thereto dated as of February
21, 1997, and desire to further amend the Agreement in the manner set forth
herein. The parties accordingly agree as follows.
1. Section 7.1(a)(ii) is hereby amended by changing the thirty (30) day
period set forth therein to a forty-five (45) day period.
2. Section 7.2(a) of the Agreement is hereby amended in its entirety to
read as follows:
"create or incur any Liens on any of the property or assets of the Borrower
or any of its Subsidiaries except as permitted pursuant to Section 4.11
("Limitation on Liens") of that certain Indenture between the Borrower and
Fleet National Bank as Trustee dated as of February 21, 1997."
3. Subsections (j) and (m) of Section 8 of the Agreement are hereby each
amended by replacing the phrase "One Million Dollars ($1,000,000)" appearing
therein with the phrase "Five Million Dollars ($5,000,000)".
4. Except as amended hereby, the Agreement shall remain in full force and
effect.
In witness whereof, this Second Amendment to Credit Agreement has been
executed by the parties hereto as of the date first set forth above.
UNIFI Communications, Inc. SingTel (Netherlands Antilles)
Pte N.V.
By: /s/ Douglas J. Ranalli By: /s/ Chua Sock Koong
------------------------- -------------------------
Douglas J. Ranalli
President Title: Director
----------------------
<PAGE>
EXHIBIT 10.34
SECOND AMENDMENT TO
TERM LOAN AGREEMENT--EQUIPMENT
The parties to this Second Amendment to Term Loan Agreement--Equipment, dated as
of March 14, 1998, are UNIFI Communications, Inc., a Delaware corporation (the
"Borrower"), and SingTel (Netherlands Antilles) Pte N.V., a Netherlands Antilles
- ---------
corporation having its registered office at Pietermaai 15 Willemstad, Curacao,
Netherlands Antilles ("SingTel N.A.").
------------
The parties are parties to a Term Loan Agreement--Equipment (the "Agreement")
---------
dated as of April 10, 1995, as amended by the First Amendment thereto dated as
of February 21, 1997, and desire to further amend the Agreement in the manner
set forth herein. The parties accordingly agree as follows.
1. Section 7.1(a)(ii) is hereby amended by changing the thirty (30) day
period set forth therein to a forty-five (45) day period.
2. Section 7.2(a) of the Agreement is hereby amended in its entirety to
read as follows:
"create or incur any Liens on any of the property or assets of the Borrower
or any of its Subsidiaries except as permitted pursuant to Section 4.11
("Limitation on Liens") of that certain Indenture between the Borrower and Fleet
National Bank as Trustee dated as of February 21, 1997."
3. Subsections (j) and (m) of Section 8 of the Agreement are hereby each
amended by replacing the phrase "One Million Dollars ($1,000,000)" appearing
therein with the phrase "Five Million Dollars ($5,000,000)".
4. Except as amended hereby, the Agreement shall remain in full force and
effect.
In witness whereof, this Second Amendment to Term Loan Agreement--Equipment
has been executed by the parties hereto as of the date first set forth above.
UNIFI Communications, Inc. SingTel (Netherlands Antilles)
Pte N.V.
By: /s/ Douglas J. Ranalli By: /s/ Chua Sock Koong
----------------------------------------- ---------------------------
Douglas J. Ranalli
President Title: Director
-------------------------
<PAGE>
EXHIBIT 11.0
UNIFI COMMUNICATIONS, INC.
COMPUTATION OF NET LOSS PER SHARE (1)
FORM 10K, DECEMBER 31, 1997
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
1996 1997
<S> <C> <C>
Net loss $(48,913) $(80,834)
======== ========
Weighted average number of common shares
outstanding during period 3,752 3,812
======== ========
Net loss per common share $ (13.04) $ (21.21)
======== ========
</TABLE>
(1) Primary and fully diluted net loss per share has not been separately
presented, as the amounts would not be meaningful.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into UNIFI Communications, Inc.'s previously
filed Registration Statement on Form S-8, File No. 333-47217.
ARTHUR ANDERSON LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
FOR UNIFI COMMUNICATIONS INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS
ENTIRETY BY REFERNCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 50,687
<SECURITIES> 0
<RECEIVABLES> 8,259
<ALLOWANCES> 294
<INVENTORY> 0
<CURRENT-ASSETS> 83,623
<PP&E> 43,967
<DEPRECIATION> 18,515
<TOTAL-ASSETS> 130,502
<CURRENT-LIABILITIES> 30,366
<BONDS> 0
0
13,515
<COMMON> 39
<OTHER-SE> (161,341)
<TOTAL-LIABILITY-AND-EQUITY> 130,502
<SALES> 43,857
<TOTAL-REVENUES> 43,857
<CGS> 37,945
<TOTAL-COSTS> 42,220
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,436
<INCOME-PRETAX> (80,834)
<INCOME-TAX> 0
<INCOME-CONTINUING> (80,834)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (80,834)
<EPS-PRIMARY> (21.21)
<EPS-DILUTED> 0
</TABLE>
