<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1996
REGISTRATION NO. 333-4115
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
MFS COMMUNICATIONS COMPANY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 47-0714388
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION)
11808 MIRACLE HILLS DRIVE
OMAHA, NEBRASKA 68154
(402) 231-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
TERRENCE J. FERGUSON, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
MFS COMMUNICATIONS COMPANY, INC.
11808 MIRACLE HILLS DRIVE
OMAHA, NEBRASKA 68154
(402) 231-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
WITH COPIES TO:
JOHN S. D'ALIMONTE, ESQ. AUGUST J. MORETTI, ESQ.
STEVEN J. GARTNER, ESQ. RICHARD FRIEDMAN, ESQ.
WILLKIE FARR & GALLAGHER HELLER EHRMAN WHITE & MCAULIFFE
ONE CITICORP CENTER 525 UNIVERSITY AVENUE
153 EAST 53RD STREET PALO ALTO, CALIFORNIA 94301
NEW YORK, NEW YORK 10022 (415) 324-7000
(212) 821-8000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Item 501 of Registration S-K showing the location in the Joint
Proxy Statement-Prospectus of the responses to the Items of Part 1 of Form S-4.
<TABLE>
<CAPTION>
JOINT PROXY STATEMENT-PROSPECTUS
REGISTRATION STATEMENT ITEM AND CAPTION CAPTION
--------------------------------------- --------------------------------
<C> <S>
1. Forepart of Registration Statement and
Outside Front Cover Page of Facing Page; Cross-Reference
Prospectus............................. Sheet; Outside Front Cover of
Prospectus
2. Inside Front and Outside Back Cover Inside Front Cover of Prospectus;
Pages of Prospectus.................... Table of Contents
3. Risk Factors, Ratio of Earnings to
Fixed Charges and Other Information.... Summary; Summary Historical and
Unaudited Pro Forma Combined
Condensed Information; and
Comparative Per Share Prices
4. Terms of the Transaction............... Summary; The Merger; The Merger
Agreement; The Stock Option
Agreement; MFS Voting Agreement;
Description of MFS Capital
Stock; Comparison of
Stockholders Rights
5. Pro Forma Financial Information........ Summary Historical and Unaudited
Pro Forma Combined Condensed
Financial Information; Unaudited
Pro Forma Consolidated Financial
Statements--The Merger;
Unaudited Pro Forma Combined
Financial Statements--Exercise
of Option
6. Material Contracts with the Company
Being Acquired......................... The Merger Agreement
7. Additional Information Required for
Reoffering by Persons and Parties
Deemed to be Underwriters.............. Not Applicable
8. Interests of Named Experts and
Counsel................................ Not Applicable
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
10. Information with Respect to S-3 Available Information;
Registrants............................ Incorporation of Documents by
Reference; Summary; Business of
MFS; Description of MFS Capital
Stock
11. Incorporation of Certain Information by
Reference.............................. Available Information;
Incorporation of Documents by
Reference
12. Information with Respect to S-2 or S-3
Registrants............................ Not Applicable
13. Incorporation of Certain Information by
Reference.............................. Not Applicable
14. Information with Respect to Registrants
Other Than S-2 or S-3 Registrants...... Not Applicable
15. Information with Respect to S-3
Companies.............................. Not Applicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JOINT PROXY STATEMENT-PROSPECTUS
REGISTRATION STATEMENT ITEM AND CAPTION CAPTION
--------------------------------------- --------------------------------
<C> <S>
16. Information with Respect to S-2 or S-3
Companies.............................. Not Applicable
17. Information with Respect to Companies
Other Than S-2 or S-3 Companies........ Summary; Business of UUNET;
Selected Consolidated Financial
Data of UUNET; UUNET
Management's Discussion and
Analysis of Financial Condition
and Results of Operations; UUNET
Technologies, Inc. Consolidated
Financial Statements
18. Information if Proxies, Consents or
Authorizations Are to Be Solicited..... Summary; The UUNET Special
Meeting; The MFS Annual Meeting;
The Merger; Management of UUNET;
Security Ownership of MFS;
Security Ownership of UUNet
19. Information if Proxies, Consents or
Authorizations are Not to Be Solicited
or in an Exchange Offer................ Not Applicable
</TABLE>
<PAGE>
MFS COMMUNICATIONS COMPANY, INC.
11808 MIRACLE HILLS DRIVE
OMAHA, NEBRASKA 68154
LOGO
, 1996
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders of
MFS Communications Company, Inc. ("MFS") to be held at [10:00] a.m. on ,
, 1996, at .
At this important meeting, you will be asked to approve the issuance of MFS
common stock, par value $.01 per share (the "MFS Common Stock") in connection
with the Agreement and Plan of Merger, dated as of April 29, 1996 (the "Merger
Agreement"), among MFS, MFS Global Internet Services, Inc., a wholly owned
subsidiary of MFS ("Sub"), and UUNET Technologies, Inc. ("UUNET"). Pursuant to
the terms of the Merger Agreement, Sub will be merged with and into UUNET (the
"Merger"), and UUNET will become a wholly owned subsidiary of MFS.
Pursuant to the Merger, each outstanding share of UUNET common stock will be
converted into and represent the right to receive 1.777776 shares of MFS
Common Stock (the "Exchange Ratio"). The proposed Merger is described in the
accompanying Joint Proxy Statement-Prospectus, the forepart of which includes
a summary of the terms of the Merger and certain other information relating to
the proposed transaction. In addition, pursuant to a Stockholder Option,
Voting and Proxy Agreement, MFS has been granted an option (the "Option") by
certain stockholders of UUNET to purchase all such stockholders' shares of
UUNET common stock held on the date of exercise of the option (19,300,917
shares of UUNET common stock as of the MFS Record Date (as defined below)) for
the Exchange Ratio. The Option may be exercised at any time following the
occurrence of a Purchase Event (as defined in the Merger Agreement). Under
Delaware law, the holders of MFS capital stock are not entitled to appraisal
rights in connection with the issuance of shares of MFS Common Stock in the
Merger or MFS' exercise of the Option.
Gleacher NatWest Inc. ("Gleacher NatWest") was retained by MFS to act as its
independent financial advisor in connection with the Merger. As discussed in
the accompanying Joint Proxy Statement-Prospectus, Gleacher NatWest has
delivered to the MFS Board of Directors its written opinion that, as of April
29, 1996 and based upon and subject to certain matters stated in its written
opinion, the Exchange Ratio offered by MFS to the UUNET stockholders pursuant
to the Merger is fair from a financial point of view to MFS and its
stockholders.
Certain stockholders of MFS who owned 15,305,777 shares of MFS Common Stock,
or approximately 12.1% of the outstanding shares of MFS Common Stock and
representing approximately 5.5% of the voting power of the MFS capital stock
as of June 21, 1996, the Record Date for the Annual Meeting (the "MFS Record
Date") have advised MFS that they have granted irrevocable proxies in favor of
UUNET to vote all of such stockholders' shares of MFS Common Stock owned as of
the MFS Record Date in favor of the issuance of MFS Common Stock pursuant to
the Merger Agreement.
ON APRIL 29, 1996, YOUR BOARD OF DIRECTORS DETERMINED THAT THE MERGER IS
FAIR TO, AND IN THE BEST INTERESTS OF, MFS AND ITS STOCKHOLDERS. YOUR BOARD OF
DIRECTORS HAS APPROVED THE TERMS OF THE MERGER BY THE UNANIMOUS VOTE OF THOSE
DIRECTORS PRESENT AND UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO APPROVE
THE ISSUANCE OF MFS COMMON STOCK PURSUANT TO THE MERGER AGREEMENT.
At the Annual Meeting you will also be asked to consider and act upon the
following matters: (a) the reelection to the Board of Directors of MFS of the
four Class I Directors for a three-year term until the 1999 Annual Meeting of
Stockholders; (b) the adoption of amendments to the MFS 1993 Stock Plan; (c)
the adoption of amendments to the MFS 1995 Deferred Stock Purchase Plan; (d)
the ratification of the appointment by the MFS Board of Directors of Coopers &
Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal year; and
(e) the transaction of such other business as may properly come before the
Annual Meeting.
<PAGE>
The MFS Board of Directors recommends that its stockholders reelect the four
Class I directors for a three-year term until the 1999 Annual Meeting of
Stockholders, approve the proposed amendments to the MFS 1993 Stock Plan,
approve the proposed amendments to the MFS 1995 Deferred Stock Purchase Plan
and ratify the appointment by the MFS Board of Directors of Coopers & Lybrand
L.L.P. as independent auditors of MFS for the 1996 fiscal year. See "MFS
REELECTION OF CLASS I DIRECTORS PROPOSAL," "MFS AMENDMENT TO AMENDED AND
RESTATED 1993 STOCK PLAN PROPOSAL," "MFS AMENDMENT TO 1995 DEFERRED STOCK
PURCHASE PLAN (AMENDED AND RESTATED AUGUST 28, 1995) PROPOSAL" and "MFS
RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS PROPOSAL,"
respectively. It is MFS' current intention to vote all proxies that contain
instructions to vote in favor of the MFS Share Proposal and those proxies that
contain no voting instructions for purposes of the MFS Share Proposal to
adjourn the Annual Meeting in order to solicit additional votes in favor of
the MFS Share Proposal, should such additional solicitation be necessary to
approve the MFS Share Proposal.
Information concerning the matters to be considered and voted upon at the
Annual Meeting is set forth in the attached Notice of Annual Meeting and Joint
Proxy Statement-Prospectus. It is important that your shares be represented at
the Annual Meeting, regardless of the number you hold. Therefore, please sign,
date and return your proxy card as soon as possible, whether or not you plan
to attend the Annual Meeting. This will not prevent you from voting your
shares in person if you subsequently choose to attend the Annual Meeting.
Sincerely,
James Q. Crowe
Chairman of the Board and Chief
Executive Officer
<PAGE>
MFS COMMUNICATIONS COMPANY, INC.
11808 MIRACLE HILLS DRIVE
OMAHA, NEBRASKA 68154
----------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD , 1996
----------------
To the Stockholders of MFS Communications Company, Inc.:
The Annual Meeting of Stockholders of MFS Communications Company, Inc., a
Delaware corporation ("MFS"), will be held at at [10:00] a.m. on
, , 1996 for the following purposes:
1. To approve the issuance (the "MFS Share Proposal") of MFS common
stock, par value $.01 per share ("MFS Common Stock") in connection with
either (i) the Agreement and Plan of Merger, dated as of April 29, 1996
(the "Merger Agreement"), among MFS, MFS Global Internet Services, Inc., a
wholly owned subsidiary of MFS ("Sub"), and UUNET Technologies, Inc.
("UUNET"), pursuant to which (a) Sub will be merged with and into UUNET
(the "Merger") and UUNET will become a wholly owned subsidiary of MFS, and
(b) each outstanding share of UUNET common stock, $.001 par value per share
(other than shares owned by UUNET or its subsidiaries and MFS or its
subsidiaries, all of which will be canceled), will be converted into and
represent the right to receive 1.777776 shares of MFS Common Stock (the
"Exchange Ratio") or (ii) a Stockholder Option, Voting and Proxy Agreement,
dated as of April 29, 1996 (the "Stock Option Agreement") among MFS, Sub
and certain stockholders of UUNET pursuant to which MFS may purchase all of
such stockholders' shares of UUNET common stock held on the date of
exercise of the option for the Exchange Ratio. A copy of the Merger
Agreement is attached as Annex A to the Joint Proxy Statement-Prospectus
accompanying this Notice and a copy of the Stock Option Agreement is
attached as Annex B to the Joint Proxy Statement-Prospectus accompanying
this Notice;
2. To reelect the four Class I Directors to the Board of Directors of MFS
for a three-year term until the 1999 Annual Meeting of Stockholders;
3. To adopt amendments to the MFS 1993 Stock Plan;
4. To adopt amendments to the MFS 1995 Deferred Stock Purchase Plan;
5. To ratify the appointment by the Board of Directors of Coopers &
Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal year; and
6. To transact such other business as may properly come before the
meeting or any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on June 21, 1996 as
the record date for the determination of the holders of MFS Common Stock,
Series A 8% Cumulative Convertible Preferred Stock, par value $.01 per share
("Series A Preferred") and Series B Cumulative Convertible Preferred Stock,
par value $.01 per share (the "Series B Preferred" and together with the MFS
Common Stock and Series A Preferred, the "MFS Capital Stock") entitled to
notice of, and to vote at, the meeting. Accordingly, only holders of record of
MFS Capital Stock at the close of business on such date will be entitled to
notice of and to vote at the Annual Meeting and any adjournment or
postponement thereof.
The affirmative vote of a majority of votes cast by the holders of the
outstanding shares of MFS Capital Stock, at a meeting at which a quorum is
present, is necessary for the approval of the issuance of the MFS Common Stock
pursuant to the MFS Share Proposal. The four Class I Directors will be elected
by a plurality of the votes cast by holders of MFS Capital Stock present in
person or by proxy and entitled to vote at the Annual Meeting. The proposals
to amend the MFS 1993 Stock Plan, to amend the MFS 1995 Deferred Stock
Purchase
<PAGE>
Plan and to ratify the appointment by the Board of Directors of Coopers &
Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal year each
require the affirmative vote of the holders of a majority of the votes
entitled to be cast in respect of all outstanding shares of MFS Capital Stock
present in person or by proxy at the Annual Meeting and entitled to vote
thereon.
The matters to be considered at the Annual Meeting are more fully described
in the accompanying Joint Proxy Statement-Prospectus, and the annexes thereto,
which form a part of this Notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE ANNUAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE-PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER
ATTENDING THE ANNUAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS
RETURNED A PROXY.
By Order of the Board of Directors
James Q. Crowe
Chairman of the Board
Dated: , 1996
<PAGE>
UUNET TECHNOLOGIES, INC.
3060 WILLIAMS DRIVE
FAIRFAX, VIRGINIA 22031
, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders of
UUNET Technologies, Inc. ("UUNET") to be held at a.m. on , 1996
at .
At the Special Meeting you will be asked to consider a single proposal to
authorize and adopt the Agreement and Plan of Merger, dated as of April 29,
1996, (the "Merger Agreement"), providing for the merger (the "Merger") of a
subsidiary of MFS Communications Company, Inc. ("MFS") with and into UUNET and
to authorize the other transactions contemplated by the Merger Agreement. The
consummation of the Merger will result in, among other things, UUNET becoming
a wholly owned subsidiary of MFS and the issuance and exchange of the
outstanding common stock, par value $.001 per share, of UUNET ("UUNET Common
Stock") for 1.777776 newly issued shares of common stock, par value $.01 per
share, of MFS (the "Exchange Ratio") all as more fully described in the
accompanying Joint Proxy Statement-Prospectus. Under Delaware law, the holders
of UUNET Common Stock are not entitled to appraisal rights in connection with
the Merger.
ADDITIONAL INFORMATION REGARDING THE MERGER AND THE MERGER AGREEMENT IS SET
FORTH IN THE ACCOMPANYING JOINT PROXY STATEMENT-PROSPECTUS AND THE ANNEXES
THERETO, WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY. PLEASE DO
NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
The Board of Directors of UUNET has received the opinion, dated as of April
29, 1996, of Goldman, Sachs & Co., which is annexed to the accompanying Joint
Proxy Statement-Prospectus as Annex D, that, as of such date and based upon
and subject to certain matters stated therein, the Exchange Ratio was fair to
the holders of UUNET Common Stock.
UUNET'S BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED THE TERMS AND CONDITIONS
OF THE PROPOSED MERGER AND HAS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE FAIR TO, AND IN
THE BEST INTERESTS OF, UUNET AND ITS STOCKHOLDERS. ACCORDINGLY, YOUR BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE MERGER
AGREEMENT AND THE AUTHORIZATION OF THE MERGER AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT.
As of June 21, 1996, the Record Date for the Special Meeting (the "UUNET
Record Date"), certain stockholders of UUNET owned 19,300,917 shares of UUNET
Common Stock, or approximately 59.5% of the outstanding UUNET Common Stock.
Such stockholders have sole voting and investment power with respect to all of
the UUNET Common Stock held of record by them and have, therefore, sufficient
voting power, without the vote of any other holder of UUNET Common Stock, to
determine the outcome of the vote on the proposal to approve the Merger
Agreement and any related transactions that may come before the Special
Meeting. Such stockholders have advised UUNET that they have granted
irrevocable proxies in favor of MFS to vote all of such stockholders' shares
of UUNET Common Stock owned as of the UUNET Record Date in favor of approval
of the Merger Agreement. ACCORDINGLY, BY VIRTUE OF SUCH STOCKHOLDERS'
OWNERSHIP OF 59.5% OF THE OUTSTANDING UUNET COMMON STOCK, THE PROPOSAL TO
ADOPT THE MERGER AGREEMENT WILL BE ADOPTED WITHOUT THE VOTE OF ANY OTHER
STOCKHOLDERS OF UUNET.
In view of the importance of the action to be taken at this Special Meeting
of UUNET stockholders, we urge you to review carefully the accompanying Notice
of Special Meeting of Stockholders and the Joint Proxy Statement-Prospectus,
including the annexes thereto, which also include information on UUNET and
MFS. Whether or not you expect to attend the Special Meeting, please complete,
sign and date the enclosed proxy and return it to UUNET as promptly as
possible.
Very truly yours,
Richard L. Adams, Jr.
Chairman of the Board
<PAGE>
UUNET TECHNOLOGIES, INC.
3060 WILLIAMS DRIVE
FAIRFAX, VIRGINIA 22031
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD , 1996
----------------
To the Stockholders of UUNET Technologies, Inc.:
The Special Meeting of Stockholders of UUNET Technologies, Inc., a Delaware
corporation ("UUNET"), will be held at , on , 1996 at a.m., for
the following purposes:
1. To consider and vote on a single proposal (the "Merger Proposal") to
adopt the Agreement and Plan of Merger, dated as of April 29, 1996 (the
"Merger Agreement"), by and among MFS Communications Company, Inc., a
Delaware corporation ("MFS"), MFS Global Internet Services, Inc., a wholly
owned subsidiary of MFS ("Sub"), and UUNET, providing for the merger (the
"Merger") of Sub with and into UUNET, and to authorize the Merger and the
other transactions contemplated thereby. The consummation of the Merger
will result in, among other things, UUNET becoming a wholly owned
subsidiary of MFS and the exchange of outstanding shares of common stock,
par value $.001 per share, of UUNET (the "UUNET Common Stock") for newly
issued shares of common stock, par value $.01 per share, of MFS, all as
more fully described in the accompanying Joint Proxy Statement-Prospectus.
A copy of the Merger Agreement is attached as Annex A to the accompanying
Joint Proxy Statement-Prospectus; and
2. To transact such other business as may properly come before the
meeting, or any adjournment or postponement thereof.
The Board of Directors of UUNET has fixed the close of business on June 21,
1996, as the record date for the determination of the holders of UUNET Common
Stock entitled to notice of, and to vote at, the meeting and adjournments or
postponements thereof. The Merger Proposal requires the affirmative vote of
the holders of a majority of the outstanding shares of UUNET Common Stock
entitled to vote at the meeting. It is UUNET's current intention to vote all
proxies that contain instructions to vote in favor of the Merger Agreement and
those proxies that contain no voting instructions for purposes of the vote on
the Merger Agreement to adjourn the Special Meeting in order to solicit
additional votes in favor of the Merger Agreement, should such additional
solicitation be necessary to approve the Merger Agreement.
Information regarding the proposed Merger, the Merger Agreement and related
matters is contained in the accompanying Joint Proxy Statement-Prospectus and
the annexes thereto, which are incorporated by reference herein and form a
part of this Notice.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING. TO
ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, HOWEVER, YOU ARE URGED TO
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE. A
POSTAGE PREPAID ENVELOPE IS ENCLOSED FOR THAT PURPOSE. ANY STOCKHOLDER
ATTENDING THE SPECIAL MEETING MAY VOTE IN PERSON EVEN IF THAT STOCKHOLDER HAS
RETURNED A PROXY.
By Order of the Board of Directors
Richard L. Adams, Jr.
Chairman of the Board
Dated: , 1996
PLEASE DO NOT SEND ANY SHARE CERTIFICATES AT THIS TIME.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION JULY 2, 1996
MFS Communications Company, Inc. UUNET Technologies, Inc.
11808 Miracle Hills Drive 3060 Williams Drive
Omaha, Nebraska 68154 Fairfax, Virginia 22031
(402) 231-3000 (703) 206-5600
MFS COMMUNICATIONS COMPANY, INC.
PROXY STATEMENT-PROSPECTUS
-----------
UUNET TECHNOLOGIES, INC.
PROXY STATEMENT
This Joint Proxy Statement-Prospectus (the "Joint Proxy Statement-
Prospectus") is being furnished to the holders of common stock, par value $.001
per share (the "UUNET Common Stock"), of UUNET Technologies, Inc., a Delaware
corporation ("UUNET"), in connection with the solicitation of proxies by the
Board of Directors of UUNET (the "UUNET Board of Directors") for use at a
Special Meeting of Stockholders of UUNET to be held at , on ,
[ , 1996], at [10:00] a.m., and at any and all adjournments or postponements
thereof (the "UUNET Special Meeting").
This Joint Proxy Statement-Prospectus is also being furnished to the holders
of common stock, par value $.01 per share (the "MFS Common Stock"), Series A 8%
Cumulative Convertible Preferred Stock, par value $.01 per share (the "Series A
Preferred") and Series B Cumulative Convertible Preferred Stock, par value $.01
per share (the "Series B Preferred" and together with the MFS Common Stock and
the Series A Preferred, the "MFS Capital Stock"), of MFS Communications
Company, Inc., a Delaware corporation ("MFS"), in connection with the
solicitation of proxies by the Board of Directors of MFS (the "MFS Board of
Directors") for use at the Annual Meeting of Stockholders of MFS to be held at
, on , [ , 1996], at [10:00] a.m., and at any and all
adjournments or postponements thereof (the "MFS Annual Meeting").
This Joint Proxy Statement-Prospectus relates to the proposed merger (the
"Merger") into UUNET of MFS Global Internet Services, Inc., a wholly owned
subsidiary of MFS ("Sub"), pursuant to the Agreement and Plan of Merger, dated
as of April 29, 1996 (the "Merger Agreement"), among MFS, Sub and UUNET. Upon
consummation of the Merger, UUNET will become a wholly owned subsidiary of MFS.
In the Merger, each outstanding share of UUNET Common Stock (other than shares
owned by UUNET as treasury stock or by its subsidiaries or by MFS or its
subsidiaries, all of which will be canceled) will be converted into and
represent the right to receive 1.777776 shares of MFS Common Stock (the
"Exchange Ratio") and cash in lieu of fractional shares of MFS Common Stock. As
provided for in the Rights Agreement dated as of September 30, 1995, between
MFS and Continental Stock Transfer & Trust Company (the "MFS Rights Plan"),
each share of MFS Common Stock issued in connection with the Merger will be
accompanied by one MFS Right (a "MFS Right") to purchase one one-thousandth of
a share of MFS Series C Junior Participating Preferred Stock, par value $.01
per share. Consummation of the Merger is subject to various conditions,
including the approval of a majority of the outstanding shares of UUNET Common
Stock at the UUNET Special Meeting and the approval by the affirmative vote of
a majority of votes cast by the holders of the outstanding shares of MFS
Capital Stock, at a meeting at which a quorum is present.
Pursuant to a Stockholder Option, Voting and Proxy Agreement, dated as of
April 29, 1996, among MFS, Sub and certain stockholders of UUNET (as amended,
the "Stock Option Agreement"), MFS has been granted an option (the "Option") by
certain stockholders of UUNET to purchase all of such stockholders' shares of
UUNET Common Stock held on the date of exercise of the Option (19,300,917
shares of UUNET Common Stock as of the UUNET Record Date) for the Exchange
Ratio as an alternative to the issuance of MFS Common Stock in the Merger. The
Option may be exercised at any time following the occurrence of a Purchase
Event (as defined in the Merger Agreement). In addition, pursuant to the Stock
Option Agreement, the same stockholders of UUNET have granted irrevocable
proxies in favor of MFS to vote all of such stockholders' shares of UUNET
Common Stock held as of the UUNET Record Date in favor of the Merger
(19,300,917 shares of UUNET Common Stock representing approximately 59.5% of
the outstanding UUNET Common Stock as of the UUNET Record Date). Such
stockholders have sole voting and investment power with respect to all of the
UUNET Common Stock held of record by them and have, therefore, sufficient
voting power, without the vote of any other holder of UUNET Common Stock, to
determine the outcome of the vote on the proposal to approve the Merger
Agreement and any related transactions that may come before the Special
Meeting. ACCORDINGLY,
<PAGE>
BY VIRTUE OF SUCH STOCKHOLDERS' OWNERSHIP OF 59.5% OF THE OUTSTANDING UUNET
COMMON STOCK, THE PROPOSAL TO ADOPT THE MERGER AGREEMENT WILL BE ADOPTED
WITHOUT THE VOTE OF ANY OTHER STOCKHOLDERS OF UUNET. THE APPROVAL BY THE
HOLDERS OF MFS CAPITAL STOCK OF THE MFS SHARE PROPOSAL, HOWEVER, IS NOT
ASSURED.
At the MFS Annual Meeting, holders of the MFS Capital Stock will also be
asked to consider and act upon the following matters: the reelection of four
Class I Directors to the Board of Directors of MFS for a three-year term that
will expire at the 1999 Annual Meeting; amendments to the MFS 1993 Stock Plan;
amendments to the MFS 1995 Deferred Stock Purchase Plan; and the ratification
of the appointment by the MFS Board of Directors of Coopers & Lybrand L.L.P.
as independent auditors of MFS for the 1996 fiscal year.
This Joint Proxy Statement-Prospectus also constitutes the Prospectus of MFS
with respect to an estimated (as of July , 1996) maximum of shares of MFS
Common Stock to be issued in connection with the Merger or, if the Option is
exercised, up to shares of MFS Common Stock in connection with such
exercise. Each share of new MFS Common Stock issued in connection with the
Merger will be accompanied by one MFS Right. MFS Common Stock is traded on the
Nasdaq Stock Market's National Market ("Nasdaq") under the symbol "MFST." On
, 1996, the closing sales price for the MFS Common Stock as reported on
Nasdaq was $ per share. Holders of UUNET Common Stock are urged to obtain
more recent market information relating to the closing sales price for the MFS
Common Stock.
The Boards of Directors of UUNET, MFS and Sub, and MFS as the holder of all
the outstanding capital stock of Sub have approved the Merger Agreement. THE
UUNET BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF UUNET COMMON
STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. THE MFS BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT HOLDERS OF MFS CAPITAL STOCK VOTE FOR
THE ISSUANCE OF MFS COMMON STOCK PURSUANT TO THE MFS SHARE PROPOSAL. See "THE
MERGER--Interests of Certain Persons in the Merger."
The MFS Board of Directors also recommends that its stockholders reelect the
four Class I directors for a three-year term until the 1999 Annual Meeting of
Stockholders, approve the proposed amendments to the MFS 1993 Stock Plan,
approve the proposed amendments to the MFS 1995 Deferred Stock Purchase Plan
and ratify the appointment by the MFS Board of Directors of Coopers & Lybrand
L.L.P. as independent auditors of MFS for the 1996 fiscal year.
Proxies for the UUNET Special Meeting may be revoked, subject to the
procedures described herein, at any time up to and including the date of the
UUNET Special Meeting. See "THE UUNET SPECIAL MEETING--Record Date; Voting
Rights; Proxies." Proxies for the MFS Annual Meeting may be revoked, subject
to the procedures described herein, at any time up to and including the date
of the MFS Annual Meeting. See "THE MFS ANNUAL MEETING--Record Date; Voting
Rights; Proxies."
SEE "RISK FACTORS" ON PAGES - FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE EVALUATED IN CONNECTION WITH THE MERGER.
All information contained in this Joint Proxy Statement-Prospectus with
respect to UUNET has been provided by UUNET. All information contained in this
Joint Proxy Statement-Prospectus with respect to MFS and Sub has been provided
by MFS.
This Joint Proxy Statement-Prospectus and the accompanying forms of proxy
are first being mailed to stockholders of UUNET and MFS on or about ,
1996.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT PROXY
STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT-PROSPECTUS IS , 1996.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................... 1
INCORPORATION OF DOCUMENTS BY REFERENCE................................... 1
SUMMARY................................................................... 3
RISK FACTORS.............................................................. 18
Integration of the Two Companies........................................ 18
Substantial Dilution of Ownership Interest of Current MFS Stockholders.. 18
The Effect of the Stock Price Fluctuations on the Consideration to be
Received by the Holders of UUNET Common Stock in the Merger............ 18
Shares Eligible for Future Sale; Possible Volatility of Stock Price..... 18
Acquisition Strategy.................................................... 19
Operating Losses........................................................ 19
Significant Capital Requirements........................................ 20
Competition............................................................. 20
Regulation.............................................................. 23
Risks of Expansion and Implementation................................... 24
Rapid Technological Changes; Dependence Upon Product Development........ 25
Dependence on Key Personnel............................................. 26
Dependence upon Network Infrastructure; Risk of System Failure; Security
Risks.................................................................. 26
Variability of Quarterly Operating Results.............................. 27
UUNET's Reliance on Strategic Relationship with Microsoft............... 28
UUNET's Dependence upon Suppliers; Sole and Limited Sources of Supply... 29
UUNET's Dependence upon New and Uncertain Market........................ 30
Tax Net Operating Loss Carryforwards.................................... 30
Anti-Takeover Provisions in MFS' Charter and By-laws.................... 31
THE UUNET SPECIAL MEETING................................................. 32
Purpose of the UUNET Special Meeting.................................... 32
Record Date; Voting Rights; Proxies..................................... 32
Solicitation of Proxies................................................. 32
Required Vote........................................................... 33
THE MFS ANNUAL MEETING.................................................... 34
Purposes of the MFS Annual Meeting...................................... 34
Record Date; Voting Rights; Proxies..................................... 34
Solicitation of Proxies................................................. 35
Quorum.................................................................. 35
Required Vote........................................................... 35
THE MERGER................................................................ 37
General................................................................. 37
Effective Date.......................................................... 37
Conversion of Shares; Procedures for Exchange of Certificates........... 37
Background to the Merger................................................ 38
Recommendation of the Board of Directors of UUNET; Reasons for the
Merger................................................................. 40
Interests of Certain Persons in the Merger.............................. 42
Recommendation of MFS Board of Directors of the Merger; Reasons for the
Merger................................................................. 43
Opinion of UUNET's Financial Advisor.................................... 44
Opinion of MFS' Financial Advisor....................................... 47
Certain Federal Income Tax Consequences................................. 50
Accounting Treatment.................................................... 51
Certain Legal Matters................................................... 52
Federal Securities Law Consequences..................................... 52
Listing................................................................. 53
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Appraisal Rights....................................................... 53
Certain Effects of the Stock Option Agreement and Termination Fee...... 53
THE MERGER AGREEMENT..................................................... 54
The Merger............................................................. 54
Effective Date......................................................... 54
Terms of the Merger.................................................... 54
Fractional Shares...................................................... 55
Surrender and Payment.................................................. 55
Stock Options and Stock Purchase Plan.................................. 56
Conditions to Consummation of the Merger............................... 56
Representations and Warranties......................................... 57
Conduct of Business Pending the Merger................................. 57
Covenants.............................................................. 59
Effect on Employee Benefit Plans....................................... 60
No Solicitation........................................................ 60
Indemnification........................................................ 61
Termination; Fees and Expenses......................................... 61
Amendment; Waiver...................................................... 62
THE STOCK OPTION AGREEMENT............................................... 63
Number of Shares; Exercise Price....................................... 63
Exercise of the Option................................................. 63
Adjustment of Number of Shares Subject to Option....................... 64
Agreement to Vote...................................................... 64
Grant of Proxy......................................................... 64
Restrictions on Transfer............................................... 65
Certain Federal Income Tax Consequences................................ 65
MFS VOTING AGREEMENT..................................................... 65
Voting Agreement....................................................... 65
No Disposition or Encumbrance of Shares and Options.................... 65
Termination............................................................ 65
BUSINESS OF UUNET........................................................ 66
SELECTED CONSOLIDATED FINANCIAL DATA OF UUNET............................ 80
UUNET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 82
BUSINESS OF MFS.......................................................... 92
GLOSSARY................................................................. 94
COMPARATIVE PER SHARE PRICES............................................. 98
MFS.................................................................... 98
UUNET.................................................................. 98
Equivalent Per Share Data.............................................. 98
Historical............................................................. 99
MFS--Pro forma......................................................... 99
UUNET--Pro forma....................................................... 99
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--THE MERGER........ 100
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--EXERCISE OF OPTION.... 104
DESCRIPTION OF MFS CAPITAL STOCK......................................... 109
General................................................................ 109
Common Stock........................................................... 109
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Preferred Stock........................................................ 109
Preferred Stock Purchase Rights........................................ 111
COMPARISON OF STOCKHOLDER RIGHTS......................................... 112
MANAGEMENT OF UUNET...................................................... 113
Directors.............................................................. 113
Officers............................................................... 115
Employment Arrangements................................................ 117
SECURITY OWNERSHIP OF MFS................................................ 118
Prior to the Merger.................................................... 118
After the Merger....................................................... 119
SECURITY OWNERSHIP OF UUNET.............................................. 122
Security Ownership of Certain Beneficial Owners........................ 122
MFS REELECTION OF CLASS I DIRECTORS PROPOSAL............................. 124
Information as to Nominees for Election as Class I Directors........... 124
Board of Directors' Meetings........................................... 125
Executive Committee.................................................... 125
Audit Committee........................................................ 125
Compensation Committee................................................. 125
Compensation Committee Interlocks and Insider Participation............ 125
Compliance with Section 16(a) of the Securities Exchange Act........... 125
Compensation Committee Report.......................................... 125
Determination of the Chief Executive Officer's Compensation............ 126
Equity Compensation.................................................... 126
Executive Compensation................................................. 127
Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value
Table................................................................. 128
Directors' Compensation................................................ 128
Certain Relationships and Related Transactions......................... 128
Performance Graph...................................................... 129
MFS AMENDMENT TO AMENDED AND RESTATED 1993 STOCK PLAN PROPOSAL........... 130
Summary of the MFS 1993 Plan........................................... 130
Summary of Amendments to the MFS 1993 Plan............................. 134
Federal Income Tax Consequences........................................ 136
New Plan Benefits...................................................... 137
MFS AMENDMENT OF 1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND RESTATED
AUGUST 28, 1995) PROPOSAL............................................... 138
Summary of the Match Plan ............................................. 138
Summary of Amendments to the Match Plan................................ 140
MFS RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS PROPOSAL.... 140
OTHER MATTERS............................................................ 141
LEGAL MATTERS............................................................ 141
EXPERTS.................................................................. 141
MFS STOCKHOLDER PROPOSALS................................................ 141
</TABLE>
Annex A--Merger Agreement
Annex B--Stock Option Agreement
Annex C--MFS Voting Agreement
Annex D--Opinion of Goldman, Sachs & Co.
Annex E--Opinion of Gleacher NatWest Inc.
iii
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS JOINT
PROXY STATEMENT-PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION NOT CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS JOINT PROXY STATEMENT-PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR THE SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES
OFFERED BY THIS JOINT PROXY STATEMENT-PROSPECTUS, OR THE SOLICITATION OF A
PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR FROM WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN OFFER, OR PROXY SOLICITATION
IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT-
PROSPECTUS NOR THE ISSUANCE OR SALE OF ANY SECURITIES HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH HEREIN SINCE THE DATE HEREOF OR INCORPORATED BY
REFERENCE HEREIN SINCE THE DATE HEREOF.
AVAILABLE INFORMATION
UUNET and MFS are subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance
therewith file reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed may be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and may be
available at the following Regional Offices of the Commission: Midwest
Regional Office, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and New York Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials can be obtained
at prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a Web site that contains reports, proxy and information
statements and other materials that are filed through the Commission's
Electronic Data Gathering, Analysis, and Retrieval system. This Web site can
be accessed at http://www.sec.gov. In addition, material filed by each of
UUNET and MFS can be inspected at the offices of the National Association of
Securities Dealers, Inc., at 1735 K Street, N.W., Washington, D.C. 20006.
This Joint Proxy Statement-Prospectus does not contain all the information
set forth in the Registration Statement on Form S-4 and exhibits relating
thereto, including any amendments (the "Registration Statement"), of which
this Joint Proxy Statement-Prospectus is a part, and which MFS has filed with
the Commission under the Securities Act of 1933, as amended (the "Securities
Act"). Reference is made to such Registration Statement for further
information with respect to MFS and the securities of MFS offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in
its entirety by reference to the copy of the applicable document filed with
the Commission or attached as an annex hereto. The information in this Joint
Proxy Statement-Prospectus concerning UUNET and MFS has been furnished by
UUNET and MFS, respectively.
INCORPORATION OF DOCUMENTS BY REFERENCE
MFS hereby incorporates by reference into this Joint Proxy Statement-
Prospectus the following documents previously filed with the Commission
pursuant to the Exchange Act:
1. MFS' Annual Report on Form 10-K for the year ended December 31, 1995
as amended by MFS' Form 10-K/A;
2. The description of MFS Common Stock contained in MFS' Registration
Statement on Form 8-A (File No. 0-21594) filed with the Commission pursuant
to Section 12(g) of the Exchange Act on April 21, 1993, as amended by
Amendment No. 1 filed with the Commission on a Form 8 on May 10, 1993, and
any amendment or report filed for the purpose of updating any such
description;
3. MFS' Reports on Form 8-K dated January 23, 1996, April 30, 1996 and
May 10, 1996; and
4. MFS' Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
1
<PAGE>
In addition, all reports and other documents filed by MFS pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the MFS Annual Meeting or the UUNET Special Meeting shall
be deemed to be incorporated by reference herein and to be a part hereof from
the date of filing of such reports and documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Joint Proxy
Statement- Prospectus to the extent that a statement contained herein, or in
any other subsequently filed document that also is incorporated or deemed to
be incorporated by reference herein, modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Joint Proxy Statement-
Prospectus.
THIS JOINT PROXY STATEMENT-PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
FILED BY MFS WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE
DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE,
UPON WRITTEN OR ORAL REQUEST FROM ANY PERSON, INCLUDING ANY BENEFICIAL OWNER,
TO WHOM THIS JOINT PROXY STATEMENT-PROSPECTUS IS DELIVERED, FROM MFS
COMMUNICATIONS COMPANY, INC., 11808 MIRACLE HILLS DRIVE, OMAHA, NEBRASKA
68154, ATTENTION: SECRETARY (TEL. (402) 231-3000). IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY , 1996.
2
<PAGE>
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Joint Proxy Statement-Prospectus and the Annexes
hereto. This summary is not intended to be complete and is qualified in its
entirety by the more detailed information contained elsewhere or incorporated
by reference in this Joint Proxy Statement-Prospectus. Stockholders of UUNET
and MFS should read carefully this Joint Proxy Statement-Prospectus in its
entirety. Certain capitalized terms used in this summary are defined elsewhere
in this Joint Proxy Statement-Prospectus, including the Glossary.
THE COMPANIES
UUNET. UUNET Technologies, Inc. ("UUNET") is a leading worldwide provider of
a comprehensive range of Internet access options, applications, and consulting
services to businesses, professionals and on-line services providers. UUNET
provides both dedicated and dial-up Internet access, and other applications and
services which include Web server hosting and integration services, client
software and security products, training, and network integration and
consulting services. UUNET estimates that its current customer base includes
over 22,000 business and professional accounts.
UUNET makes available to customers a variety of products and services,
including Web server hosting and content development services, client software
and security products and training, all of which can be integrated by UUNET
through its network integration and consulting services, through a single
source. UUNET's products and services are supported by a technical staff that
is highly experienced in Internet operations and services. UUNET's network
operations center monitors traffic across UUNET's network 24 hours per day,
seven days a week.
UUNET's network infrastructure, following the acquisition of Unipalm Group
plc (doing business as "UUNET PIPEX")("UUNET PIPEX"), of a 40 percent interest
in EUnet Deutschland GmbH ("EUnet Germany") and of an additional 31 percent
interest (a total interest of 51 percent after the acquisition) in UUNET
Canada, Inc. ("UUNET Canada"), allowed local access to users in 543 POPs,
including 288 outside of the United States as of April 1, 1996. UUNET plans to
continue to expand its network to allow local access to users in numerous
additional cities worldwide. UUNET's network infrastructure includes a high
capacity frame relay-based network backbone comprised primarily of 45 Mbps, DS-
3 leased lines in the United States and fractional DS-3 leased lines
internationally. UUNET is expanding and enhancing its network infrastructure
which is designed to be scaleable to meet increased user demand.
UUNET's network infrastructure is based on its own 45 Mbps, DS-3 leased line,
frame relay-based network of Cascade switches supporting Cisco 7000 routers.
This network infrastructure enables customers to access the Internet through
dedicated lines or by placing a local telephone call (dial-up) through a modem
to the nearest UUNET POP. Once connected, the customer's traffic is routed
though UUNET's network infrastructure to the desired Internet location, whether
on UUNET's network or elsewhere on the Internet.
UUNET continues to upgrade its network infrastructure in response to the
increase in the number of customers purchasing UUNET's Internet access
services, particularly UUNET's high speed T-1 and T-3 access options. UUNET
believes that this network infrastructure provides the higher bandwidth,
increased throughput and reliability, capacity and a geographic coverage UUNET
believes is required by businesses and professionals using the Internet at a
lower per unit cost than its previous infrastructure.
UUNET has a strategic relationship with Microsoft Corporation ("Microsoft")
in which UUNET is developing, operating and maintaining a large-scale, high
speed, dial-up and ISDN TCP/IP access network as part of its overall network
infrastructure. This network is the primary Internet dial-up network and
infrastructure for Microsoft, including The Microsoft Network. The Microsoft
relationship provides UUNET with the opportunity to accelerate the expansion of
the capacity and geographic coverage of its network infrastructure both
domestically and internationally.
3
<PAGE>
UUNET initiated a major international expansion in 1995, which included
establishing international gateway hubs in 13 countries and building facilities
to allow local access to users in nine cities in Europe, seven cities in
Canada, two cities in Asia, and one city in Australia. In addition, UUNET
acquired UUNET PIPEX, the largest Internet access provider in the United
Kingdom. In December 1995, UUNET agreed to acquire 40 percent of the equity of
EUnet Germany, a leading Internet services provider in Germany; the acquisition
closed in February 1996. In addition, in January 1996, UUNET agreed to increase
its equity ownership of UUNET Canada to 51 percent, which acquisition closed in
April 1996. This expansion plan capitalizes on the opportunity to build network
infrastructure for The Microsoft Network, while providing significant capacity
for UUNET to utilize for its other customers.
UUNET intends to continue the international expansion begun in 1995 by
pursuing several avenues, including acquiring other Internet service providers
and complementary businesses and technologies in various target countries and
obtaining international telecommunications facilities, including significant
undersea and European terrestrial fiber optic cable capacity.
As used in this Joint Proxy Statement-Prospectus, the term "UUNET" refers to
UUNET Technologies, Inc. and its subsidiaries, unless the context otherwise
requires. The principal executive offices of UUNET are located at 3060 Williams
Drive, Fairfax, Virginia 22031; its telephone number is (703) 206-5600. Its
Internet address is investor-relations @uu.net or www.uu.net.
MFS. MFS Communications Company, Inc. ("MFS") provides facilities-based
telecommunications services and systems to business and government. MFS
believes business and government users have distinct telecommunications service
requirements, including maximum reliability, consistent high quality, capacity
for high-speed data transmission, responsive customer service and continuous
attention to service enhancement and new service development. MFS believes it
has significant advantages over its competitors as a result of MFS': (i) focus
on business and government end users; (ii) expertise in developing highly
reliable, advanced digital fiber optic networks which offer substantial
transmission capacity; (iii) centralized, real-time network monitoring and
control provided by MFS' advanced network operations control centers; (iv)
emphasis on providing comprehensive and responsive customer service; (v)
economic benefits derived from being a national and international multi-service
provider; (vi) ongoing development of new services, such as integrated local
and long distance switched services and data transmission services which
improve the quality of, enhance the performance of, or reduce the cost of,
telecommunications services for business and government end users; (vii)
deployment of its networks in key domestic and international business markets
to take advantage of regulatory changes that permit greater competition in the
local market; and (viii) international network platform that serves customers
with multiple offices in key business centers.
MFS is organized as a holding company and operates through its subsidiaries
in two business segments: (i) telecommunications services; and (ii) network
systems integration. MFS provides telecommunications services domestically and
internationally in the form of: (i) dedicated special access and private line
circuits, local switched service and high speed data communications to large
business customers; (ii) single source integrated local and long distance
switched services, high speed data communications services and facilities
management to medium and small businesses; (iii) local access to long distance
companies; and (iv) local access, ATM-based backbone service and
interconnection via Network Access Points ("NAPs") to Internet service
providers.
MFS provides telecommunications services by utilizing its international
network platform, which consists of MFS owned transmission and switching
facilities and network capacity leased from other carriers primarily in the
United States and Western Europe. The MFS owned portion of the international
network platform consists of metropolitan area networks of fiber optic cables,
integrated local and long distance switches, advanced electronics, ATM
switching equipment, transmission equipment and associated wiring and
equipment. In addition, MFS has ownership interests in several international
submarine cables. The metropolitan area networks are generally linked to each
other with leased high capacity fiber optic lines. MFS provides international
service
4
<PAGE>
through several means, including leasing submarine cable capacity from
international carriers as well as taking ownership interests and obtaining
indefeasible rights of use capacity on other submarine cables. On May 7, 1996,
MFS announced that it intends to build or acquire its own U.S. and
international inter-metropolitan area and transoceanic fiber optic networks, to
be deployed over a four year period to connect its metropolitan networks.
The fiber optic cable utilized in MFS' networks typically contain from 12 to
144 fiber strands, each of which is capable of providing multiple
telecommunications channels or "circuits." Depending on transmission
electronics, a single pair of glass fibers on MFS' networks currently can
transmit 32,256 or more simultaneous voice conversations, whereas a typical
pair of copper wires generally can carry a maximum of 24 simultaneous voice
conversations. Although local exchange carriers (the "LECs") and foreign
telecommunications carriers have historically used copper wire in their
networks, they currently are deploying fiber optic cable to supplement or
upgrade portions of their copper-based networks, particularly in areas served
by MFS. MFS expects that continuing developments in telecommunications
equipment will increase the capacity of each optical fiber, thereby providing
even greater capacity at relatively low incremental cost.
MFS has moved quickly to capitalize on the anticipated benefits of the
Telecommunications Act of 1996 (the "Telecom Act"). MFS has contacted 21 LECs
to initiate the process of implementing the "co-carrier" provisions of the
Telecom Act as quickly as possible and has established a co-carrier task force
consisting of approximately 100 personnel dedicated to facilitate the
negotiation and implementation of co-carrier arrangements with the LECs. On May
22, 1996, MFS announced that it and Ameritech Corp. ("Ameritech") had entered
into a comprehensive co-carrier agreement which involves the networks of the
respective companies in the entire Ameritech marketing region, including
Illinois, Indiana, Michigan, Ohio and Wisconsin. Included in the agreement with
Ameritech are provisions relating to: interconnection at any technically
feasible point within Ameritech's network; interim number portability; access
to poles, ducts, conduits and rights-of-way controlled by Ameritech; exchange
of all local traffic at a fully reciprocal per minute rate; receipt by MFS of
terminating access charges for long distance calls made to its customers; and
nondiscriminatory access to 911 and emergency 911 services, directory
assistance services, operator call completion services and white pages
directory listings for MFS' customers.
MFS' subsidiary, MFS Global Network Services, Inc. ("Global Network
Services") manages the operation and development of MFS' networks. MFS Global
Network Services contracts with another MFS subsidiary, MFS Network
Technologies, Inc. ("MFS Network Technologies") which engineers and manages the
construction of the fiber optic network. As each portion of the network is
completed, MFS Global Network Services manages the operation of the network.
Over time, MFS' network evolved from "islands" of advanced fiber optic networks
within individual metropolitan areas, to an integrated international network
platform consisting of fiber optic cables either owned or leased by MFS,
integrated local and long distance switches, advanced electronics, ATM
switching equipment, transmission equipment and associated wiring and
equipment.
MFS also plays a major role in making the Internet available to users
internationally through sales of dedicated circuits for local access and high
bandwidth-based backbone service to Internet service providers. MFS is also one
of several companies that manage the operation of NAPs, through which
significant amounts of traffic on the Internet pass. MFS developed and manages
NAPs that are in operation and known as MAE East in Washington, D.C., MAE West
in San Jose, California and MAE Chicago in Chicago, Illinois. Additional NAPs
are under development.
Initially created to design and build MFS' networks in a high quality and
cost-effective manner, MFS Network Technologies provides network systems
integration for MFS and third parties which desire to deploy sophisticated
networks, including intelligent transportation systems, voice and data
networks, interactive distance learning networks, security systems and combined
cable television-telephone networks.
As used in this Joint Proxy Statement-Prospectus, the term "MFS" refers to
MFS Communications Company, Inc. and its subsidiaries, unless the context
otherwise requires. The principal executive offices of MFS are located at 11808
Miracle Hills Drive, Omaha, Nebraska 68154; its telephone number is (402) 231-
3000.
5
<PAGE>
THE MEETINGS
Times, Places and Dates
A Special Meeting of the stockholders of UUNET will be held at , on ,
, 1996, at [10:00] a.m., local time (including any and all adjournments or
postponements thereof, the "UUNET Special Meeting").
The Annual Meeting of the stockholders of MFS will be held at the , on
, , 1996 at [10:00] a.m., local time (including any and all adjournments
or postponements thereof, the "MFS Annual Meeting").
Purposes of the Meetings
At the UUNET Special Meeting, holders of UUNET Common Stock will consider and
vote upon a proposal to approve and adopt an Agreement and Plan of Merger,
dated as of April 29, 1996, among UUNET, MFS and Sub, a copy of which is
attached as Annex A to this Joint Proxy Statement-Prospectus, providing for the
Merger of Sub with and into UUNET. As a result of the Merger, UUNET will become
a wholly owned subsidiary of MFS. In the Merger, each outstanding share of
UUNET Common Stock will be converted into and represent the right to receive
1.777776 shares of MFS Common Stock. Each share of MFS Common Stock issued in
connection with the Merger will be accompanied by one MFS Right. Stockholders
of UUNET will also consider and vote upon any other matter that may properly
come before the meeting.
At the MFS Annual Meeting, holders of MFS Capital Stock, will consider and
vote upon the issuance of shares of MFS Common Stock pursuant to either the
Merger Agreement or the Stock Option Agreement (the "MFS Share Proposal"). At
the MFS Annual Meeting, holders of MFS Capital Stock will also be asked to
consider and act upon the following matters: the reelection of four Class I
Directors to the Board of Directors of MFS for a three-year term until the 1999
Annual Meeting; amendments to the Amended and Restated 1993 Stock Plan (the
"MFS 1993 Stock Plan"); amendments to the MFS 1995 Deferred Stock Purchase
Plan; and the ratification of the appointment by the MFS Board of Directors of
Coopers & Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal
year. See "MFS REELECTION OF CLASS I DIRECTORS PROPOSAL," "MFS AMENDMENT TO
AMENDED AND RESTATED 1993 STOCK PLAN PROPOSAL," "MFS AMENDMENT TO 1995 DEFERRED
STOCK PURCHASE PLAN (AMENDED AND RESTATED AUGUST 28, 1995) PROPOSAL" and "MFS
RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS PROPOSAL,"
respectively. Holders of MFS Capital Stock will also consider and vote upon any
other matter that may properly come before the meeting.
Votes Required; Record Dates
Approval and adoption of the Merger Agreement require the affirmative vote of
the holders of a majority of the outstanding shares of UUNET Common Stock
entitled to vote thereon. Holders of UUNET Common Stock are entitled to one
vote per share. Only holders of UUNET Common Stock at the close of business on
June 21, 1996 (the "UUNET Record Date") will be entitled to notice of and to
vote at the UUNET Special Meeting. On June 21, 1996 there were 32,462,956
shares of UUNET Common Stock outstanding and entitled to vote. Pursuant to the
Stock Option Agreement certain stockholders of UUNET have granted irrevocable
proxies in favor of MFS to vote all of such stockholders' shares of UUNET
Common Stock as of the UUNET Record Date in favor of the Merger (19,300,917
shares of UUNET Common Stock representing approximately 59.5% of the
outstanding UUNET Common Stock as of the UUNET Record Date). See "THE UUNET
SPECIAL MEETING" and "THE STOCK OPTION AGREEMENT."
The MFS Share Proposal will require approval by the affirmative vote of a
majority of votes cast by the holders of the outstanding shares of MFS Capital
Stock, at a meeting at which a quorum is present. As of the Record Date, there
were 126,664,076 shares of MFS Common Stock outstanding, 94,992 shares of the
Series A Preferred outstanding and 15,000,000 shares of Series B Preferred
outstanding. Each share of MFS Common Stock is entitled to one vote, each share
of Series A Preferred is entitled to ten votes, and each share of Series B
6
<PAGE>
Preferred is entitled to ten votes on each matter to be voted upon at the MFS'
Annual Meeting. The shares of Series B Preferred are held by certain
stockholders of Peter Kiewit Sons', Inc., MFS' former controlling stockholder.
The shares of Series B Preferred, however, are held subject to an irrevocable
proxy that has been granted to the Secretary and Assistant Secretary of MFS to
vote all shares of Series B Preferred on all matters, other than the election
of MFS directors and matters as to which the holders of the Series B Preferred
vote as a separate class, in proportion to the vote of the holders of the MFS
Common Stock. The MFS Share Proposal, the amendments to the MFS 1993 Stock
Plan, the amendments to the MFS 1995 Deferred Stock Purchase Plan and the
ratification of Coopers & Lybrand L.L.P. as independent auditors of MFS for the
1996 fiscal year do not require a separate class vote by the holders of the
Series B Preferred. Only holders of MFS Capital Stock at the close of business
on June 21, 1996 (the "MFS Record Date") will be entitled to notice of and to
vote at the MFS Annual Meeting. Pursuant to the MFS Voting Agreement (defined
below), certain MFS stockholders, all of whom are Directors of MFS, have
granted irrevocable proxies in favor of UUNET to vote all of such stockholders'
shares of MFS Common Stock as of the MFS Record Date in favor of the MFS Share
Proposal (15,305,777 shares of MFS Common Stock representing approximately
12.1% of the outstanding MFS Common Stock and representing approximately 5.5%
of the voting power of the MFS Capital Stock as of the MFS Record Date). See
"THE MFS ANNUAL MEETING" and the "MFS VOTING AGREEMENT."
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Boards of Directors of UUNET and MFS believe that the terms of the Merger
are fair to and in the best interests of their respective stockholders and have
by the unanimous vote of all directors present approved the Merger Agreement
and the related transactions. The UUNET Board of Directors unanimously
recommends that its stockholders approve and adopt the Merger Agreement, and
the MFS Board of Directors unanimously recommends that its stockholders approve
the MFS Share Proposal. See "THE MERGER--Background of the Merger," "--
Recommendation of the Board of Directors of UUNET; Reasons for the Merger," "--
Recommendation of the Board of Directors of MFS; Reasons for the Merger" and
"--Interests of Certain Persons in the Merger."
The MFS Board of Directors also unanimously recommends that its stockholders
reelect the four Class I Directors to the MFS Board of Directors for a three-
year term until the 1999 Annual Meeting of Stockholders, approve the proposed
amendments to the MFS 1993 Stock Plan, approve the proposed amendments to the
MFS 1995 Deferred Stock Purchase Plan and ratify the appointment by the MFS
Board of Directors of Coopers & Lybrand L.L.P. as independent auditors of MFS
for the 1996 fiscal year. See "MFS REELECTION OF CLASS I DIRECTORS PROPOSAL,"
"MFS AMENDMENT TO AMENDED AND RESTATED 1993 STOCK PLAN PROPOSAL," "MFS
AMENDMENT TO 1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND RESTATED AUGUST 28,
1995) PROPOSAL," and "MFS RATIFICATION OF THE SELECTION OF INDEPENDENT
ACCOUNTANTS PROPOSAL," respectively.
THE MERGER
Merger Consideration
On the effective date of the Merger (the "Effective Date"), each outstanding
share of UUNET Common Stock (other than shares owned by UUNET or its
subsidiaries and MFS or its subsidiaries, all of which will be canceled) will
be automatically converted (subject to certain provisions described herein with
respect to fractional shares) into and represent the right to receive 1.777776
shares of MFS Common Stock. Each share of MFS Common Stock issued in connection
with the Merger will be accompanied by one MFS Right. No fractional shares will
be issued. Upon consummation of the Merger, Sub will be merged with and into
UUNET and UUNET, as the surviving corporation in the Merger, will become a
wholly owned subsidiary of MFS. See "THE MERGER AGREEMENT--Terms of the
Merger."
Conditions to the Merger; Termination
The obligations of UUNET and MFS to consummate the Merger are subject to
various conditions, including, but not limited to: (i) obtaining requisite
stockholder and governmental approvals (which have been obtained); (ii) the
absence of any preliminary or permanent injunction or other order by any
federal or state court
7
<PAGE>
which prevents the consummation of the Merger; (iii) approval for listing on
Nasdaq, subject to official notice of issuance, of the MFS Common Stock to be
issued in connection with Merger (which has been obtained); (iv) receipt of
opinions of counsel at the closing of the Merger in respect of certain federal
income tax consequences of the Merger; and (v) the receipt of any required
third party consents. See "THE MERGER AGREEMENT--Conditions to Consummation of
the Merger."
The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of UUNET: (i) by mutual consent of the
Boards of Directors of UUNET and MFS; (ii) by either MFS or UUNET if the Merger
has not been consummated on or before November 30, 1996; (iii) by UUNET if any
of the conditions to its obligation to consummate the Merger have not been met
or waived by UUNET at such time as such condition is no longer capable of
satisfaction; (iv) by MFS if any of the conditions to its obligation to
consummate the Merger have not been met or waived by MFS at such time as such
condition is no longer capable of satisfaction; (v) by MFS in the event of a
Purchase Event (defined in this Joint Proxy Statement-Prospectus under the
caption "THE STOCK OPTION AGREEMENT--Exercise of the Option"), (vi) by either
MFS or UUNET, if the approval of UUNET's stockholders of the Merger is not
obtained at the UUNET Special Meeting; or (vii) by either MFS or UUNET if the
approval of MFS' stockholders to the MFS Share Proposal is not obtained at the
MFS Annual Meeting.
If the Merger Agreement is terminated by MFS because of a failure by the
UUNET stockholders to approve the Merger, the failure of UUNET to perform in
all material respects its agreements contained in the Merger Agreement on or
prior to the Effective Date or the failure of the representations and
warranties of UUNET contained in the Merger Agreement to be true in all
material respects when made and on and as of the Effective Date as if made on
and as of such date, except to the extent they relate to a particular date, and
within 18 months after the date of such termination, UUNET accepts or
recommends to its stockholders for approval an Acquisition Proposal (as defined
in the Merger Agreement) that MFS believes would result in a transaction more
favorable to UUNET's stockholders than the Merger and such Acquisition Proposal
is consummated, UUNET is obligated to pay MFS a fee of $60 million. If the
Merger Agreement is terminated by UUNET because of a failure by the MFS
stockholders to approve the MFS Share Proposal, the failure of MFS or Sub to
perform in all material respects their agreements contained in the Merger
Agreement on or prior to the Effective Date or the failure of the
representations and warranties of MFS or Sub contained in the Merger Agreement
to be true in all material respects when made and on and as of the Effective
Date as if made on and as of such date, except to the extent they relate to a
particular date, MFS is obligated to pay UUNET a fee of $60 million and, at
UUNET's option, to purchase 1,551,724 shares of newly issued UUNET Common Stock
for $90 million, and, at UUNET's option, to provide a maximum of $100 million
of certain data communications services to UUNET at MFS' cost over five years.
Certain aspects of these termination fees could have the effect of discouraging
a third party from pursuing an acquisition transaction involving UUNET. See
"THE MERGER AGREEMENT--Certain Effects of the Stock Option Agreement," "--No
Solicitation" and "--Termination Fee."
Listing
It is a condition to the Merger that the shares of MFS Common Stock to be
issued in the Merger be authorized for listing on Nasdaq, subject to official
notice of issuance, which condition has been satisfied.
Governmental Approvals Required
Certain aspects of the Merger required notifications to, and/or approvals
from, certain federal authorities, including the expiration or termination of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, all of which have been obtained. See "THE MERGER--Certain
Legal Matters."
Accounting Treatment
The Merger will be accounted for as a purchase for accounting and financial
reporting purposes. See "THE MERGER--Accounting Treatment."
8
<PAGE>
Appraisal Rights
Under Delaware law, the holders of UUNET Common Stock and MFS Capital Stock
are not entitled to any appraisal rights in connection with the Merger. See
"THE MERGER--Appraisal Rights."
Stock Option Agreement
As a condition to entering into the Merger Agreement, MFS required certain
stockholders of UUNET to enter into the Stock Option Agreement pursuant to
which such stockholders (i) agreed to vote their shares of UUNET Common Stock
in favor of the approval of the Merger Agreement and against any proposal for
any recapitalization, merger (other than the Merger), sale of assets or other
business combination between UUNET and any person or entity (other than MFS or
Sub) or any other action or agreement that would result in a breach of the
Merger Agreement or result in any conditions of the Merger Agreement not being
fulfilled, (ii) granted irrevocable proxies in favor of MFS and Sub to so vote
their shares, and (iii) issued to MFS the Option to purchase, all of such
stockholders' shares of UUNET Common Stock held on the UUNET Record Date and
the date of exercise of the Option (equal to approximately 59.5% or 19,300,917
shares, of the issued and outstanding shares of UUNET Common Stock as of the
UUNET Record Date) for the Exchange Ratio. The Option may only be exercised
upon the occurrence of certain events, which generally relate to, or are
designed to culminate in, the acquisition of control of, or a significant
equity interest in or significant assets of, UUNET by a third party. Certain
aspects of the Stock Option Agreement could have the effect of discouraging a
third party from pursuing an acquisition transaction involving UUNET. A copy of
the Stock Option Agreement is attached to this Joint Proxy Statement-Prospectus
as Annex B. See "THE MERGER--Certain Effects of the Stock Option Agreement and
Termination Fee" and "THE STOCK OPTION AGREEMENT."
MFS Voting Agreement
As a condition to entering into the Merger Agreement, UUNET required certain
MFS stockholders, all of whom are Directors of MFS, to enter into the Parent
Voting and Proxy Agreement, dated as of April 29, 1996 (the "MFS Voting
Agreement"), pursuant to which such MFS stockholders granted irrevocable
proxies in favor of UUNET to vote all of such stockholders' shares of MFS
Common Stock held as of the MFS Record Date in favor of the MFS Share Proposal.
As of the MFS Record Date, the number of shares of MFS Common Stock subject to
the irrevocable proxies equals approximately 12.1% of the issued and
outstanding shares of MFS Common Stock and representing approximately 5.5% of
the voting power of the MFS Capital Stock. A copy of the MFS Voting Agreement
is attached to this Joint Proxy Statement-Prospectus as Annex C. See "MFS
VOTING AGREEMENT."
OPINIONS OF FINANCIAL ADVISORS
UUNET
Goldman, Sachs & Co. ("Goldman Sachs") delivered its written opinion to the
UUNET Board of Directors to the effect that as of April 29, 1996, the Exchange
Ratio pursuant to the Merger Agreement was fair to holders of the UUNET Common
Stock.
The full text of the written opinion of Goldman Sachs, which sets forth
assumptions made, matters considered and limitations on the review undertaken
in connection with the opinion, is attached hereto as Annex D and is
incorporated herein by reference. HOLDERS OF UUNET COMMON STOCK ARE URGED TO,
AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "THE MERGER--Opinion of
UUNET's Financial Advisor."
MFS
Gleacher NatWest Inc. ("Gleacher NatWest") delivered its written opinion to
the MFS Board of Directors that as of April 29, 1996, and based upon and
subject to certain matters stated in its opinion, the Exchange Ratio offered by
MFS to the UUNET stockholders pursuant to the Merger is fair from a financial
point of view to MFS and its stockholders.
9
<PAGE>
The full text of the written opinion of Gleacher NatWest, which sets forth
assumptions made, matters considered and limitations on the review undertaken
in connection with the opinion, is attached hereto as Annex E and is
incorporated herein by reference. HOLDERS OF MFS CAPITAL STOCK ARE URGED TO,
AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "THE MERGER--Opinion of MFS'
Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the UUNET Board of Directors with
respect to the Merger Agreement and the transactions contemplated thereby,
UUNET stockholders should be aware that certain members of UUNET's management
and the UUNET Board of Directors have certain interests in the Merger that are
in addition to the interests of stockholders of UUNET generally. These
interests arise from, among other things, certain employee benefit plans,
indemnification and insurance arrangements and other matters which MFS will
assume or has agreed to provide after the Merger. In addition, subject to the
consummation of the Merger, MFS has agreed to appoint to the MFS Board of
Directors John W. Sidgmore, President, Chief Executive Officer and a director
of UUNET, Richard L. Adams, Jr., Chairman of the Board of UUNET, and a third
individual designated by UUNET and approved by MFS. See "THE MERGER--Interests
of Certain Persons in the Merger."
RISK FACTORS
Holders of UUNET Common Stock, in voting on the Merger, and holders of MFS
Capital Stock, in voting on the MFS Share Proposal, should consider among other
factors the following: (i) the difficulty of integration of the two companies;
(ii) substantial dilution of ownership interest of current MFS stockholders;
(iii) the effect of stock price fluctuations on consideration paid to UUNET
stockholders (iv) the potential effect of shares eligible for future sales; (v)
the risks of the combined company's acquisition strategy; (vi) operating
losses; (vii) significant capital requirements; (viii) competition; (ix)
regulation; (x) risks of expansion and implementation; (xi) rapid technological
changes; (xii) dependence on key personnel; (xiii) dependence upon network
infrastructure; (xiv) variability of quarterly operating results; (xv) UUNET's
reliance upon its relationship with Microsoft; (xvi) UUNET's dependence upon
sole and limited sources of supply; (xvii) UUNET's dependence upon a new and
uncertain market; (xviii) tax net operating loss carryforwards; and (xix) MFS'
charter and by-laws anti-takeover provisions. See "RISK FACTORS."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon the delivery of opinions of
counsel dated as of the closing date of the Merger to the effect that the
Merger will constitute a "reorganization" within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"). See "THE MERGER--
Certain Federal Income Tax Consequences." Accordingly, except as more fully
described under "THE MERGER--Certain Federal Income Tax Consequences," no gain
or loss will be recognized by UUNET stockholders as a result of the Merger,
except with respect to cash received in lieu of fractional shares, and no gain
or loss will be recognized by MFS, UUNET or Sub as a result of the Merger.
THE MFS COMMON STOCK
There are 400,000,000 shares of MFS Common Stock authorized, of which, as of
the MFS Record Date, 1996, there were 126,664,076 shares outstanding, an
additional 19,258,997 shares issuable upon exercise of outstanding options and
an additional 24,499,200 shares issuable upon conversion of the outstanding
shares of both the Series A Preferred and the Series B Preferred. It is
anticipated that on the Effective Date, approximately shares of MFS Common
Stock will be issued to the holders of UUNET Common Stock, and an additional
shares of MFS Common Stock will be issuable upon the exercise of options
which were previously exercisable for shares of UUNET Common Stock. Such shares
will represent approximately %
10
<PAGE>
of the outstanding MFS Common Stock after such issuance. The MFS Common Stock
trades on Nasdaq under the symbol "MFST." See "DESCRIPTION OF MFS CAPITAL
STOCK."
COMPARATIVE RIGHTS OF STOCKHOLDERS
The rights of UUNET stockholders currently are governed by Delaware law,
UUNET's Certificate of Incorporation and UUNET's By-laws. Upon consummation of
the Merger, stockholders of UUNET will become stockholders of MFS, which is
also a Delaware corporation, and their rights as stockholders of MFS will be
governed by Delaware law, MFS' Restated Certificate of Incorporation, as
amended, and MFS' By-laws. For a comparison of the rights of UUNET stockholders
and the rights of MFS stockholders, see "COMPARISON OF STOCKHOLDER RIGHTS."
COMPARATIVE PER SHARE PRICES
MFS
The MFS Common Stock trades on Nasdaq under the symbol "MFST." The following
table sets forth the high and low sale prices of the MFS Common Stock as
reported by Nasdaq for each of the quarters in the two year period ended
December 31, 1995 and for the first and second quarters of 1996, which prices
give effect to a 2-for-1 stock split which was payable on April 26, 1996.
<TABLE>
<CAPTION>
1994 HIGH LOW
---- ------- -------
<S> <C> <C>
First Quarter................................................ $20.625 $14.000
Second Quarter............................................... 17.000 10.250
Third Quarter................................................ 18.375 12.250
Fourth Quarter............................................... 20.750 16.250
1995
----
First Quarter................................................ $19.500 $15.375
Second Quarter............................................... 18.625 14.375
Third Quarter................................................ 24.500 15.875
Fourth Quarter............................................... 26.875 19.125
1996
----
First Quarter................................................ $34.000 $28.875
Second Quarter............................................... 38.375 31.250
</TABLE>
On April 29, 1996, the last sales price of the MFS Common Stock on Nasdaq was
$34.625. The public announcement of the Merger Agreement occurred prior to the
opening of trading on April 30, 1996.
UUNET
Since May 25, 1995, the UUNET Common Stock has traded on Nasdaq under the
symbol "UUNT." The following table sets forth the high and low sale prices of
the UUNET Common Stock as reported by Nasdaq for each of the quarters in the
period ended December 31, 1995 and for the first and second quarters of 1996.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ------- -------
<S> <C> <C>
Second Quarter............................................... $28.500 $21.750
Third Quarter................................................ 51.750 27.250
Fourth Quarter............................................... 98.750 38.750
<CAPTION>
1996
----
<S> <C> <C>
First Quarter................................................ $62.500 $25.000
Second Quarter............................................... 67.500 25.500
</TABLE>
On April 29, 1996, the last sales price of the UUNET Common Stock on Nasdaq
was $48.250. The public announcement of the Merger Agreement occurred prior to
the opening of trading on April 30, 1996.
11
<PAGE>
EQUIVALENT PER SHARE DATA
The following tables set forth certain data concerning the historical book
value per share, cash dividends declared per share and income (loss) per share
from continuing operations for MFS and UUNET, respectively, on a pro forma
basis after giving effect to the Merger and on a pro forma basis after giving
effect to the exercise of the Option. The pro forma combined data are presented
for comparative purposes only and are not necessarily indicative of what the
actual financial position and results of operations would have been as of and
for the periods ended December 31, 1995 and March 31, 1996 had the Merger or
exercise of the Option been consummated nor does such data purport to represent
results for future periods. The information should be read in conjunction with
the unaudited Pro Forma Consolidated Condensed Financial Statements of MFS
contained elsewhere in this Joint Proxy Statement-Prospectus, the historical
financial statements of MFS incorporated herein by reference and the historical
financial statements of UUNET contained elsewhere herein. The unaudited pro
forma equivalent per share data shows for each share of MFS Common Stock and
UUNET Common Stock before the Merger and the exercise of the Option, its
equivalent position after giving effect to the Merger and the exercise of the
Option. UUNET stockholders will receive 1.777776 shares of MFS Common Stock for
each share of UUNET Common Stock outstanding.
HISTORICAL
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------------- ------------------
MFS UUNET MFS UUNET
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Book value per share................ $ 6.01 $ 2.55 $ 6.67 $ 2.52
Cash dividends per share............ -- -- -- --
Income (loss) per share from
continuing operations.............. (0.75) 0.01 (2.21) (0.63)
MFS--Pro Forma
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------------- ------------------
MERGER OPTION MERGER OPTION
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Book value per share................ $ 15.62 $ 12.33 $ 16.13 $ 12.88
Cash dividends per share............ -- -- -- --
Income (loss) per share from
continuing operations.............. (1.09) (0.97) (3.92) (3.33)
UUNET--Pro Forma Equivalents
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------------- ------------------
MERGER OPTION MERGER OPTION
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Book value per share................ $ 27.77 $ 21.91 $ 28.67 $ 22.90
Cash dividends per share............ -- -- -- --
Income (loss) per share from
continuing operations.............. (1.94) (1.72) (6.97) (5.92)
</TABLE>
SURRENDER OF STOCK CERTIFICATES
On the Effective Date, MFS will instruct Continental Stock Transfer & Trust
Company, in its capacity as exchange agent for the Merger (the "Exchange
Agent"), to mail to each holder of record of UUNET Common Stock a transmittal
letter within three business days. The transmittal letter will contain
instructions with respect to the surrender of certificates representing UUNET
Common Stock to be exchanged for MFS Common Stock. See "THE MERGER--Conversion
of Shares; Procedures for Exchange of Certificates."
12
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
UUNET HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth summary historical consolidated financial
information of UUNET and has been derived from and should be read in
conjunction with UUNET's audited consolidated financial statements and
unaudited interim consolidated financial statements, including the notes
thereto, which are included in this Joint Proxy Statement-Prospectus. Unaudited
interim data reflect, in the opinion of UUNET's management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of results for such interim periods. Results of operations
for unaudited interim periods are not necessarily indicative of results which
may be expected for any other interim or annual period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA(1):
Revenues................ $ 43,013 $15,020 $ 94,461 $33,138 $24,019 $20,396 $14,180
Income (loss) from
operations............. 371 (391) (20,543)(2) (8,226) (1,329) 1,602 1,826
Net income (loss)....... 233 (280) (18,257)(2) (7,988) (2,026) 1,074 1,298
Pro forma net income
(loss) per common and
equivalent share(3).... 0.01 (0.01) (0.63)(2) (0.35)
Shares used in computing
pro forma net income
(loss) per share
amounts(3)............. 33,436 25,774 28,987 22,946
</TABLE>
<TABLE>
<CAPTION>
MARCH DECEMBER 31,
31, ----------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA(1):
Cash and cash equivalents.. $ 45,413 $ 60,424 $10,493 $ 857 $ 280 $ 776
Working capital............ 17,789 38,335 4,270 (1,499) (584) (874)
Total assets............... 156,278 137,610 29,625 10,585 8,285 6,499
Notes payable, net of
current portion........... 18,045 13,686 1,196 634 774 696
Redeemable convertible
preferred stock........... -- -- 14,073 2,676 200 --
Total stockholders'
equity(4)................. 82,084 80,667 279 425 2,567 1,191
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------------- ------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL
DATA:
EBITDA(5)........... $ 4,319 $ 634 $(1,154) $(6,075) $(120) $2,509 $2,376
</TABLE>
- --------
(1) UUNET acquired UUNET PIPEX in November 1995 in a transaction that was
accounted for as a pooling of interests and, as such, all financial amounts
contained in this table and the accompanying UUNET Consolidated Financial
Statements have been restated to include the financial results and data of
UUNET PIPEX for all periods presented. UUNET PIPEX previously had an April
30 fiscal year-end. In order to conform the fiscal year-end of UUNET PIPEX
to UUNET's calendar year-end, the statement of operations data for the
years ended December 31, 1991, 1992 and 1993 reflect the statement of
operations of UUNET PIPEX for the fiscal years ended April 30, 1992, 1993
and 1994, respectively. The consolidated statement of operations data for
the year ended December 31, 1993 includes the four month period ended April
30,
13
<PAGE>
1994 which is also included in the consolidated statement of operations
data for the year ended December 31, 1994. The consolidated balance sheet
data as of December 31, 1991, 1992 and 1993, includes the balance sheet
data of UUNET PIPEX as of April 30, 1992, 1993 and 1994, respectively. See
Note 1 of Notes to UUNET Consolidated Financial Statements for amounts
included in more than one period.
(2) Reflects the incurrence of acquisition-related costs of $11.1 million
during the fourth quarter of 1995 in connection with the acquisition of
UUNET PIPEX.
(3) See Note 1 of Notes to UUNET Consolidated Financial Statements for an
explanation of the determination of the number of shares and share
equivalents used in computing pro forma per share amounts.
(4) UUNET was an S corporation for federal and state income tax purposes
through September 1992. UUNET paid cash dividends to its stockholders in
1991 and 1992 sufficient for its stockholders to pay income taxes on
UUNET's taxable income. UUNET, on a consolidated basis, has not declared
any dividends since 1994. Dividends declared and paid by UUNET on a
consolidated basis were $33,000 ($0.01 per share) in 1991, $587,000 ($0.08
per share) in 1992, and $129,000 ($0.01 per share) in 1994.
(5) Represents earnings (loss) before depreciation and amortization, interest,
income tax (expense) benefit and other non-operating income or expenses.
UUNET has included information concerning EBITDA because it understands
that such information is used by certain investors as one measure of an
issuer's operating performance. EBITDA is not determined in accordance
with generally accepted accounting principles ("GAAP"), is not indicative
of cash used by operating activities and should not be considered in
isolation or as a substitute for measures of performance determined in
accordance with GAAP. For the year ended December 31, 1995, EBITDA
excludes acquisition-related costs of approximately $11.1 million incurred
in connection with the acquisition of UUNET PIPEX.
14
<PAGE>
MFS HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected consolidated data should be read in conjunction with
the MFS Consolidated Financial Statements and the notes thereto incorporated by
reference herein.
The selected consolidated financial data for each of the years in the period
1991 to 1995 have been derived from audited historical consolidated financial
statements. The selected consolidated financial data presented below as of and
for the three months ended March 31, 1995 and 1996, have been derived from
unaudited consolidated financial statements of MFS. In the opinion of MFS'
management, the unaudited financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations for
these periods. Operating results for the three months ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the full
year.
The development and acquisition by MFS of its networks and services during
the periods reflected in the MFS Historical Consolidated Financial Information
materially affect the comparability of that data from one period to another.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, DECEMBER 31,
-------------------------- ---------------------------------------------------------------
1996 1995 1995 1994(1) 1993 1992 1991
------------ ------------ ------------ ------------ ------------ ----------- --------
(DOLLARS IN THOUSAND, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Telecommunications
services.............. $ 165,590 $ 103,788 $ 498,225 $ 228,707 $ 70,048 $ 47,585 $ 23,158
Network systems
integration........... 20,726 14,552 84,969 58,040 71,063 61,122 14,065
------------ ------------ ------------ ------------ ------------ ----------- --------
Total................ 186,316 118,340 583,194 286,747 141,111 108,707 37,223
Costs and expenses:
Operating expenses..... 174,173 119,882 562,300 273,431 102,905 76,667 33,963
Depreciation and
amortization.......... 44,609 29,073 142,496 73,869 34,670 20,544 11,761
General and
administrative
expense............... 34,892 25,941 117,703 75,576 34,989 23,267 18,429
------------ ------------ ------------ ------------ ------------ ----------- --------
Total................ 253,674 174,896 822,499 422,876 172,564 120,478 64,153
------------ ------------ ------------ ------------ ------------ ----------- --------
Loss from operations.... (67,358) (56,556) (239,305) (136,129) (31,453) (11,771) (26,930)
Other income (expense)
net.................... (18,766) (7,252) (27,993) (17,175) 8,464 (792) (1,314)
------------ ------------ ------------ ------------ ------------ ----------- --------
Loss before income
taxes.................. (86,124) (63,808) (267,298) (153,304) (22,989) (12,563) (28,244)
Income tax benefit
(expense).............. (100) (100) (600) 2,103 7,220 (566) --
------------ ------------ ------------ ------------ ------------ ----------- --------
Net loss................ (86,224) (63,908) (267,898) (151,201) (15,769) (13,129) (28,244)
Dividends on preferred
stock.................. (7,072) -- (15,064) -- -- -- --
------------ ------------ ------------ ------------ ------------ ----------- --------
Net loss applicable to
common stockholders.... $ (93,296) $ (63,908) $ (282,962) $ (151,201) $ (15,769) $ (13,129) $(28,244)
============ ============ ============ ============ ============ =========== ========
Loss per share
applicable to common
stockholders(2),(4).... $ (0.75) $ (0.50) $ (2.21) $ (1.21) $ (0.15) $ (0.15)
============ ============ ============ ============ ============ ===========
Number of
shares(2),(4).......... 125,017,000 128,729,000 127,786,000 124,874,000 105,764,000 88,170,000
============ ============ ============ ============ ============ ===========
BALANCE SHEET AND OTHER
DATA:
EBITDA(3)............... $ (19,408) $ (27,483) $ (96,809) $ (62,260) $ 3,217 $ 8,773 $(15,169)
Capital expenditures,
including acquisitions
of businesses, net of
cash acquired.......... 148,440 109,973 523,727 576,711 128,651 110,171 92,411
Networks and equipment,
gross.................. 1,466,254 897,920 1,315,952 787,453 370,334 243,243 159,751
Total assets............ 2,347,211 1,554,945 1,867,134 1,584,546 906,937 363,299 204,819
Long-term obligations,
less current
maturities............. 1,286,354 560,688 723,471 548,333 143 169 7,659
Stockholders' equity.... 754,582 719,610 830,332 770,103 811,105 298,516 162,538
</TABLE>
(Footnotes appear on following page.)
15
<PAGE>
- --------
(1) Reflects the acquisition of Centex Telemanagement, Inc. as of May 18, 1994,
Cylix Communications Corporation as of November 1, 1994 and RealCom Office
Communications, Inc. as of November 14, 1994.
(2) See Note 2 to the MFS Consolidated Financial Statements, incorporated
herein by reference, which describes the calculation of loss per share.
(3) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization, non cash stock-based compensation and other
non-operating income or expenses. EBITDA is commonly used in the
communications industry to analyze companies on the basis of operating
performance. EBITDA is not intended to represent cash flows for the
periods. See the MFS Consolidated Statements of Cash Flows incorporated by
reference in this Joint Proxy Statement-Prospectus.
(4) Reflects the 2-for-1 stock split that was effected on April 26, 1996.
16
<PAGE>
MFS PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed financial data under
the columns captioned "Merger" give effect to the Merger pursuant to the Merger
Agreement. The pro forma balance sheet data under the columns captioned
"Merger" assume that the Merger occurred on March 31, 1996. The pro forma
statement of operations data under the columns captioned "Merger" assume that
the Merger occurred as of January 1, 1995. The following unaudited pro forma
consolidated condensed financial data under the columns captioned "Option" give
effect to the exercise of the Option to purchase 19,300,917 shares of UUNET
Common Stock (representing approximately 59.5% of the outstanding shares of
UUNET Common Stock outstanding at the UUNET Record Date) by MFS pursuant to the
Stock Option Agreement. The pro forma balance sheet data under the columns
captioned "Option" assume that the exercise of the Option occurred on March 31,
1996. The pro forma statement of operations data under the columns captioned
"Option" assume that the exercise of the Option occurred as of January 1, 1995.
The pro forma consolidated condensed financial information is not necessarily
indicative of the results that actually would have been attained if the Merger
or the exercise of the Option had been in effect on the dates indicated or
which may be attained in the future. Such statements should be read in
conjunction with the MFS and UUNET historical consolidated financial statements
and notes thereto that are either incorporated by reference or included herein.
<TABLE>
<CAPTION>
MERGER OPTION
-------------------------------- --------------------------------
THREE MONTHS THREE MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995 MARCH 31, 1996 DECEMBER 31, 1995
-------------- ----------------- -------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 228,007 $ 671,810 $ 228,007 $ 671,810
Costs and expenses:
Operating expenses.... 208,419 639,361 208,419 639,361
Depreciation and
amortization......... 154,464 574,446 110,905 400,211
General and
administrative
expenses............. 38,018 130,412 38,018 130,412
Other................. -- 11,067 -- 11,067
------------ ------------ ------------ ------------
400,901 1,355,286 357,342 1,181,051
------------ ------------ ------------ ------------
Loss from operations.... (172,894) (683,476) (129,335) (509,241)
Other income (expense):
Interest income....... 6,221 15,935 6,221 15,935
Interest expense...... (23,955) (39,414) (23,955) (39,414)
Other................. (1,170) (2,702) (1,259) 4,236
------------ ------------ ------------ ------------
Total other income
(expense).......... (18,904) (26,181) (18,993) (19,243)
------------ ------------ ------------ ------------
Loss before income
taxes.................. (191,798) (709,657) (148,328) (528,484)
Income tax expense...... (100) (600) (100) (600)
------------ ------------ ------------ ------------
Net loss................ (191,898) (710,257) (148,428) (529,084)
Dividends on preferred
stock.................. (7,072) (15,064) (7,072) (15,064)
------------ ------------ ------------ ------------
Loss applicable to
common stockholders.... $ (198,970) $ (725,321) $ (155,500) $ (544,148)
============ ============ ============ ============
Weighted average number
of shares outstanding.. 182,265,000 185,034,000 160,511,000 163,280,000
============ ============ ============ ============
Pro forma net loss per
share applicable to
common stockholders.... $ (1.09) $ (3.92) $ (0.97) $ (3.33)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
MERGER OPTION
-------------- --------------
MARCH 31, 1996 MARCH 31, 1996
-------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets..................................... $4,537,298 $3,698,168
Long-term obligations less current maturities.... 1,304,399 1,304,399
Stockholders' equity............................. 2,856,075 1,985,753
</TABLE>
17
<PAGE>
RISK FACTORS
Holders of UUNET Common Stock and holders of MFS Capital Stock should
consider carefully all of the information contained in this Joint Proxy
Statement-Prospectus, including the following factors:
RISKS RELATED TO THE MERGER
Integration of the Two Companies
UUNET and MFS have entered into the Merger Agreement with the expectation
that the Merger will result in certain benefits. Achieving the benefits of the
Merger will depend in part upon the integration of the businesses of UUNET and
MFS in an efficient manner, and there can be no assurance that this will
occur. The transition to a combined company will require substantial attention
from management. Neither company's management has experience in integrating
operations on the scale represented by the Merger. The diversion of management
attention and any difficulties encountered in the transition process could
have an adverse effect on the revenues and operating results of the combined
company. In addition, the process of combining the two organizations could
cause the interruption of, or a disruption in, the activities of either or
both of the companies' businesses, which could have a material adverse effect
on their combined operations. There can be no assurance that the combined
company will realize any of the anticipated benefits of the Merger.
Substantial Dilution of Ownership Interest of Current MFS Stockholders
Following the Merger, the current stockholders of MFS will own approximately
% of the outstanding shares of MFS Common Stock. This represents substantial
dilution of the ownership interest in MFS of the current MFS stockholders.
The Effect of Stock Price Fluctuations on the Consideration to be Received by
the Holders of UUNET Common Stock in the Merger
The relative stock prices of the UUNET Common Stock and the MFS Common Stock
at the Effective Date may vary significantly from the prices as of the date of
execution of the Merger Agreement or the date hereof or the date on which
stockholders vote on the Merger or the MFS Share Proposal. These variances may
be due to changes in the business, operations and prospects of UUNET or MFS,
market assessments of the likelihood that the Merger will be consummated and
the timing thereof, the effect of any conditions or restrictions imposed on or
proposed with respect to the combined companies by regulatory agencies in
connection with or following consummation of the Merger, general market and
economic conditions, and other factors. For example, between April 30, 1996
and June 21, 1996, the closing sales price of the MFS Common Stock has ranged
from a high of 38 3/8 to a low of 33 5/16 and the closing sales price of the
UUNET Common Stock during the same period has ranged from a high of 66 3/4 to
a low of 56 3/4. The Exchange Ratio is fixed and will not be adjusted based on
changes in the relative stock prices of the UUNET Common Stock and the MFS
Common Stock. Thus, the dollar value of the MFS Common Stock to be received by
the holders of UUNET Common Stock will not be determined until the Effective
Date, and may be substantially more or less than the value of the MFS Common
Stock as of the date of execution of the Merger Agreement, the date hereof or
the date on which stockholders vote on the Merger or the MFS Share Proposal.
Shares Eligible for Future Sale; Possible Volatility of Stock Price
After the Merger and assuming the conversion of the 32,462,956 shares of
UUNET Common Stock outstanding on the UUNET Record Date to shares of MFS
Common Stock, approximately 23,396,313 of the shares of MFS Common Stock
issued to UUNET stockholders will be freely tradeable and an additional
34,315,551 shares of MFS Common Stock will be tradeable under Rule 145 under
the Securities Act. As a result, substantial sales of MFS Common Stock could
occur after the Merger. Sales of a substantial number of such shares of MFS
Common Stock could adversely affect or cause substantial fluctuations in the
market price of MFS Common Stock and impair MFS' ability to raise additional
capital through the sale of its equity securities. As of the MFS Record Date,
MFS had outstanding under the MFS 1992 Stock Plan and the MFS 1993 Stock Plan
options to purchase approximately 19,258,997 shares of MFS Common Stock. In
addition, as of the MFS Record Date, warrants to purchase 1,500,000 shares of
MFS Common Stock were outstanding. As of the UUNET Record Date, UUNET had
outstanding 358,463 vested options, which, if outstanding upon consummation of
the Merger, will convert to options to purchase 637,267 shares of MFS Common
Stock.
18
<PAGE>
The market price for the MFS Common Stock is subject to significant
fluctuations in response to a number of factors, including variations in MFS'
quarterly operating results, changes in estimates of MFS' results of
operations, perceptions about market conditions in the telecommunications
industry and the effect of general economic conditions, many of which are
unrelated to MFS' operating performance. Since the announcement of the Merger
Agreement, the market price of MFS Common Stock has been subject to
significant fluctuation in response to factors affecting UUNET and the
Internet industry. In addition, the stock market generally has experienced
significant price and volume fluctuations. These market fluctuations could
have a material adverse effect on the market price or liquidity of the MFS
Common Stock.
RISKS RELATED TO MFS, UUNET AND THE COMBINED COMPANY
Acquisition Strategy
Both MFS and UUNET have acquired complementary businesses as part of their
business strategies. UUNET is in the process of integrating certain of the
operations, research and development, sales and marketing, finance and
administrative functions of UUNET PIPEX and UUNET Canada. In addition, UUNET
has recently acquired 40 percent of the equity ownership of EUnet Germany and
has increased its ownership interest in UUNET Canada to 51 percent.
After the Merger, it is likely that the combined company will continue to
acquire complementary businesses, and any future acquisitions will be
accompanied by the risks commonly associated with acquisitions. These risks
include potential exposure to unknown liabilities of acquired companies or to
acquisition costs and expenses, the difficulty and expense of integrating the
operations and personnel of the companies, the potential disruption to the
business of the combined company and potential diversion of management time
and attention, the impairment of relationships with and the possible loss of
key employees and customers as a result of changes in management, incurring
amortization expenses if an acquisition is accounted for as a purchase and
dilution to the stockholders of the combined company if the acquisition is
made for stock of the combined company. There can be no assurance that
products, technologies or businesses of acquired companies will be effectively
assimilated into the business or product offerings of the combined company. In
addition, the combined company may incur significant expense to complete
acquisitions and to support the acquired products and businesses. There can be
no assurance that any acquired products, technologies or businesses will
contribute to the combined company's revenues or earnings to any material
extent. Further, the challenge of managing the integration of future
acquisitions may distract management and may interfere with the successful
integration of MFS and UUNET.
Operating Losses
A substantial portion of the expenditures relating to the development of
MFS' businesses, the installation and expansion of its domestic and
international networks and the recently proposed linking of these networks
through the acquisition or construction of facilities will be incurred before
the realization of revenues. These expenditures, together with the associated
up front operating expenses, result in negative cash flow until an adequate
customer base is established. MFS reported losses from operations of
approximately $31.5 million, $136.1 million and $239.3 million for the three
years ended December 31, 1993, 1994 and 1995, respectively, and $67.4 million
for the three months ended March 31, 1996. In addition, at March 31, 1996, MFS
had an accumulated deficit of approximately $727.3 million. Although its
revenues have increased substantially in each of the last three years and for
the three months ended March 31, 1996, MFS has incurred significant increases
in expenses associated with the development and expansion of its fiber optic
networks, services and customer base, which expenses are expected to continue
for the foreseeable future.
At March 31, 1996, UUNET had an accumulated deficit on a consolidated basis
of approximately $27.3 million. UUNET reported net losses on a consolidated
basis of approximately $2.0 million, $8.0 million and $18.3 million for the
years ended December 31, 1993, 1994 and 1995, respectively, and net income on
a consolidated basis of approximately $0.2 million for the quarter ended March
31, 1996. There can be no assurance that UUNET will be able to maintain
profitability. UUNET is expanding the network and organizational
infrastructure and increasing the marketing and advertising efforts and
expense necessary to
19
<PAGE>
expand its Internet access services domestically and internationally, and
there can be no assurance that UUNET will report operating profits in the
future. There can be no assurance that the combined company will achieve or
sustain profitability in the future.
Significant Capital Requirements
The development of MFS' businesses, the installation and expansion of its
domestic and international networks and the recently proposed linking of these
networks through the acquisition or construction of facilities require
significant capital expenditures. During the first quarter of 1996, MFS'
capital expenditures, which are primarily for the construction of networks and
the purchase of related equipment, were $153 million, including acquisitions
and deferred costs. On May 7, 1996, MFS announced that it intends to undertake
certain initiatives designed to take advantage of opportunities created by
changes in telecommunications laws and the rapid development of Internet
technology-based communications networks. These initiatives involve increasing
the number of metropolitan areas served, expanding its networks in existing
metropolitan areas, constructing or acquiring its own intercity high capacity
network, accelerating central office interconnection, deploying additional
switches, and providing high-speed local Internet access. Expenditures for the
initiatives are subject to MFS' review of a number of factors including cost
of any additional capital required, technological developments and market
conditions. In addition, each initiative may be implemented in whole or in
part, and independently of any other initiative, ensuring that MFS retains
maximum financial and operating flexibility. MFS anticipates that
implementation of these initiatives will, together with currently anticipated
expenditures, result in total average annual capital expenditures of
approximately $1.0 billion to $1.3 billion over the period of implementation
which MFS estimates to be four years. Since a significant portion of MFS'
capital expenditures are success-based (that is, related directly to revenue
growth), actual capital expenditures may vary significantly from the above
range depending on the level of incremental sales. This range is also subject
to a number of factors, including pace and extent of network development,
levels of incremental sales, as well as regulatory actions by state, federal
and international authorities, which, individually or in the aggregate, could
cause material changes in capital expenditure requirements.
UUNET will also require additional financing to continue with its plan to
accelerate international expansion (including obtaining significant undersea
and European terrestrial fiber optic cable capacity), make strategic
acquisitions of other Internet service providers or complementary businesses,
technologies or products to develop new products or otherwise respond to
unanticipated competitive pressures. The combined company expects to fund
additional capital requirements through additional debt or equity financing,
existing resources and internally generated funds as appropriate. There can be
no assurance, however, that the combined company will be successful in
producing sufficient cash flow or raising sufficient debt or equity capital on
terms that it will consider acceptable. Failure to generate or raise
sufficient funds may require the combined company to delay or abandon some of
its future expansion or expenditures of MFS or UUNET, which could have a
material adverse effect on the growth of the combined company.
COMPETITION
MFS
Virtually all markets for telecommunications services, including Internet
access and on-line services, are extremely competitive, and UUNET and MFS
expect that competition will intensify in the future. In each of the markets
in which it offers telecommunications services, MFS faces significant
competition from larger, better financed incumbent providers. MFS competes,
both domestically and internationally, with incumbent LECs, which have
historically dominated their local telecommunications markets, and long
distance carriers, for the provision of long distance services. In certain
markets, especially international markets, the incumbent provider offers both
local and long distance services. The LECs presently have numerous advantages
as a result of their historic monopoly control of the local exchange market. A
continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new larger competitors to
MFS. Many of MFS' existing and potential competitors have financial, personnel
and other resources significantly greater than those of MFS. MFS also faces
competition in most markets in which it operates from one or more competitors,
20
<PAGE>
including competitive access providers ("CAPs") operating fiber optic
networks, in some cases in conjunction with the local cable television
operator. Each of AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI")
and Sprint Corporation ("Sprint") has indicated its intention to offer local
telecommunications services in major U.S. markets using its own facilities or
by resale of the LECs' or others' services. Other potential competitors
include cable television companies, wireless telephone companies, electric
utilities, microwave carriers and private networks of large end users. In
addition, MFS competes with equipment vendors and installers and
telecommunications management companies with respect to certain portions of
its business.
Under the Telecommunications Act of 1996 (the "Telecom Act") and ensuing
federal and state regulatory initiatives, barriers to local exchange
competition are being removed. The introduction of such competition, however,
also establishes the predicate for the Bell Operating Companies (the "BOCs")
to provide in-region interexchange long distance services. The BOCs are
currently allowed to offer certain "incidental" long distance service in-
region and to offer out-of-region long distance services. Once the BOCs are
allowed to offer in-region long distance services, both they and the three
largest long distance carriers (AT&T, MCI and Sprint) will be in a position to
offer single source local and long distance service similar to that being
offered by MFS.
MFS competes in three international markets: international services from the
United States; international services from certain countries in continental
Europe and Hong Kong; and domestic services within, and international services
from, the United Kingdom and Sweden. MFS offers private line, high-speed LAN
interconnect data and voice services in each of these markets, subject to
varying governmental authorizations. MFS faces competition in international
service originating in the United States from, among others, AT&T, MCI, Sprint
and WorldCom, Inc., which conducts business under the name "LDDS WorldCom"
("WorldCom"). These companies own significant international transmission
capacity and have established operating agreements with governmental and
private telecommunications providers in Europe, Asia and elsewhere, which
greatly reduce their cost of providing service. In international markets, MFS
competes with the incumbent telecommunications carrier, which generally offers
both local and long distance services and benefits from its history as an
incumbent provider.
MFS Network Technologies' primary network systems integration competitors
are the BOCs, long distance carriers, equipment manufacturers and major
independent telephone companies. In certain circumstances, MFS Network
Technologies may also compete with regional and local systems integration and
construction firms for integration and installation projects. In the automatic
vehicle identification market, MFS Network Technologies competes with specific
manufacturers and several of the aerospace defense contractors that have
indicated an intention to shift to commercial markets.
UUNET
The market for data communications services, including Internet access and
on-line services, is extremely competitive. There are no substantial barriers
to entry, and UUNET expects that competition will intensify in the future.
UUNET believes that its ability to compete successfully depends on a number of
factors, including: market presence; the ability to execute a strategy of
rapid expansion; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of
new products and services by UUNET and its competitors; UUNET's ability to
support industry standards; and industry and general economic trends. UUNET's
success in this market will depend heavily upon its ability to provide high
quality Internet connectivity and value-added Internet services at competitive
prices.
UUNET's current and potential competitors headquartered in the United States
generally may be divided into the following three groups: (1)
telecommunications companies, such as AT&T, MCI, Sprint, WorldCom, BOCs and
@Home (a joint venture between Tele-Communications, Inc. and a venture capital
firm) and various other cable companies; (2) other Internet access providers,
such as BBN Corporation ("BBN"), NETCOM On-Line Communication Services, Inc.
("NETCOM"), PSINet Inc. ("PSI"), and other national and regional
21
<PAGE>
providers; and (3) on-line services providers, such as America Online, Inc.
("America Online"), CompuServe Corporation ("CompuServe"), Intuit Inc.,
Microsoft, and Prodigy. Many of these competitors have greater market
presence, engineering and marketing capabilities, and financial, technological
and personnel resources than those available to UUNET. As a result, they may
be able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and changes
in customer requirements, take advantage of acquisition and other
opportunities more readily, and devote greater resources to the marketing and
sale of their services than can UUNET.
UUNET expects that all of the major on-line services providers and
telecommunications companies will expand their current services to compete
fully in the Internet access market. UUNET believes that new competitors,
including large computer hardware, software, media and other technology and
telecommunications companies will enter the Internet access market, resulting
in even greater competition for UUNET. Certain companies, including America
Online, AT&T, BBN and PSI, have obtained or expanded their Internet access
products and services as a result of acquisitions and strategic investments.
Such acquisitions may permit UUNET's competitors to devote greater resources
to the development and marketing of new competitive products and services and
the marketing of existing competitive products and services. MFS and UUNET
expect these acquisitions and strategic investments to increase, thus creating
significant new larger competitors to MFS and UUNET. In addition, the ability
of some of UUNET's competitors to bundle other services and products with
Internet access services, such as the Internet service offerings recently
announced by AT&T and MCI, could place UUNET at a competitive disadvantage.
As UUNET continues to expand its operations outside of the United States, it
will encounter competition from companies whose operating styles are
substantially different from those that it usually experiences. UUNET will be
forced to compete with and buy services from government owned or subsidized
telecommunications providers, some of which may enjoy an absolute monopoly on
telecommunications services essential to UUNET's business. For example, in the
United Kingdom, UUNET PIPEX competes directly with: (1) telecommunications
companies, such as British Telecommunications plc ("BT"), Cable and Wireless
plc ("Cable and Wireless"), Mercury Communications Limited ("Mercury") and
others; (2) other Internet access providers, such as Demon Internet Limited
("Demon") and EUnet GB Limited ("EUnet GB"); and (3) on-line services
providers, such as CompuServe, America Online/Bertelsmann, Microsoft and AT&T.
In addition to the risks ascribed to UUNET's previously described competitors,
these foreign competitors may possess a better understanding of their local
markets and may have better working relationships with local
telecommunications companies. There can be no assurance that UUNET can obtain
similar levels of local knowledge and failure to obtain that knowledge could
place UUNET at a serious competitive disadvantage.
As a result of increased competition in the industry, UUNET expects to
continue to encounter significant pricing pressure, which in turn could result
in significant reductions in the average selling price of UUNET's services.
For example, certain of UUNET's competitors which are telecommunications
companies, including AT&T and MCI, provide customers with low priced or free
Internet access services in connection with the purchase of telephone or other
communications services, significantly increasing price pressures on UUNET.
UUNET has in the past reduced prices on certain of its Internet access options
and may do so in the future. There can be no assurance that UUNET will be able
to offset the effects of any such price reductions with an increase in the
number of its customers, higher revenue from enhanced services, cost
reductions or otherwise. In addition, UUNET believes that the data
communications business, and in particular the Internet access and on-line
services businesses, are likely to encounter consolidation in the near future,
which could result in increased price and other competition in the industry.
Increased price or other competition could result in erosion of UUNET's market
share and could have a material adverse effect on UUNET's business, financial
condition and results of operations. There can be no assurance that UUNET will
have the financial resources, technical expertise, marketing and support
capabilities or expansion and acquisition possibilities to continue to compete
successfully.
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REGULATION
MFS
MFS is subject to varying degrees of federal, state, local and international
regulation. In the United States, MFS is most heavily regulated by the states,
especially for the provision of local exchange services. MFS must be
separately certified in each state to offer local exchange services. No state,
however, subjects MFS to price cap or rate of return regulation, nor is MFS
currently required to obtain FCC authorization for installation or operation
of its network facilities used for domestic services. FCC approval is
required, however, for the installation and operation of its international
facilities and services. Both the states and the FCC have determined that
nondominant carriers, such as MFS, are required to file interstate tariffs on
an ongoing basis, setting forth MFS' rates and operating procedures.
Challenges to these tariffs by third parties may cause MFS to incur
substantial legal and administrative expenses. The FCC has initiated a
rulemaking to eliminate this requirement for all nondominant carriers. In
addition, MFS is subject to varying degrees of regulation in the foreign
jurisdictions in which it conducts operations including authorization for the
installation and operation of its network facilities. Although the trend in
federal, state and international regulation appears to favor increased
competition, no assurance can be given that changes in current or future
regulations adopted by the FCC, state or foreign regulators or legislative
initiatives in the United States and abroad would not have a material adverse
effect on MFS.
UUNET
UUNET is not currently subject to direct regulation by the FCC or any other
U.S. agency, other than regulation applicable to businesses generally. The FCC
recently requested comments on a petition filed by the America's Carriers
Telecommunication Association which requests that the FCC regulate certain
voice transmissions over the Internet as telecommunications services. Changes
in the regulatory environment relating to the telecommunications or Internet
access industry, could have an adverse effect on UUNET's business. The Telecom
Act may permit telecommunications companies, BOCs or others to increase the
scope or reduce the cost of their Internet access services. UUNET cannot
predict the effect that the Telecom Act or any future legislation, regulation
or regulatory changes may have on its business.
The law in the United States relating to the liability of on-line services
providers and Internet access providers for information carried on,
disseminated through or hosted on their systems is currently unsettled.
Several private lawsuits seeking to impose such liability are currently
pending. In one case brought against an Internet access provider, Religious
Technology Center v. Netcom On-Line Communication Services, Inc., the United
States District Court for the Northern District of California ruled in a
preliminary phase that under certain circumstances Internet access providers
could be held liable for copyright infringement. The case has not reached
final judgment. The Telecom Act prohibits and imposes liability for using an
interactive computer service for transmitting certain types of information and
content. On June 12, 1996, however, a panel of three federal judges granted a
preliminary injunction barring enforcement of this portion of the Telecom Act
to the extent that enforcement is based upon allegations other than obscenity
or child pornography as an impermissible restriction on the First Amendment's
right of free speech. In addition, numerous states have adopted or are
currently considering similar types of legislation. The imposition upon UUNET
and other Internet access providers or Web hosting sites of potential
liability for materials carried on or disseminated through their systems could
require UUNET to implement measures to reduce its exposure to such liability,
which may require the expenditure of substantial resources or the
discontinuation of certain product or service offerings. UUNET believes that
it is currently unsettled whether the Telecom Act prohibits and imposes
liability for any services provided by UUNET should the content or information
transmitted be subject to the statute. The increased attention focused upon
liability issues as a result of these lawsuits, legislation and legislative
proposals could impact the growth of Internet use. While UUNET carries
insurance, it may not be adequate to compensate UUNET in the event UUNET
becomes liable for information carried on or disseminated through its systems.
Any costs not covered by insurance incurred as a result of such liability or
asserted liability could have a material adverse effect on UUNET's business,
financial condition and results of operations.
The law relating to the liability of on-line services providers and Internet
access providers in relation to information carried, disseminated or hosted
also is being developed in the United Kingdom and other
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jurisdictions. The scope of authority of various regulatory bodies in relation
to on-line services is at present uncertain. The Office of Telecommunications
in the United Kingdom has recently published a consultative document setting
out a number of issues for discussion, including the roles of traditional
telecommunications and broadcasting regulators with respect to on-line
services. The Securities Investment Board is investigating the status of on-
line services and the transmission of investment information over networks
controlled by access providers. Such transmissions may make the access
provider concerned liable for any infringement of securities and other
financial services legislation and regulations. Decisions regarding
regulation, enforcement, content liability and the availability of Internet
access in other countries may significantly affect the ability to offer
certain services worldwide and the development and profitability of companies
offering Internet and on-line services in the future. For example, CompuServe
recently removed certain content from its services worldwide in reaction to
law enforcement activities in Germany, and it has been reported that an
Internet access provider in Germany has been advised by prosecutors that it
may have liability for disseminating neo-Nazi writings by providing access to
the Internet where these materials are available.
RISKS OF EXPANSION AND IMPLEMENTATION
MFS
MFS is engaged in the expansion and development of its networks and
services. The expansion and development of its networks will depend on, among
other things, its ability to assess markets, design fiber optic network
backbone routes, install facilities and obtain rights-of-way, building access
and any required government authorizations and/or permits, all in a timely
manner, at reasonable costs and on satisfactory terms and conditions. As a
result, there can be no assurance that MFS will be able to expand its existing
networks or install new networks. If MFS is not able to expand its networks or
install or acquire new networks, there will be a material adverse effect on
its growth.
Foreign operations or investment may be adversely affected by local
political and economic developments, exchange controls, currency fluctuations,
royalty and tax increases, retroactive tax claims, expropriation, import and
export regulations and other foreign laws or policies as well as by laws and
policies of the United States affecting foreign trade, taxation and
investment. In addition, in the event of a dispute arising from foreign
operations, MFS may be subject to the exclusive jurisdiction of foreign courts
or may not be successful in subjecting foreign persons to the jurisdiction of
courts in the United States. MFS may also be hindered or prevented from
enforcing its rights with respect to a governmental instrumentality because of
the doctrine of sovereign immunity.
UUNET
The growth and expansion domestically and internationally of UUNET's
business and its product and service offerings have placed, and are expected
to continue to place, a significant strain on UUNET's management, operational
and financial resources. To manage its growth, UUNET must continue to
implement and improve its operational, financial and management information
systems, including its billing, accounts receivable and payable tracking,
fixed assets and other financial management systems; must continue to hire and
train additional qualified management and technical personnel; and must
continue to expand and upgrade its network infrastructure and operations.
Demands on UUNET's network infrastructure and technical support resources have
grown rapidly with UUNET's expanding customer base, and UUNET from time to
time experiences difficulties meeting the demand for its access services and
technical support. UUNET expects to experience even greater strain on its
operational and management resources and systems as it continues to develop,
operate and maintain the portion of its network infrastructure which is the
primary Internet dial-up network and infrastructure for Microsoft, including
The Microsoft Network, continues to expand its own operations internationally
and makes acquisitions domestically and internationally. Although UUNET is
taking steps, including hiring and training additional personnel, to help
ensure that its technical support resources can manage increased use of its
network infrastructure, there can be no assurance that UUNET's technical
support or
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other resources will be sufficient to facilitate UUNET's growth. Any failure
of UUNET to manage its growth effectively could have a material adverse effect
on UUNET's business, financial condition and results of operations.
Risks of Foreign Operations. A key component of UUNET's strategy is its
continued expansion into international markets. To date, UUNET has limited
experience in providing international Internet services. There can be no
assurance that UUNET will be able to obtain the capital required to finance
its continued expansion into these markets. In addition, there can be no
assurance that UUNET will be able to obtain the permits and operating licenses
required for it to operate, to hire and train employees or to market, sell and
deliver services in these countries. In certain countries, UUNET has needed
to, and will continue to need to, enter into joint ventures or other strategic
relationships with one or more third parties in order to conduct operations.
In addition to the uncertainty as to UUNET's ability to expand its
international presence, there are certain risks inherent in foreign
operations, including management of a large operation spread over various
countries, longer accounts receivable payment cycles in certain countries,
general economic conditions in each country, currency fluctuations, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, loss of revenue, property and equipment from
expropriation, nationalization, war, insurrection, terrorism and other
political risks, the overlap of different tax structures, risks of increases
in taxes and other government fees and involuntary renegotiation of contracts
with foreign governments and telecommunications carriers. UUNET is also at
risk from changes in foreign and domestic laws, regulations and policies
governing foreign operations.
Currency Risks. Exchange rates of foreign currency may fluctuate in relation
to the U.S. dollar. Any such fluctuation may have a material adverse effect on
UUNET's earnings or assets when translated into U.S. dollars. UUNET may
receive a substantial portion of its revenues in foreign currency. Any
increase in value of the U.S. dollar relative to certain foreign currency
could result in lower revenues and earnings when translated into U.S. dollars.
UUNET may enter into foreign exchange contracts to hedge intercompany foreign
exchange transactions, but there can be no assurance that exchange rate
fluctuations will not have an adverse effect on UUNET's business, financial
condition and results of operations. There may exist various foreign exchange
controls which may delay or prevent repatriation of foreign profits. There can
be no assurance that additional foreign exchange restrictions will not be
imposed or that existing restrictions will not be strengthened in the future.
Risks Associated with Foreign Tax Liabilities. UUNET or its affiliates
generally will be subject to various taxes in foreign countries where UUNET
operates. UUNET's ability to claim a foreign tax credit against its U.S.
federal income taxes is subject to various limitations. These limitations
could result in a high effective tax rate on UUNET's earnings.
Technology Export Considerations. UUNET relies heavily on equipment
incorporating technology that is developed primarily, or in some cases
exclusively, in the United States. UUNET's current international expansion
plans are dependent upon using this U.S.-developed technology in foreign
countries. Export of technology from the United States or import into a
foreign country may be prohibited or may be subject to duties or other charges
of possibly punitive scale, delays from customs brokers or government
agencies, and regulatory or similar issues. Export from the United States of
encryption technology suitable for commercial transactions is currently
severely restricted and in some countries use of such technology is illegal.
Problems with technology export could have a material adverse effect on
UUNET's business, financial condition and results of operations.
There can be no assurance that laws or administrative practice relating to
taxation, foreign exchange or other matters of countries within which UUNET
operates or will operate will not change. Any such change could have a
material adverse effect on UUNET's business, financial condition and results
of operations.
RAPID TECHNOLOGICAL CHANGES; DEPENDENCE UPON PRODUCT DEVELOPMENT
MFS
The telecommunications industry is subject to rapid and significant changes
in technology. While MFS believes that, for the foreseeable future, these
changes will neither materially and adversely affect the continued
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use of fiber optic cable nor materially hinder its ability to acquire
necessary technologies, the effect of technological changes, including changes
relating to emerging wireline and wireless transmission and switching
technologies, on the businesses of MFS cannot be predicted.
UUNET
UUNET's success will depend upon its ability to develop new products and
provide new services that meet changing customer requirements. The market for
UUNET's products and services is characterized by rapidly changing technology,
evolving industry standards, emerging competition and frequent new product and
service introductions. There can be no assurance that UUNET will successfully
identify new product and service opportunities and develop and bring new
products and services to market in a timely manner. UUNET is also at risk from
fundamental changes in the way Internet access services are marketed and
delivered. For example, cable modems have been developed by third parties
which are intended to permit connection to the Internet through the cable
network used for cable television transmission. UUNET's pursuit of necessary
technological advances may require substantial time and expense, and there can
be no assurance that UUNET will succeed in adapting its Internet services
business to alternate access devices and conduits. Failure of UUNET, for
technological or other reasons, to develop and introduce new products and
product enhancements and new services that are compatible with industry
standards and that satisfy customer requirements would have a material adverse
effect on UUNET's business, financial condition and results of operations.
In addition, UUNET or its competitors may announce enhancements to existing
products or services, or new products or services embodying new technologies,
industry standards or customer requirements that have the potential to replace
or to provide lower cost alternatives to UUNET's existing products and
services. The introduction of such enhancements or new products and services
could render UUNET's existing products and services obsolete and unmarketable.
Specifically, UUNET's services rely on the continued widespread commercial use
of Transmission Control Protocol/Internetwork Protocol ("TCP/IP"). Alternative
open protocol and proprietary protocol standards have been or are being
developed. If any of these alternative protocols becomes widely adopted, there
may be a reduction in the use of TCP/IP. There can be no assurance that the
announcement or introduction of new products or services by UUNET or its
competitors or any change in industry standards will not cause customers to
defer or cancel purchases of existing products or services, which could have a
material adverse effect on UUNET's business, financial condition and results
of operations.
Furthermore, introduction by UUNET of products or services with reliability,
quality or compatibility problems could result in reduced orders, delays in
collecting accounts receivable and additional service costs. The failure to
introduce a new product, service or product enhancement on a timely basis
could delay or hinder market acceptance. Products and services as complex as
those offered by UUNET may contain undetected errors or defects when first
introduced or as new versions are released. There can be no assurance that,
despite testing by UUNET or its customers, errors will not be found in new
products after commencement of commercial deployment, resulting in product
redevelopment costs and loss of, or delay in, market acceptance. Any such
event could have a material adverse effect on UUNET's business, financial
condition and results of operations.
DEPENDENCE ON KEY PERSONNEL
MFS' and UUNET's businesses are managed by a small number of key executive
officers, the loss of certain of whom could have a material adverse effect on
MFS and UUNET. MFS and UUNET believe that their future success will depend in
large part on their continued ability to attract and retain highly skilled and
qualified personnel. MFS does not have employment agreements with any of its
key executive officers.
DEPENDENCE UPON NETWORK INFRASTRUCTURE; RISK OF SYSTEM FAILURE; SECURITY RISKS
UUNET's success will depend upon the capacity, reliability and security of
its network infrastructure. UUNET derives a substantial portion of its revenue
by charging fees to connect customers to the Internet. UUNET must continue to
expand and adapt its network infrastructure domestically and internationally
as the number of users and the amount of information they wish to transfer
increases, and to meet changing customer
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requirements. The expansion and adaptation of UUNET's network infrastructure
requires, and will continue to require, substantial financial, operational and
management resources. UUNET has, from time to time, been unable to meet
additional demand and customer requirements. For example, customers from time
to time are unable to obtain Internet access during hours of peak use. In
addition, delays in providing Internet access are often caused by delays in
receiving telecommunication services from suppliers. There can be no assurance
that UUNET will be able to expand or adapt its network infrastructure to meet
additional demand or its customers' changing requirements on a timely basis,
at a commercially reasonable cost, or at all, or that UUNET will be able to
deploy successfully the planned data communications networks. Any failure of
UUNET to expand its network infrastructure on a timely basis or adapt it
either to changing customer requirements or to evolving industry standards
could have a material adverse effect on UUNET's business, financial condition
and results of operations.
In addition, the operations of UUNET are dependent upon its ability to
protect its network infrastructure against damage from fire, earthquakes,
floods, mudslides, power loss, telecommunications failures and similar events.
A significant portion of its computer equipment, including critical equipment
dedicated to its Internet access services, is located at facilities in
Fairfax, Virginia and Cambridge, England. In addition, UUNET's modems and
routers that serve large areas of the U.S. and a large portion of the United
Kingdom are concentrated in several cities. Despite precautions taken, the
occurrence of a natural disaster or other unanticipated problem at a network
operations center, hubs (sites at which routers, switches and other computer
equipment which make up the backbone of the network infrastructure are
located) or at a number of POPs (points-of-presence, geographic areas in which
UUNET allows local access) has caused, and in the future could cause,
interruptions in network access by customers. In addition, failure of UUNET's
telecommunications providers to provide data communications capacity as a
result of a natural disaster, operational disruption or for any other reason
could cause interruptions in network access by customers. Any damage or
failure that causes interruptions in operations could have a material adverse
effect on UUNET's business, financial condition and results of operations.
Despite the implementation of security measures, the core of UUNET's network
infrastructure is vulnerable to computer viruses, break-ins and other
disruptive problems. UUNET and other Internet access providers have in the
past experienced, and may in the future experience, interruptions in service
as a result of the accidental or intentional actions of Internet users,
current and former employees or others. Unauthorized use could also
potentially jeopardize the security of confidential information stored in the
computer systems of UUNET and its customers, which may result in liability of
UUNET to its customers and also may deter potential subscribers. Although
UUNET intends to continue to implement industry-standard security measures,
such measures have been circumvented in the past, and there can be no
assurance that measures implemented by UUNET will not be circumvented in the
future. Eliminating computer viruses and alleviating other security problems
may require interruptions, delays or cessation of service to UUNET's customers
which could have a material adverse effect on UUNET's business, financial
condition and results of operations.
VARIABILITY OF QUARTERLY OPERATING RESULTS
MFS
As a result of the significant expenses associated with the expansion and
development of its networks and services, MFS anticipates that its operating
results could vary significantly from period to period and such variability
could adversely affect MFS' results of operations. In addition, MFS' network
systems integration revenues are and generally will continue to be dependent
upon a small number of large projects. Accordingly, these revenues are likely
to vary significantly from period to period, and such variability could
adversely affect MFS' results of operations.
UUNET
UUNET's quarterly operating results have in the past varied and are expected
in the future to vary significantly depending upon factors such as the timing
and installation of significant orders, which in the past
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have been, and will in the future be, delayed from time to time by delays in
the installation of lines and equipment by UUNET's telecommunications
subcontractors. Additional factors contributing to variability of operating
results include the pricing and mix of services and products sold by UUNET,
customer terminations of service, new product introductions by UUNET and its
competitors, market acceptance of new and enhanced versions of UUNET's
products and services, competitive factors such as quality of service by UUNET
and its competitors and changes in pricing policies by its competitors,
UUNET's ability to obtain sufficient supplies of sole or limited source
components and to integrate successfully such components into its products and
network infrastructure, the timing of the expansion of UUNET's network
infrastructure domestically and internationally, the timing and costs of
marketing and advertising efforts, and the timing and costs of any
acquisitions of businesses, products or technologies. In response to
competitive pressures, UUNET may take certain pricing or marketing actions
that could have a material adverse effect on UUNET's business, financial
condition and results of operations. As a result, variations in the timing and
amounts of revenues could have a material adverse effect on UUNET's quarterly
operating results.
In addition, each of MFS and UUNET expects competition in its business to
increase and that competitors will offer new and existing products and
services at prices necessary to gain or retain market share and customers.
This competition and continuing price erosion for basic Internet access and
telephone services could adversely affect the results of operations of the
combined company in any given quarter. In addition, the combined company's
operating results may also be subject to significant quarterly fluctuations as
a result of other factors, including product mix, variations in product cost
and pricing, delays in product development and introduction, increased
competition and the general level of economic activity in the markets served
by the combined company.
UUNET'S RELIANCE ON STRATEGIC RELATIONSHIP WITH MICROSOFT
In December 1994, UUNET and Microsoft entered into a strategic relationship
for the development, operation and maintenance of a large-scale high speed
dial-up and ISDN TCP/IP access network which is the primary Internet dial-up
network and infrastructure for Microsoft, including The Microsoft Network. The
parties entered into a TCP/IP Local Access Network Agreement (the "Microsoft
Agreement") and a loan agreement under which Microsoft agreed to lend to UUNET
up to $26.0 million to cover the anticipated capital cost of the network
equipment, which amount was increased subsequent to March 31, 1996, by $22.2
million to a total of $48.2 million. Revenues from Microsoft totaled
approximately 20% and 37% of consolidated revenues during the year ended
December 31, 1995 and the quarter ended March 31, 1996, respectively. UUNET
expects that it will continue to derive a significant portion of its revenues
from Microsoft for at least the next several years, and the Microsoft
Agreement limits UUNET's ability to enter into similar agreements for the
development of other large-scale dial-up networks prior to March 1997.
Although UUNET has met Microsoft's needs through March 31, 1996, there can be
no assurance that UUNET will be able to meet all future deployment commitments
to Microsoft. After September 1996, Microsoft may terminate the Microsoft
Agreement if UUNET breaches certain material terms of the Microsoft Agreement
and is unable to cure, thereby causing a sustained operational failure of the
dial-up network. In addition, Microsoft may terminate the Microsoft Agreement
if, prior to March 2000, certain competitors of Microsoft acquire majority
ownership of UUNET, and Microsoft has the right to impose performance
penalties in certain other situations. Termination of the Microsoft Agreement
by Microsoft for any reason could, at Microsoft's option, result in the loss
of all future revenues from Microsoft and the acceleration of UUNET's
obligation to pay to Microsoft amounts due under the loan agreement. Any such
termination, loss or acceleration or imposition of penalties would have a
material adverse effect on UUNET's business, financial condition and results
of operations. In addition, any regulatory or private party legal challenges
to The Microsoft Network, including those in the United States and Europe
which have been threatened to date, could result in termination or
restructuring of UUNET's strategic relationship with Microsoft, which would
have a material adverse effect on UUNET. The terms of construction,
maintenance and operation (including the allocation of costs and payment of
fees) of international gateway hubs beyond the initial 14 such hubs are
subject to future agreement between Microsoft and UUNET. UUNET expects that
the terms of any funding or revenues from Microsoft relating to additional
international hubs, if any, will be different from those of the Microsoft
Agreement. In addition, UUNET and Microsoft have an understanding that
providers of Internet access services
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(such as the PTTs) will begin to bear certain of the costs of the 14
international gateway hubs. As this begins, Microsoft's share of such costs
will decrease, and UUNET will become more dependent upon such providers and
other customers for revenues to support such costs. Microsoft continues to
evolve its international strategy for The Microsoft Network, and its final
strategy may differ materially from that originally anticipated. Although
UUNET is Microsoft's primary Internet access provider, there can be no
assurance that Microsoft will obtain additional Internet network
infrastructure or capacity it may require from UUNET, other than that
specified in the Microsoft Agreement. Microsoft has announced a relationship
with MCI under which MCI will resell The Microsoft Network, Microsoft's
Internet Explorer Web browser software, and other Microsoft Internet-related
software. Although the terms of the relationship have not been fully
disclosed, this relationship with MCI may allow access to The Microsoft
Network through MCI's dial-up network. Further, Microsoft is developing
relationships with other Internet service providers to resell The Microsoft
Network and the Internet Explorer. As originally planned, Microsoft is
developing relationships with foreign and domestic telecommunications
companies and Internet access providers to resell access to The Microsoft
Network. If Microsoft fully develops these resale relationships, UUNET's
revenues may not increase beyond Microsoft's guaranteed minimum payments. Any
failure of such revenues to increase could have a material adverse effect on
UUNET's business, financial condition and results of operations.
UUNET'S DEPENDENCE UPON SUPPLIERS; SOLE AND LIMITED SOURCES OF SUPPLY
UUNET relies on other companies to supply certain key components of its
network infrastructure, including telecommunications services and networking
equipment, which, in the quantities and quality demanded by UUNET, are
available only from sole or limited sources. WorldCom, MFS, Cable and Wireless
and GEIS are the primary providers to UUNET of data communications facilities
and capacity and lease physical space to UUNET for switches, modems and other
equipment. If UUNET were required to vacate any such facilities because of a
termination of the agreement by the lessor or for any other reason, UUNET
would be required to expend a significant amount of money and effort in
obtaining and equipping another facility to service the affected locale. There
can be no assurance that UUNET could obtain or equip another facility if
necessary. UUNET is also dependent upon LECs to provide telecommunications
services to UUNET and its customers. UUNET has from time to time experienced
delays in receiving telecommunications services, and there can be no assurance
that UUNET will be able to obtain such services on the scale and within the
time frames required by UUNET at an affordable cost, or at all. Any failure to
obtain such services or additional capacity on a timely basis at an affordable
cost, or at all, would have a material adverse effect on UUNET's business,
financial condition and results of operations.
The routers used in UUNET's network infrastructure are supplied solely by
Cisco. In addition, the switches, modems and bandwidth managers primarily used
in UUNET's network infrastructure are supplied solely by Cascade
Communications Corporation ("Cascade"), Ascend Communications, Inc. ("Ascend")
and OnStream Networks ("OnStream," formerly T3plus Networking), respectively.
UUNET purchases these components pursuant to purchase orders placed from time
to time, does not carry significant inventories of these components and has no
guaranteed supply arrangements. UUNET's suppliers also sell products to
UUNET's competitors and may in the future become competitors of UUNET. There
can be no assurance that UUNET's suppliers will not enter into exclusive
arrangements with UUNET's competitors or stop selling their products or
components to UUNET at commercially reasonable prices or at all. UUNET from
time to time experiences delays in receiving components. Expansion of network
infrastructures by UUNET and others is placing, and will continue to place, a
significant demand on UUNET's suppliers, some of which have limited resources
and production capacity. In addition, certain of UUNET's suppliers, in turn,
rely on sole or limited sources of components included in their products.
Failure of UUNET's suppliers to adjust to meet demand may prevent them from
continuing to supply components and products in the quantities and quality and
at the times required by UUNET, or at all. UUNET'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
expanding, and overburdening of, UUNET's network infrastructure, which would
have a material adverse effect on UUNET's business, financial condition and
results of operations.
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UUNET also is dependent on its suppliers' ability to provide necessary
products and components that comply with various Internet and
telecommunications standards, interoperate with products and components from
other vendors and function as intended when installed as part of the network
infrastructure. Any failure of UUNET's sole or limited source suppliers to
provide products or components that comply with Internet standards,
interoperate with other products or components used by UUNET in its network
infrastructure or by its customers or fulfill their intended function as a
part of the network infrastructure could have a material adverse effect on
UUNET's business, financial condition and results of operations.
Certain of UUNET's suppliers, including the BOCs and other LECs, currently
are subject to tariff controls and other price constraints which in the future
may be changed. In addition, the Telecom Act will produce changes in the
market for telecommunications services. These changes may affect the prices
charged by the BOCs and other LECs to UUNET. Any such changes could result in
increased prices of products and services which could have a material adverse
effect on UUNET's business, financial condition and results of operations.
UUNET'S DEPENDENCE UPON NEW AND UNCERTAIN MARKET
Substantially all of UUNET's consolidated revenues to date have been, and
for the foreseeable future will be, derived from the sale of its Internet
access options, applications and consulting services. UUNET's success will
depend upon the development and expansion of the market domestically and
internationally for Internet access services and products and the networks
which comprise the Internet. The market for Internet access services began
developing in the last few years in the United States and the United Kingdom
and more recently in other countries. Certain critical issues concerning
commercial use of the Internet, including security, reliability, capacity,
ease and cost of access, quality of service and regulation remain unresolved
and may impact the growth of Internet use. UUNET cannot predict the size of
the market or the rate at which the market will grow. If the Internet access
market fails to grow, grows more slowly than anticipated, or becomes saturated
with competitors, UUNET's business, financial condition and results of
operations would be materially adversely affected.
TAX NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1995, MFS and UUNET had net operating loss carryforwards
("NOLs") of approximately $420 million and $12 million, which expire in years
through 2010, respectively.
MFS believes that the Merger will cause an "ownership change" within the
meaning of Section 382 of the Code with respect to both MFS and UUNET.
Consequently, MFS' and UUNET's NOL and credit carryovers from periods prior to
the Merger will be subject to annual limitations. Under Section 382, a
corporation is only allowed to use a portion of its NOL and credit carryovers
from periods prior to an ownership change to offset its income in periods
subsequent to the ownership change. This yearly limitation (the "Section 382
limitation") is generally equal to the value of all of the outstanding stock
of the corporation immediately prior to the ownership change multiplied by the
"applicable long-term tax-exempt rate," which is the highest of the adjusted
federal long-term rates in effect for any month in the three calendar month
period ending with the calendar month in which the ownership change date
occurs.
In general, MFS will be required to pay federal income tax in any year in
which MFS' and UUNET's taxable income exceeds the amount of each of MFS' and
UUNET's Section 382 limitation plus any NOL and credit carryovers from years
subsequent to the ownership change. To the extent that either MFS or UUNET
does not use the full amount of its Section 382 limitation in any year, such
unused portion can be used to increase the Section 382 limitation for
subsequent years. Based on the value of MFS and UUNET prior to the Merger, the
amount of the NOLs of each company prior to the Merger and the fact that MFS
expects to have significant NOLs in 1996 and 1997, MFS believes that the
Section 382 limitations will not have a material effect on the amount of its
federal income tax liability in future years.
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ANTI-TAKEOVER PROVISIONS IN MFS' CHARTER AND BY-LAWS
MFS' Restated Certificate of Incorporation and By-laws contain provisions
that could delay, defer or prevent a change in control without the approval of
its incumbent Board of Directors. These provisions, among other things, (i)
divide the MFS Board of Directors into three classes, with members of each
class to be elected in staggered three-year terms, (ii) prohibit stockholder
action by written consent in lieu of a meeting, (iii) limit the right to call
special meetings of stockholders and (iv) authorize the MFS Board of Directors
to issue preferred stock in one or more classes or series without any action
on the part of stockholders. Such provision could limit the price that
investors might be willing to pay in the future for shares of MFS Common Stock
and significantly impede the ability of the holders of MFS Common Stock to
replace management. In addition, MFS has adopted the MFS Rights Plan, which
has certain anti-takeover effects. The MFS Rights Plan will cause substantial
dilution to a person or group that attempts to acquire MFS on terms not
approved by MFS' Board of Directors. Provisions and agreements that inhibit or
discourage takeover attempts could reduce the market value of the MFS Common
Stock.
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THE UUNET SPECIAL MEETING
PURPOSE OF THE UUNET SPECIAL MEETING
At the UUNET Special Meeting, holders of UUNET Common Stock will consider
and vote upon a proposal to approve and adopt the Merger Agreement and such
other matters as may properly be brought before the UUNET Special Meeting.
THE BOARD OF DIRECTORS OF UUNET HAS UNANIMOUSLY APPROVED THE MERGER
AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
RECORD DATE; VOTING RIGHTS; PROXIES
The UUNET Board of Directors has fixed the close of business on June 21,
1996 as the UUNET Record Date for determining holders entitled to notice of
and to vote at the UUNET Special Meeting.
As of the UUNET Record Date, there were 32,462,956 shares of UUNET Common
Stock issued and outstanding, each of which entitles the holder thereof to one
vote. All shares of UUNET Common Stock represented by properly executed
proxies will, unless such proxies have been previously revoked, be voted in
accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS
ARE INDICATED, SUCH SHARES OF UUNET COMMON STOCK WILL BE VOTED FOR APPROVAL
AND ADOPTION OF THE MERGER AGREEMENT.
UUNET does not know of any matters other than as described in the Notice of
Special Meeting that are to come before the UUNET Special Meeting. If any
other matter or matters are properly presented for action at the UUNET Special
Meeting, the persons named in the enclosed form of proxy and acting thereunder
will have the discretion to vote on such matters in accordance with their best
judgment, unless such authorization is withheld. It is UUNET's current
intention to vote all proxies that contain instructions to vote in favor of
the Merger Agreement and those proxies that contain no voting instructions for
purposes of the vote on the Merger Agreement to adjourn the Special Meeting in
order to solicit additional votes in favor of the Merger Agreement, should
such additional solicitation be necessary to approve the Merger Agreement. A
stockholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice thereof to the Secretary of UUNET, by
signing and returning a later dated proxy, or by voting in person at the UUNET
Special Meeting; however, mere attendance at the UUNET Special Meeting will
not in and of itself have the effect of revoking the proxy.
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of UUNET Common Stock entitled
to vote is necessary to constitute a quorum at the UUNET Special Meeting.
Votes cast by proxy or in person at the UUNET Special Meeting will be
tabulated by the election inspectors appointed for the meeting who will
determine whether or not a quorum is present. Where, as to any matter
submitted to the stockholders for a vote, proxies are marked as abstentions
(or stockholders appear in person but abstain from voting), such abstentions
will be treated as shares that are present and entitled to vote for purposes
of determining the presence of a quorum but as unvoted for purposes of
determining the approval of any matter submitted to the stockholders for a
vote. If a broker indicates on the proxy that it does not have discretionary
authority as to certain shares to vote on a particular matter, those shares
will not be considered as present and entitled to vote with respect to that
matter.
SOLICITATION OF PROXIES
UUNET will bear its own cost of solicitation of proxies. In addition to the
use of the mails, proxies may be solicited by the directors and officers of
UUNET by personal interview, telephone, telegram or e-mail. Such directors and
officers will not receive additional compensation for such solicitation but
may be reimbursed for out-of-pocket expenses incurred in connection therewith.
Arrangements may also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares
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of UUNET Common Stock held of record by such persons, in which case UUNET will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
REQUIRED VOTE
The approval of the Merger requires the affirmative vote of the holders of a
majority of the outstanding shares of UUNET Common Stock. As of the UUNET
Record Date, there were 32,462,956 shares of UUNET Common Stock outstanding
and entitled to vote held by approximately 505 stockholders of record. As of
the UUNET Record Date, directors and officers of UUNET and their affiliates as
a group beneficially owned 17,036,826 shares of UUNET Common Stock, or
approximately 52.48% of those shares of UUNET Common Stock outstanding as of
such date. Pursuant to the Stock Option Agreement, certain stockholders of
UUNET have granted irrevocable proxies in favor of MFS to vote all of such
stockholders' shares of UUNET Common Stock held as of the UUNET Record Date in
favor of the Merger Agreement and the Merger (19,300,917 shares of UUNET
Common Stock or approximately 59.5% of the outstanding shares of UUNET Common
Stock as of the UUNET Record Date). ACCORDINGLY, BY VIRTUE OF SUCH
STOCKHOLDERS' OWNERSHIP OF 59.5% OF THE OUTSTANDING UUNET COMMON STOCK, THE
PROPOSAL TO ADOPT AND APPROVE THE MERGER AGREEMENT WILL BE ADOPTED WITHOUT THE
VOTE OF ANY OTHER STOCKHOLDERS OF UUNET. SEE "STOCK OPTION AGREEMENT."
Under applicable Delaware law, abstentions will be present and entitled to
vote, and will, therefore, have the effect of a negative vote on the approval
and adoption of the Merger Agreement. Since the affirmative vote of a majority
of the outstanding shares of UUNET Common Stock is required to approve and
adopt the Merger Agreement, a broker non-vote will have the effect of a vote
against the approval and adoption of the Merger Agreement.
THE MATTERS TO BE CONSIDERED AT THE UUNET SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF UUNET. ACCORDINGLY, STOCKHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS JOINT PROXY
STATEMENT-PROSPECTUS, AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE
ENCLOSED PROXY IN THE ENCLOSED POSTAGE PAID ENVELOPE.
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THE MFS ANNUAL MEETING
PURPOSES OF THE MFS ANNUAL MEETING
At the MFS Annual Meeting, holders of MFS Capital Stock will consider and
vote upon the MFS Share Proposal to approve the issuance of shares of MFS
Common Stock pursuant to the Merger Agreement or the Stock Option Agreement.
At the MFS Annual Meeting, holders of MFS Capital Stock will also be asked to
consider and act upon the following matters: (a) the reelection to the MFS
Board of Directors of four Class I Directors for a three-year term until the
1999 Annual Meeting; (b) the adoption of amendments to the MFS 1993 Stock
Plan; (c) the adoption of amendments to the MFS 1995 Deferred Stock Purchase
Plan; (d) the ratification of the appointment by the MFS Board of Directors of
Coopers & Lybrand L.L.P. as independent auditors of MFS for the 1996 fiscal
year; and (e) the transaction of such other business as may properly come
before the MFS Annual Meeting. Although Delaware law and the Restated
Certificate of Incorporation of MFS do not require MFS to obtain stockholder
approval of the Merger because UUNET is merging with a subsidiary of MFS,
rather than MFS itself, due to the number of shares of MFS Common Stock to be
issued in either the Merger or the exercise of the Option, Nasdaq requires MFS
to obtain stockholder approval of the issuance of such shares. Stockholder
approval of the MFS Share Proposal will constitute the approval required by
Nasdaq for the issuance of the MFS Common Stock in connection with the Merger
or the exercise of the Option.
THE BOARD OF DIRECTORS OF MFS HAS APPROVED BY THE UNANIMOUS VOTE OF THOSE
DIRECTORS PRESENT THE MERGER AGREEMENT AND THE MFS SHARE PROPOSAL IN
CONNECTION WITH THE MERGER AND UNANIMOUSLY RECOMMENDS A VOTE FOR THE MFS SHARE
PROPOSAL. THE MFS BOARD OF DIRECTORS ALSO UNANIMOUSLY RECOMMENDS THAT ITS
STOCKHOLDERS REELECT THE FOUR CLASS I DIRECTORS FOR A THREE-YEAR TERM UNTIL
THE 1999 ANNUAL MEETING OF STOCKHOLDERS, APPROVE THE PROPOSED AMENDMENTS TO
THE MFS 1993 STOCK PLAN, APPROVE THE PROPOSED AMENDMENTS TO THE MFS 1995
DEFERRED STOCK PURCHASE PLAN AND RATIFY THE APPOINTMENT BY THE MFS BOARD OF
DIRECTORS OF COOPERS & LYBRAND L.L.P. AS INDEPENDENT AUDITORS OF MFS FOR THE
1996 FISCAL YEAR. SEE "MFS REELECTION OF CLASS I DIRECTORS PROPOSAL," "MFS
AMENDMENT TO AMENDED AND RESTATED 1993 STOCK PLAN PROPOSAL," "MFS AMENDMENT TO
1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND RESTATED AS OF AUGUST 28, 1995)
PROPOSAL," AND "MFS RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS
PROPOSAL," RESPECTIVELY.
RECORD DATE; VOTING RIGHTS; PROXIES
The MFS Board of Directors has fixed the close of business on June 21, 1996
as the MFS Record Date for determining holders of MFS Capital Stock entitled
to notice of and to vote at the MFS Annual Meeting.
As of the Record Date, there were 126,664,076 shares of MFS Common Stock
outstanding, 94,992 shares of the Series A Preferred outstanding and
15,000,000 shares of Series B Preferred outstanding. Each share of MFS Common
Stock is entitled to one vote, each share of Series A Preferred is entitled to
ten votes, and each share of Series B Preferred is entitled to ten votes on
each matter to be voted upon at the MFS Annual Meeting. All shares of MFS
Capital Stock represented by properly executed proxies will, unless such
proxies have been previously revoked, be voted in accordance with the
instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH
SHARES OF MFS CAPITAL STOCK WILL BE VOTED IN FAVOR OF THE MFS SHARE PROPOSAL,
THE REELECTION OF THE CLASS I DIRECTORS, THE AMENDMENTS TO THE MFS 1993 STOCK
PLAN, THE AMENDMENTS TO THE MFS 1995 DEFERRED STOCK PURCHASE PLAN, AND THE
RATIFICATION OF THE APPOINTMENT OF COOPERS & LYBRAND L.L.P.
As stated above, each share of Series B Preferred is entitled to ten votes
per share. The shares of Series B Preferred, however, are held subject to an
irrevocable proxy that has been granted to the Secretary and Assistant
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Secretary of MFS to vote all shares of Series B Preferred on all matters,
other than the election of MFS directors and matters as to which the holders
of the Series B Preferred vote as a separate class, in proportion to the vote
of the holders of the MFS Common Stock. The MFS Share Proposal, the amendments
to the MFS 1993 Stock Plan, the amendments to the MFS 1995 Deferred Stock
Purchase Plan and the ratification of the appointment of Coopers & Lybrand
L.L.P. as independent auditors of MFS for the 1996 fiscal year do not require
a separate class vote by the holders of the Series B Preferred.
MFS does not know of any matters other than as described in the Notice of
Annual Meeting that are to come before the MFS Annual Meeting. If any other
matter or matters are properly presented for action at the MFS Annual Meeting,
the persons named in the enclosed form of proxy and acting thereunder will
have the discretion to vote on such matters in accordance with their best
judgment, unless such authorization is withheld. It is MFS' current intention
to vote all proxies that contain instructions to vote in favor of the MFS
Share Proposal and those proxies that contain no voting instructions for
purposes of the MFS Share Proposal to adjourn the MFS Annual Meeting in order
to solicit additional votes in favor of the MFS Share Proposal, should such
additional solicitation be necessary to approve the MFS Share Proposal. A
stockholder who has given a proxy may revoke it at any time prior to its
exercise by giving written notice thereof to the Secretary of MFS by signing
and returning a later dated proxy, or by voting in person at the MFS Annual
Meeting; however, mere attendance at the MFS Annual Meeting will not in and of
itself have the effect of revoking the proxy.
Votes cast by proxy or in person at the MFS Annual Meeting will be tabulated
by the election inspectors appointed for the meeting, who will determine
whether or not a quorum is present. Where, as to any matter submitted to the
stockholders for a vote, proxies are marked as abstentions (or stockholders
appear in person but abstain from voting), such abstentions will be treated as
shares that are present and entitled to vote for purposes of determining the
presence of a quorum but as unvoted for purposes of determining the approval
of any matter submitted to the stockholders for a vote. If a broker indicates
on the proxy that it does not have discretionary authority as to certain
shares to vote on a particular matter, those shares will not be considered as
present and entitled to vote with respect to that matter.
SOLICITATION OF PROXIES
MFS will bear its own cost of solicitation of proxies. In addition to the
use of the mails, proxies may be solicited by the directors and officers of
MFS by personal interview, telephone, telegram or e-mail. Such directors and
officers will not receive additional compensation for such solicitation but
may be reimbursed for out-of-pocket expenses incurred in connection therewith.
Arrangements may also be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares of MFS Common Stock held of record by such persons, in which
case MFS will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in
connection therewith.
QUORUM
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of MFS Capital Stock entitled to
vote is necessary to constitute a quorum at the MFS Annual Meeting. Under
applicable Delaware law, abstentions and "broker non-votes" (that is, proxies
from brokers or nominees indicating that such persons have not received
instructions from the beneficial owner or other persons entitled to vote
shares as to a matter with respect to which the brokers or nominees do not
have discretionary power to vote) will be treated as present for purposes of
determining the presence of a quorum at the MFS Annual Meeting.
REQUIRED VOTE
The approval of the MFS Share Proposal requires the affirmative vote of a
majority of votes cast by the holders of the outstanding shares of MFS Capital
Stock at a meeting at which a quorum is present. The four Class I Directors
will be elected by a plurality of the votes cast by holders of MFS Capital
Stock present in person or by proxy and entitled to vote at the MFS Annual
Meeting. The proposals to amend the MFS 1993 Stock Plan, to amend the MFS 1995
Deferred Stock Purchase Plan and to ratify the appointment by the MFS
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Board of Directors of Coopers & Lybrand L.L.P. as independent auditors of MFS
for the 1996 fiscal year require the affirmative vote of the holders of a
majority of the votes entitled to be cast in respect of all outstanding shares
of MFS Capital Stock present in person or by proxy at the MFS Annual Meeting
and entitled to vote thereon.
Under applicable Delaware law, abstentions will be present and entitled to
vote, and will, therefore, have the effect of a negative vote on the MFS Share
Proposal, the proposal to amend the MFS 1993 Stock Plan, the proposal to amend
the MFS 1995 Deferred Stock Purchase Plan and the proposal to ratify the
appointment of Coopers & Lybrand L.L.P., but will have no effect on the
outcome of the reelection of Class I Directors. A broker non-vote will have no
effect on the MFS Share Proposal, the proposal to amend the MFS Stock Plan,
the proposal to amend the MFS 1995 Deferred Stock Purchase Plan, the proposal
to ratify the appointment of Coopers & Lybrand L.L.P. or the outcome of the
reelection of Class I Directors.
As of the MFS Record Date, the directors and executive officers of MFS as a
group beneficially owned 19,631,136 shares of the MFS Common Stock and
2,953,704 shares of the Series B Preferred, representing in the aggregate
approximately 17.2% of outstanding votes at that date. Pursuant to the MFS
Voting Agreement, certain stockholders of MFS, all of whom are Directors of
MFS, granted irrevocable proxies to vote all of such stockholders' shares of
MFS Common Stock held as of the MFS Record Date in favor of the MFS Share
Proposal (15,305,777 shares of MFS Common Stock or approximately 12.1% of the
outstanding MFS Common Stock and representing 5.5% of the voting power of the
MFS Capital Stock as of the MFS Record Date). See "MFS VOTING AGREEMENT."
THE MATTERS TO BE CONSIDERED AT THE MFS ANNUAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF MFS. ACCORDINGLY, STOCKHOLDERS ARE URGED TO
READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS PROXY STATEMENT,
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE
ENCLOSED POSTAGE PAID ENVELOPE.
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THE MERGER
GENERAL
The Merger Agreement provides that the Merger will be consummated if the
approvals of the UUNET and MFS stockholders required therefor are obtained and
all other conditions to the Merger are satisfied or waived. Upon consummation
of the Merger, Sub will be merged with and into UUNET, and UUNET will become a
wholly owned subsidiary of MFS.
Upon consummation of the Merger, each outstanding share of UUNET Common
Stock (other than shares owned by UUNET as treasury stock or by its
subsidiaries or by MFS or its subsidiaries, all of which will be canceled)
will be automatically converted (subject to provisions with respect to
fractional shares) into the right to receive 1.777776 shares of MFS Common
Stock. Each share of new MFS Common Stock issued in connection with the Merger
will be accompanied by one MFS Right.
Based upon the capitalization of UUNET and MFS as of the MFS Record Date,
the stockholders of UUNET will own approximately % of the outstanding MFS
Common Stock following consummation of the Merger. Such percentage could
change depending on the number of shares of MFS Common Stock and UUNET Common
Stock issued upon exercise of outstanding UUNET and MFS stock options or
otherwise issued prior to the Effective Date.
EFFECTIVE DATE
The Effective Date of the Merger will occur upon the filing of a Certificate
of Merger with the Secretary of State of the State of Delaware (the
"Certificate of Merger") or at such later time as is specified on such
certificate. The filing of the Certificate of Merger will occur as soon as
practicable after the satisfaction of the conditions set forth in the Merger
Agreement. The Merger Agreement may be terminated by either party if the
Merger has not been consummated on or before November 30, 1996 and under
certain other conditions. See "THE MERGER--Conditions to the Consummation of
the Merger" and "THE MERGER AGREEMENT-- Termination; Fees and Expenses."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion, at the Exchange Ratio, of UUNET Common Stock into the right
to receive MFS Common Stock will occur automatically at the Effective Date.
On the Effective Date, MFS will instruct the Exchange Agent to mail to each
holder of record of UUNET Common Stock within three business days a
transmittal letter and instructions for use in effecting the surrender of
certificates which represented shares of UUNET Common Stock. Upon receipt of
such certificates, the Exchange Agent will deliver full shares of MFS Common
Stock to such stockholder and cash in lieu of fractional shares pursuant to
the terms of the Merger Agreement and in accordance with the transmittal
letter, together with any dividends or other distributions to which such
stockholder is entitled without interest.
If any issuance of shares of MFS Common Stock in exchange for shares of
UUNET Common Stock is to be made to a person other than the holder of UUNET
Common Stock in whose name the certificate is registered at the Effective
Date, it will be a condition of such exchange that the certificate so
surrendered be properly endorsed or otherwise in proper form for transfer and
that the holder of UUNET Common Stock requesting such issuance either pay any
transfer or other tax required or establish to the satisfaction of MFS that
such tax has been paid or is not payable.
After the Effective Date, there will be no further transfers of UUNET Common
Stock on the stock transfer books of UUNET. If a certificate representing
UUNET Common Stock is presented for transfer, it will be canceled and a
certificate representing the appropriate number of full shares of MFS Common
Stock and cash in lieu of fractional shares and any dividends and
distributions will be issued in exchange therefor, without interest.
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After the Effective Date and until surrendered, shares of UUNET Common Stock
will be deemed for all corporate purposes, other than the payment of dividends
and distributions, to evidence ownership of the number of full shares of MFS
Common Stock into which such shares of UUNET Common Stock were converted on
the Effective Date. No dividends or other distributions, if any, payable to
holders of MFS Common Stock will be paid to the holders of any certificates
for shares of UUNET Common Stock until such certificates are surrendered. Upon
surrender of such certificates, all such declared dividends and distributions
payable after the Effective Date will be paid to the holder of record of the
full shares of MFS Common Stock represented by the certificate issued in
exchange therefor, without interest.
HOLDERS OF UUNET COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES TO THE
EXCHANGE AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. HOLDERS OF UUNET
COMMON STOCK SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
BACKGROUND TO THE MERGER
Commencing in late November 1995, MFS began studying the Internet service
provider ("ISP") industry to identify and analyze leading ISPs that could be
potential acquisition candidates or commercial or strategic partners with MFS.
After identifying and analyzing several leading ISPs, MFS focused on UUNET as
an attractive candidate because it appeared to be the largest (based on
revenue and customer base).
On February 7, 1996, Frederick W. Weidinger, Vice President of MFS, placed a
telephone call to Richard L. Adams, Jr., Chairman of the Board and Chief
Technical Officer of UUNET, in order to schedule a meeting to discuss a
potential commercial or strategic relationship. A meeting was subsequently
scheduled for February 27, 1996 at UUNET's executive offices.
On February 27, 1996, James Q. Crowe, Chairman of the Board and Chief
Executive Officer of MFS, and Mr. Weidinger, met with Mr. Adams and John W.
Sidgmore, President and Chief Executive Officer of UUNET, at the executive
offices of UUNET, for the purpose of discussing a possible commercial or a
strategic relationship. During this meeting, each side described what each
considered to be the synergies between MFS and UUNET. These synergies included
MFS selling UUNET's Internet products through the MFS sales force and a
potential strategic transaction (including MFS acquiring a minority or a
control position in UUNET). These discussions did not give rise to a proposal
with respect to a transaction, but it was agreed that the parties would hold
further discussions.
During the first week of March 1996, MFS and UUNET executed a nondisclosure
agreement and Messrs. Crowe, Weidinger, Sidgmore and Adams met again to
discuss a possible strategic relationship, which included MFS acquiring a
minority ownership position in UUNET or MFS acquiring 100% of UUNET. The
parties considered various terms including the consideration to be paid for
the UUNET Common Stock, a possible contingent value payment based upon fair
market value to be made at some date after the closing and a commitment by MFS
to invest a minimum amount of capital in UUNET if a merger was consummated. On
March 7, 1996, a discussion of UUNET financial information, including
historical results and budgets, occurred between Messrs. Weidinger and
Sidgmore. On the same date, other members of management of both MFS and UUNET
discussed the ability of UUNET to provide to MFS additional technical
expertise in configuring and managing complex packet switched networks that
support Internet and other protocols and, over time, the ability of MFS to
offer new services (including voice and video communications services) using
UUNET's Internet technology expertise and MFS' broadband, end-to-end networks.
Although these business discussions did not give rise to a specific proposal
with respect to a transaction, the parties continued to discuss possible
transaction terms and held a meeting at the executive offices of MFS on March
20, 1996 at which they continued to discuss the terms proposed earlier in the
month by MFS. During the remainder of March, the parties continued to discuss
technical matters and these possible transaction terms.
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On April 4, 1996, a meeting took place at the offices of Gleacher NatWest,
between representatives of Gleacher NatWest and representatives of Goldman
Sachs. At this meeting representatives of Goldman Sachs explained to
representatives of Gleacher NatWest their views on the value of UUNET and the
representatives of Gleacher NatWest and Goldman Sachs discussed a proposed
structure of the transaction, which involved MFS Common Stock and warrants to
purchase additional shares of MFS Common Stock. From April 5 through April 9,
MFS and UUNET continued to discuss further revised possible transaction terms
and the results of the discussion held between their respective financial
advisors. These terms included a stock-for-stock exchange (a fixed exchange
with no collar) based upon negotiated share prices. On April 16, 1996, Messrs.
Crowe and Sidgmore met again to discuss possible transaction terms, which Mr.
Sidgmore indicated he would, and did, present to the UUNET Board of Directors.
On April 17, 1996, the UUNET Board of Directors considered certain of the
proposed transaction terms and authorized Mr. Sidgmore to continue to
negotiate with MFS. On April 18, 1996, MFS proposed a transaction whereby a
subsidiary of MFS would merge with and into UUNET with UUNET as the surviving
entity, and the consideration for such transaction would be a fixed exchange
of MFS Common Stock for UUNET Common Stock. In addition, as an inducement for
MFS to enter into a transaction on this basis, MFS requested that certain
stockholders of UUNET execute an agreement pursuant to which such stockholders
would agree to vote their shares of UUNET Common Stock in favor of the Merger
and against any other proposed business transaction, grant irrevocable proxies
to MFS to vote their shares of UUNET Common Stock in favor of the Merger and
against any other proposed business combination transaction and grant MFS an
option to purchase their shares of Common Stock in exchange for the same
consideration that would be given in the proposed Merger. UUNET suggested that
the merger consideration include a cash component.
From April 19 through April 21, Messrs. Sidgmore and Weidinger spoke by
telephone to discuss the status of the proposed transaction. During this
period, each party's respective financial advisors spoke by telephone to
review the status of the progress toward an agreement upon the terms of the
transaction. During a meeting of the MFS Board of Directors on April 23, a
proposed business combination with UUNET was discussed. The terms of the
transaction discussed with the members of the MFS Board of Directors included
a stock-for-stock merger with no cash payments, the fixed exchange ratio of
MFS Common Stock for UUNET Common Stock, which was later agreed upon by the
parties and the granting to MFS by certain UUNET stockholders of an
irrevocable option to purchase such stockholders' shares of UUNET Common
Stock. On April 25, Messrs. Crowe, Weidinger and R. Douglas Bradbury,
Executive Vice President and Chief Financial Officer of MFS, attended a
meeting of the UUNET Board of Directors to discuss the business of MFS. No
merger proposal terms were discussed by Messrs. Crowe, Weidinger and Bradbury.
At this meeting, the UUNET Board of Directors authorized continued discussions
with MFS. Mr. Sidgmore then telephoned Mr. Crowe and suggested that both
parties commence financial and legal due diligence.
From April 26 through April 29, MFS and UUNET, together with their legal and
financial advisors, conducted their financial and legal due diligence and
negotiated the terms of the Merger Agreement. During this period, the parties
finalized the structure of the transaction as a stock-for-stock merger,
without a cash component as part of the merger consideration, and the parties
negotiated and agreed upon: the scope of the representations and warranties
that each party would make in the Merger Agreement; the additional covenants
between the parties, including the limitations upon the conduct of the
parties' respective businesses pending the closing of the Merger; the
treatment of UUNET's stock options; and the terms of the fees to be paid in
the event of the termination of the Merger Agreement for certain specified
events (See "THE MERGER AGREEMENT--Termination; Fees and Expenses"). In
addition, during this period, the terms of the Stock Option Agreement and the
MFS Voting Agreement were also negotiated, which agreements, among other
things, provided for the granting of the Option and the granting by certain
stockholders of UUNET of irrevocable proxies in favor of MFS to vote in favor
of the proposed merger and against any proposal for a merger or other business
combination with a third party and the granting by certain stockholders of MFS
of irrevocable proxies in favor of UUNET to vote in favor of the MFS Share
Proposal.
The MFS Board of Directors held a special meeting on April 29, 1996 to
consider the proposed Merger Agreement and the transactions contemplated
thereby, including the proposed consideration to be paid to
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UUNET stockholders. At this meeting, members of MFS' senior management,
together with MFS' legal counsel, Willkie Farr & Gallagher, and MFS' financial
advisor, Gleacher NatWest, reviewed with the MFS Board of Directors, among
other things, the background of the proposed Merger, financial analyses of the
transaction and the terms of the Merger Agreement. Representatives of Willkie
Farr & Gallagher and Gleacher NatWest made presentations to the MFS Board of
Directors and discussed with the MFS Board of Directors their views and
analyses of various aspects of the proposed Merger. In addition, at this
meeting, Gleacher NatWest delivered its oral opinion (subsequently confirmed
in a written opinion dated as of April 29, 1996) to the MFS Board of Directors
that, based upon the matters presented to the MFS Board of Directors and
subject to the matters set forth in its written opinion, as of such date, the
Exchange Ratio is fair from a financial point of view to MFS and its
stockholders. See "--Opinion of MFS' Financial Advisor." After extensive
discussion and consideration, the MFS Board of Directors approved the Merger
Agreement by the unanimous vote of all directors present (11 of 12 directors)
and the transactions contemplated thereby and authorized the execution of the
Merger Agreement and the Stock Option Agreement.
On April 29, 1996, the UUNET Board of Directors held a special meeting to
consider the proposed Merger Agreement and the transactions contemplated
thereby, including the proposed consideration to be paid to UUNET
stockholders. At this meeting, members of UUNETs senior management, together
with UUNET's legal counsel, Heller Ehrman White & McAuliffe, and UUNET's
financial advisor, Goldman Sachs, reviewed with the UUNET Board of Directors,
among other things, the background of the proposed Merger, UUNETs strategic
alternatives, financial valuation analyses of the transaction and the terms of
the Merger Agreement as well as the other matters discussed below under "--
Recommendation of UUNET Board of Directors; Reasons for the Merger."
Representatives of Heller Ehrman White & McAuliffe also made presentations to
the UUNET Board of Directors and discussed with the UUNET Board of Directors
their views and analyses of various aspects of the proposed Merger. In
addition, at this meeting, Goldman Sachs delivered its opinion to the UUNET
Board of Directors that, as of such date, the Exchange Ratio pursuant to the
Merger Agreement was fair to the holders of UUNET Common Stock. See "--Opinion
of UUNET's Financial Advisor." After extensive discussion and consideration,
the UUNET Board of Directors unanimously approved the Merger Agreement and the
transactions contemplated thereby and authorized the execution of the Merger
Agreement and the MFS Voting Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF UUNET; REASONS FOR THE MERGER
The UUNET Board of Directors believes that the terms of the Merger are fair
to, and in the best interests of, UUNET and the UUNET stockholders and has
unanimously approved the Merger Agreement and the related transactions. The
UUNET Board of Directors unanimously recommends that the UUNET stockholders
approve and adopt the Merger Agreement.
In light of the enhanced competition from major telecommunications companies
in the Internet services industry, the UUNET Board of Directors evaluated
UUNET's strategic position and determined that in order for UUNET to maintain
its leadership position in the industry it needed to augment its presence
through a merger or strategic relationship with a suitable partner. The UUNET
Board of Directors considers a merger with MFS advantageous to UUNET because:
(i) each company has similar needs for domestic and international high
capacity fiber optic infrastructure which should ultimately allow them to
reduce expenses through their combined purchasing power; (ii) both companies
focus on providing communications services to business customers and believe
that together they will be able to provide business customers with a single
source for a full range of business communications and Internet services; and
(iii) UUNET potentially could benefit from the efforts of MFS' 1,200-person
sales and marketing team offering UUNET's Internet services. The UUNET Board
of Directors concluded after lengthy negotiation that MFS would not modify its
offer to include a cash component. The UUNET Board of Directors determined
that the Merger as structured was in the best interests of UUNET and its
stockholders despite the refusal of MFS to include a cash component as part of
the Merger consideration as a result of the liquidity offered by the active
public trading market for MFS Common Stock, the perceived advantages to UUNET
of the Merger, and the determination by UUNET's financial advisor that the
Exchange Ratio pursuant to the Merger Agreement was fair to the holders of the
UUNET Common Stock. See "Opinion of UUNET's Financial Advisor."
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In reaching its decision to approve the Merger and to recommend that UUNET's
stockholders vote to approve the Merger, the UUNET Board of Directors also
considered, among other things, the following factors, both positive and
potentially negative:
(i) the Board's knowledge of the business, operations, properties,
assets, financial condition and operating results of UUNET;
(ii) the reports and opinions of UUNET's management and Goldman Sachs,
including the result of their due diligence investigations concerning the
business, operations and financial condition of MFS;
(iii) UUNET's future prospects for executing its business strategy,
including expanding worldwide operations and acquiring significant undersea
fiber optic cable capacity, and the likelihood that such prospects would be
enhanced as a result of the Merger in light of the enhanced competition
from major telecommunications companies in the Internet services industry;
(iv) the detailed financial analyses, pro forma and other information
with respect to UUNET and MFS presented by Goldman Sachs and the opinion of
Goldman Sachs that the Exchange Ratio pursuant to the Merger Agreement was
fair to the holders of UUNET Common Stock as of the date of such opinion
(see "Opinion of UUNET's Financial Advisor");
(v) the effect on stockholder value of UUNET continuing as an independent
entity compared to the effect of a combination with MFS, in light of the
financial condition and prospects of UUNET and the current economic and
industry environment, including, but not limited to, (A) other possible
strategic alternatives for UUNET which the UUNET Board of Directors had
examined, including continuing to execute its stand-alone business plan,
and (B) the potential for increased value in the combined MFS/UUNET
enterprise;
(vi) recent and current market prices of the MFS Common Stock;
(vii) the terms and conditions of the Merger Agreement and the related
documents, which were the product of extensive arm's-length negotiations,
including the fact that the closing of the Merger is not conditioned upon
the failure of a material adverse event to occur with respect to UUNET or
MFS after the signing of the Merger Agreement, but is conditioned upon the
MFS stockholders approving the issuance of shares to the UUNET stockholders
pursuant to the Merger;
(viii) the substantial premium over the recent trading prices of the
UUNET Common Stock represented by the Exchange Ratio of 37% over the UUNET
Common Stock closing sales price on April 26, the trading day prior to the
meeting of the UUNET Board of Directors at which the Merger Agreement was
approved, 38% over the price one week before April 26, and 144% over the
price 30 days before April 26;
(ix) the compatibility of the respective business philosophies of MFS and
UUNET;
(x) the opportunity for UUNET stockholders, a majority of whom supported
the Merger by agreeing to execute the Stock Option Agreement, to
participate, as holders of MFS Common Stock, in a larger, more diversified
company, and to do so by means of a transaction which is designed to be
tax-free to UUNET's stockholders;
(xi) the effect of the Merger on the interests of UUNET's customers,
suppliers and employees, which the UUNET Board of Directors determined is
likely to be beneficial given that MFS has indicated that after the Merger,
UUNET would continue to pursue its current business strategy as a separate
business entity and that UUNET should derive significant benefits from the
financial strength, marketing resources and telecommunications
infrastructure capacity of MFS;
(xii) the risks that UUNET will not achieve the synergies and cost
savings anticipated to be achieved in the Merger, including a reduction in
UUNET's "local loop" network costs (which UUNET estimates to be
approximately 40% of its "cost of revenues" in North America for 1996),
incremental sales from MFS' 1,200-person sales and marketing team offering
UUNET's Internet services to the customers of MFS and
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reduction in expenses for domestic and international high capacity fiber
optic infrastructure resulting from the combined purchasing power of the
two companies;
(xiii) the risk that the operations of the two companies would not be
successfully integrated;
(xiv) the risk that key technical and management personnel might be lost
prior to or after consummation of the Merger;
(xv) the adverse effects on UUNET's business, operations and financial
condition should it not be possible to consummate the Merger following
public announcement that the Merger Agreement had been entered into; and
(xvi) other risks associated with MFS and UUNET's businesses, including
those described above under "RISK FACTORS."
The foregoing discussion of the information and factors considered by the
UUNET Board of Directors is not intended to be exhaustive but is believed to
include all material factors considered by the UUNET Board of Directors. In
view of the variety of factors considered in connection with its evaluation of
the Merger, the UUNET Board of Directors did not find it practicable to and
did not quantify or otherwise assign relative weights to the specific factors
considered in reaching its determination. In addition, individual members of
the UUNET Board of Directors may have given different weights to different
factors. In the course of its deliberations, the UUNET Board of Directors did
not establish a range of value for UUNET; however, based on the factors
outlined above, the UUNET Board of Directors determined that the Merger is
advisable and fair and in the best interests of UUNET and its stockholders.
THE UUNET BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF
UUNET COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of UUNET with
respect to the Merger, holders of UUNET Common Stock should be aware that
certain members of UUNET's management, some of whom are members of the UUNET
Board of Directors, and the members of the UUNET Board of Directors have
certain interests in the Merger, in addition to those of the stockholders
generally. The Board of Directors of UUNET was aware of these interests when
it considered and approved the Merger and the Merger Agreement.
Pursuant to the terms of the Merger Agreement, MFS has agreed to take all
action necessary to cause John W. Sidgmore, President and Chief Executive
Officer of UUNET, Richard L. Adams, Jr., Chairman of the Board of UUNET, and a
third individual designated by UUNET and approved by MFS to become members of
the MFS Board of Directors, subject to the consummation of the Merger. Upon
joining the MFS Board of Directors, Mr. Sidgmore will become a Class I
director, UUNET's third designee will become a Class II director and Mr. Adams
will become a Class III director. In addition, Mr. Sidgmore will remain the
President, Chief Executive Officer and a director of UUNET and will become the
Co-President and Co-Chief Operating Officer of MFS.
MFS has agreed that UUNET may retain Daniel C. Lynch, Les B. Strauss and
Daniel Rosen, each currently a member of the UUNET Board of Directors, as
consultants to UUNET, in each case for at least such period of time that any
nonqualified stock options outstanding on April 29, 1996 held by such
individuals remain subject to vesting or the shares issuable upon exercise of
such options remain subject to UUNET's right of repurchase. The consideration
in each case to such consultants would be the continued vesting of such
options during the term of consultancy.
Pursuant to option and stock purchase agreements between each of various
officers and UUNET, upon consummation of the Merger, the vesting and lapse of
repurchase rights will accelerate with respect to 50% of (a) unvested options
and (b) outstanding shares or shares issuable upon option exercise subject to
a right of repurchase, in each case, as of the Effective Date. If as a result
of such acceleration, any officer of UUNET
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incurs an excise tax pursuant to Section 4999 of the Code or corresponding
provisions of applicable state law, UUNET will pay such officer when due to
the applicable tax authority an amount (the "Transfer") sufficient to pay (i)
the excise tax and (ii) any and all federal, state and local taxes payable
with respect to the receipt of the Transfer. The maximum amount that UUNET
will pay in connection with all Transfers is $4.55 million (the "Cap"), except
that the Cap will be increased if the per share value of UUNET Common Stock
used in determining the amount of the Transfer exceeds $61.33 per share and/or
the interest rate used in determining the amount of the Transfer exceeds 7.5%.
If the Cap is exceeded, the officers who would otherwise be entitled to
payment or part or all of the Transfer may (but are not obligated to) disclaim
all or part of the acceleration of vesting of options or shares.
Pursuant to the Merger Agreement, following consummation of the Merger, MFS
will, or will cause UUNET to, honor in accordance with their terms, all
employment, severance and similar agreements to which UUNET or any of its
subsidiaries is a party and all provisions for vested benefits or other vested
amounts earned or accrued through the Effective Date under UUNET's benefit
plans. See "THE MERGER AGREEMENT--Effect on Employee Benefit Plans."
MFS will indemnify and hold harmless directors, officers, and agents of
UUNET as provided in UUNET's Certificate of Incorporation, By-laws or
indemnification agreements, in effect on the date of the Merger Agreement with
respect to matters covered thereby occurring through the Effective Date. In
addition, in connection with the recently completed public offering of MFS
Common Stock, MFS has agreed to indemnify Messrs. Adams and Sidgmore as if
they were members of the MFS Board of Directors for any loss, expense, damage
or liability (including attorney fees) arising from or relating to the offer
and sale of securities pursuant to that public offering by MFS.
The Merger Agreement provides that the By-laws and the Certificate of
Incorporation of Sub will be amended prior to the Effective Date to contain
indemnification provisions identical to those set forth in the By-laws and
Certificate of Incorporation of UUNET as of April 29, 1996, which provisions
will continue in full force and effect for a period of not less than six years
from the Effective Date. The Merger Agreement provides that, with respect to
matters occurring prior to the Effective Date, MFS will cause UUNET, as the
Surviving Corporation, to maintain directors' and officers' liability
insurance policies as currently maintained by UUNET for three years after the
Effective Date to the extent that such policies are obtainable at an annual
cost of not greater than three times UUNET's last annual premium prior to
April 29, 1996; provided that if such coverage is not available for such
amount, UUNET, as the surviving corporation, will purchase as much coverage as
possible for such amount. See "THE MERGER AGREEMENT--Indemnification."
The Merger Agreement provides that under certain circumstances, MFS will
indemnify and hold harmless each member of UUNET's Board of Directors that has
executed, or whose affiliate or employer executed, a Stock Option Agreement
insofar as any loss, claim, damage, liability or expense arises solely out of,
or is based solely upon, a claim that such Director's fiduciary duty as a
member of UUNET's Board of Directors under Delaware law was breached by the
execution by him or his affiliate or employer, in his or its capacity as a
UUNET stockholder, of the Stock Option Agreement.
RECOMMENDATION OF MFS BOARD OF DIRECTORS OF THE MERGER; REASONS FOR THE MERGER
The MFS Board of Directors believes that the Merger is fair to, and in the
best interests of, MFS and its stockholders. The MFS Board of Directors has
approved the terms of the Merger by a unanimous vote of the directors present
and unanimously recommends that MFS' stockholders vote FOR the MFS Share
Proposal.
The MFS Board of Directors concluded that the Merger is in the best
interests of MFS and its stockholders because the Merger would further MFS'
strategic objective of becoming the primary provider of telecommunications
services to business and government end-users and would provide MFS with a
strategic opportunity to accelerate the addition of Internet-related services
to its suite of business service offerings. See "SUMMARY--The Companies--MFS."
The MFS Board of Directors concluded that the Merger will further
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such objectives in part because of its belief that: (i) the significant growth
of the Internet as a communications medium has created incremental revenue
opportunities for facilities-based telecommunications service providers; (ii)
UUNET's customer base of businesses is complementary to MFS' customer base;
and (iii) UUNET's relationship with Microsoft demonstrates its reputation as a
leading provider of access to highly complex Internet networks. In addition,
MFS believes that the Merger will (i) allow MFS to expand its communications
service offerings to include UUNET's existing array of Internet-related
services oriented toward the needs of business and government customers, (ii)
provide MFS with additional technical expertise in configuring and managing
complex, packet switched networks and (iii) over time, allow MFS to offer new
services (including voice and video communications services) utilizing UUNET's
Internet technology expertise and MFS' broadband, end-to-end networks. MFS
also believes that the combined entity can, over time, improve profitability
as a result of (i) a reduction in UUNET's "local loop" network costs (which
UUNET estimates to be approximately 40% of its "cost of revenues" in North
America for 1996) by utilizing available capacity on MFS' local networks, (ii)
receipt of terminating access payments, or a reduction in cost of providing
dial-up Internet access, as mandated by the Telecom Act, (iii) reduced cost of
intercity transport capacity purchased or leased from others as a result of
increased volume and migration of UUNET traffic to MFS-owned facilities and
(iv) incremental sales from offering UUNET services combined with MFS services
to the customers of UUNET.
In reaching its conclusions that the Merger is fair to, and in the best
interests of, MFS and its stockholders, the MFS Board of Directors also
considered, among other things, the following factors: (i) its knowledge of
the business, operations, properties, assets, financial condition, operating
results and prospects of MFS and UUNET; (ii) current industry, economic and
market conditions; (iii) presentations by MFS' management and by Gleacher
NatWest, MFS' financial advisors, with respect to UUNET and MFS; (iv) the
opinion of Gleacher NatWest as to the fairness, from a financial point of
view, of the Exchange Ratio to MFS and its stockholders (see "THE MERGER--
Opinion of MFS' Financial Advisor"); (v) the terms of the Merger Agreement
(see "THE MERGER AGREEMENT"); (vi) the compatibility of the respective
business philosophies of MFS and UUNET; and (vii) the opportunity for MFS
stockholders to participate in a larger, more diversified company.
In view of the variety of factors considered in connection with its
evaluation of the Merger, the MFS Board of Directors did not find it
practicable to and did not quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination.
OPINION OF UUNET'S FINANCIAL ADVISOR
Goldman Sachs delivered its written opinion to the UUNET Board of Directors
to the effect that as of the date of such opinion, the Exchange Ratio pursuant
to the Merger Agreement was fair to holders of the UUNET Common Stock.
THE FULL TEXT OF THE WRITTEN OPINION OF GOLDMAN SACHS DATED APRIL 29, 1996,
WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED HERETO AS ANNEX
D TO THIS JOINT PROXY STATEMENT-PROSPECTUS AND IS INCORPORATED HEREIN BY
REFERENCE. STOCKHOLDERS OF UUNET ARE URGED TO, AND SHOULD, READ SUCH OPINION
IN ITS ENTIRETY.
In connection with its opinion, Goldman Sachs reviewed, among other things,
(i) the Merger Agreement; (ii) the Annual Report on Form 10-K of UUNET for the
year ended December 31, 1995; (iii) Annual Reports to Stockholders of MFS for
the two years ended December 31, 1994; (iv) Annual Reports on Form 10-K of MFS
for the three years ended December 31, 1995; (v) certain interim reports to
stockholders and Quarterly Reports on Form 10-Q of UUNET and MFS; (vi) the
Registration Statement dated May 25, 1995 relating to the initial public
offering of UUNET Common Stock; (vii) the Proxy Statement dated August 7, 1995
relating to Peter Kiewit Sons, Inc.'s tax-free distribution of all of its
holdings in MFS; (viii) the Prospectus Supplement dated January 18, 1996
relating to 8 7/8% Senior Discount Notes due 2006 of MFS; (ix) certain other
communications from UUNET and MFS to their respective stockholders; and (x)
certain internal financial analyses and forecasts
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for UUNET and MFS prepared by their respective managements. Goldman Sachs also
held discussions with members of the senior managements of UUNET and MFS
regarding the past and current business operations, financial condition and
future prospects of their respective companies. Goldman Sachs reviewed with
members of the senior management of UUNET and its outside counsel and
accountants the results of UUNET's due diligence examination of MFS. In
addition, Goldman Sachs reviewed the reported price and trading activity for
the UUNET Common Stock and the MFS Common Stock, compared certain financial
and stock market information for UUNET and MFS with similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of certain recent business combinations in the technology
sector generally and the communications equipment industry specifically, and
performed such other studies and analyses as it considered appropriate.
Goldman Sachs relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by it for
purposes of its opinion. In that regard, Goldman Sachs, assumed, with UUNET's
consent, that the financial forecasts were prepared on a basis reflecting the
best then currently available judgments and estimates of UUNET and MFS and
that such forecasts would be realized in the amounts and at the times
contemplated therein. In addition, Goldman Sachs did not make an independent
evaluation or appraisal of the assets and liabilities of UUNET or MFS or any
of their respective subsidiaries and Goldman Sachs was not furnished with any
such evaluation or appraisal.
The following is a summary of certain of the financial analyses used by
Goldman Sachs in connection with providing its written opinion, dated as of
April 29, 1996, to UUNET's Board of Directors.
(i) Historical Stock Trading Analysis. Goldman Sachs reviewed the
historical trading prices and volumes for the UUNET Common Stock. In
addition, Goldman Sachs analyzed the consideration to be received by
holders of UUNET Common Stock pursuant to the Merger Agreement in relation
to the market prices of the UUNET Common Stock on April 26, 1996, April 19,
1996, March 26, 1996 and January 26, 1996. Such analysis indicated that the
price per share of UUNET Common Stock to be paid pursuant to the Merger
Agreement (based on the Exchange Ratio of 1.777776 and the implied post-
stock split price of MFS Common Stock of $61.33 as of April 26, 1996)
represented a premium of 37% based on the April 26, 1996 closing market
price of $44.75 per share of UUNET Common Stock, 38% based on the April 19,
1996 closing market price of $44.50 per share of UUNET Common Stock, 144%
based on the March 26, 1996 closing market price of $25.19 per share of
UUNET Common Stock and 31% based on the January 26, 1996 closing market
price of $46.75 per share of UUNET Common Stock. This analysis also showed
that from May 25, 1995 through April 26, 1996 UUNET Common Stock and MFS
Common Stock had traded in a ratio ranging between approximately 2.25 and
0.4 (without adjusting for the MFS 2-for-1 stock split effected on April
26, 1996), with an average ratio over that period of approximately .97
(without adjusting for the MFS 2-for-1 stock split effected on April 26,
1996).
(ii) Selected Companies Analysis. Goldman Sachs reviewed and compared
certain financial information relating to UUNET to corresponding financial
information, ratios and public market multiples for 19 publicly traded
corporations: BBN, NETCOM, PSI, America Online, CompuServe, Yahoo!, Inc.,
Lycos Inc., Open Text Corporation, Secure Computing Corporation, Raptor
Systems Inc., Cylink Corporation, CyberCash Inc., Netscape Communications
Corporation, Premenos Technology Corp., Spyglass Inc., Verity Inc.,
Netmanage Inc., Quarterdeck Office Systems, Inc. and VocalTec Inc. (the
"Selected Companies"). Goldman Sachs calculated and compared various
financial multiples and ratios. The multiples of UUNET were calculated
using a price of $44.75 per share of UUNET Common Stock, the closing price
of the UUNET Common Stock on Nasdaq on April 26, 1996. The multiples and
ratios for UUNET and for each of the Selected Companies were based on the
most recent publicly available information. With respect to the Selected
Companies, Goldman Sachs considered market capitalization as a multiple of
estimated 1996 and 1997 revenues. Goldman Sachs' analyses of the Selected
Companies indicated multiples of estimated revenues, which ranged from 2.6x
to 331.2x for 1996 and ranged from 1.3x to 32.6x for 1997, compared to
multiples of 8.4x and 3.2x, respectively, for UUNET. Goldman Sachs also
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considered, for the Selected Companies, estimated 1996 and 1997
price/earnings ratios, which ranged from 16.5x to 695.0x for 1996 and 10.9x
to 150.6x for 1997 compared to 223.8x and 89.5x, respectively, for UUNET;
and a five-year Earnings Per Share ("EPS") growth rate (provided by
Institutional Brokers Estimate System ("IBES")) ranging from 20.0% to 90.0%
compared to 50.0% for UUNET.
(iii) Discounted Cash Flow Analysis. Goldman Sachs performed a discounted
cash flow analysis under the following two scenarios: (a) using UUNET's
management projections and a price/earnings methodology (the "PE Case") and
(b) using UUNET's management projections using an Earnings Before Income
Taxes, Depreciation and Amortization ("EBITDA") methodology (the "EBITDA
Case"). Goldman Sachs analyzed the PE Case and the EBITDA Case over a five
year period (the "Five Year Period") and a three year period (the "Three
Year Period"). Goldman Sachs calculated a net present value of free cash
flows for the years 1996 through 2000 in the Five Year Period and for the
years 1996 through 1998 in the Three Year Period using discount rates
ranging from 20% to 30%, which were used to reflect theoretical risk
adjusted cost of capital. Goldman Sachs calculated UUNET's terminal values
in the year 2000 based on multiples ranging from 10.0x EBITDA to 14.0x
EBITDA in the EBITDA Case for the Five Year Period, 12.0x EBITDA to 16.0x
EBITDA in the EBITDA Case for the Three Year Period, 15.0x net income to
25.0x net income in the PE Case for the Five Year Period and 20.0x net
income to 30.0x for the Three Year Period. These terminal values were then
discounted to present value using discount rates from 20.0% to 30.0%. Based
on such analysis the implied per share values ranged from $30 to $65 in the
EBITDA Case for the Five Year Period, from $23 to $42 in the EBITDA Case
for the Three Year Period, from $28 to $75 in the PE Case for the Five Year
Period and from $22 to $45 in the PE Case for the Three Year Period.
(iv) Selected Transactions Analysis. Goldman Sachs analyzed certain
information relating to 49 selected transactions in the technology industry
since 1994 (the "Selected Technology Transactions") and 61 transactions in
the communications equipment industry since 1993 (the "Selected
Communications Transactions"). Such analyses indicated that for the
Selected Technology Transactions the premium paid over market price for the
day (i) prior to announcement ranged from negative 5.8% to 138.3% with a
mean of 35.3% and a median of 33.6% in the Selected Technology Transactions
and ranged from 1.9% to 70.0% with a mean of 30.6% and a median of 25.2% in
the Selected Communications Transactions compared to a premium of 37% over
the closing market price of the UUNET Common Stock on April 26, 1996, (ii)
one week prior to the announcement ranged from negative 5.8% to 138.3% with
a mean of 41.9% and a median of 35.3% in the Selected Technology
Transactions and ranged from 11.7% to 71.4% with a mean of 40.9% and a
median of 40.0% in the Selected Communications Transactions compared to 38%
over the closing market price of the UUNET Common Stock on April 19, 1996
and (iii) 30 days prior to the announcement ranged from negative 9.9% to
103.2% with a mean of 47.5% and a median of 45.8% in the Selected
Technology Transactions and ranged from 13.8% to 103.6% with a mean of
52.6% and a median of 52.4% in the Selected Communications Transactions
compared to 144% over the closing market price of the UUNET Common Stock on
March 26, 1996.
(v) Pro Forma Merger Analysis. Goldman Sachs prepared pro forma analyses
of the financial impact of the Merger. Using earnings estimates for UUNET
and MFS prepared by their respective managements for the years 1996 and
1997, Goldman Sachs compared the EPS of the UUNET Common Stock, on a
standalone basis, to the EPS of the common stock of the combined companies
on a pro forma basis. Goldman Sachs performed this analysis based on a
transaction value of $61.33 per share of UUNET Common Stock. Such analyses
indicated that the proposed transaction would be dilutive to UUNET's
stockholders on an EPS basis by $2.60 per share and $2.42 per share in the
years 1996 and 1997, as MFS is not projected to have positive net income in
either year.
(vi) Contribution Analysis. Goldman Sachs reviewed historical and
estimated future revenues and EBITDA for UUNET and MFS based on UUNET and
MFS managements' financial forecasts for their respective companies. The
analysis indicated that the UUNET stockholders would contribute 14%, 21%,
28% and 34%, to the combined company's revenues in 1995, 1996, 1997 and
1998, respectively and 35% and 30%, to the combined company's EBITDA in
1997 and 1998, respectively.
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The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without
considering the analyses as a whole, could create an incomplete view of the
processes underlying Goldman Sachs' opinion. In arriving at its fairness
determination, Goldman Sachs considered the results of all such analyses. No
company or transaction used in the above analyses as a comparison is directly
comparable to UUNET or MFS or the contemplated transaction. The analyses were
prepared solely for purposes of Goldman Sachs providing its opinion to the
UUNET Board of Directors as to the fairness of the Exchange Ratio pursuant to
the Merger Agreement and do not purport to be appraisals or necessarily
reflect the prices at which businesses or securities actually may be sold.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable
than suggested by such analyses. Because such analyses are inherently subject
to uncertainty, being based upon numerous factors or events beyond the control
of the parties or their respective advisors, none of UUNET, MFS, Goldman Sachs
or any other person assumes responsibility if future results are materially
different from those forecast. As described above, Goldman Sachs' opinion to
the UUNET Board of Directors was one of many factors taken into consideration
by the UUNET Board of Directors in making its determination to approve the
Merger Agreement. The foregoing summary does not purport to be a complete
description of the analysis performed by Goldman Sachs and is qualified by
reference to the written opinion of Goldman Sachs set forth in Annex D hereto.
Goldman Sachs, as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bidding,
secondary distributions of listed and unlisted securities, private placements,
and valuations for estate, corporate and other purposes. UUNET selected
Goldman Sachs as its financial advisor because it is a nationally recognized
investment banking firm that has substantial experience in transactions
similar to the Merger, as well as Goldman Sachs' prior investment banking
relationship with UUNET.
Goldman Sachs provides a full range of financial, advisory and brokerage
services and in the course of its normal trading activities may from time to
time effect transactions and hold positions in the securities or options on
securities of UUNET and/or MFS for its own account and for the account of
customers. As of the UUNET Record Date, Goldman Sachs had a net long position
of 7,078 shares of UUNET Common Stock and a net short position of 512,502
shares of MFS Common Stock, a net long position of 324,662 shares of Series A
Preferred, a short position of $5 million in aggregate principal amount of 9
3/8% of Senior Discount Notes due 2004 of MFS and a long position of $3.5
million in aggregate principal amount of 8 7/8% Senior Discount Notes due 2006
of MFS.
Pursuant to a letter agreement dated March 24, 1996 (the "Engagement
Letter"), UUNET engaged Goldman Sachs to act as its financial advisor in
connection with the possible sale of all or a portion of UUNET. Pursuant to
the terms of the Engagement Letter, UUNET has agreed to pay Goldman Sachs upon
consummation of the Merger a transaction fee based on 0.55% of the total
consideration paid for the UUNET Common Stock (including amounts paid to
holders of vested options, calculated using the treasury stock method). UUNET
has agreed to reimburse Goldman Sachs for its reasonable out-of-pocket
expenses, including attorneys' fees and disbursements, and to indemnify
Goldman Sachs against certain liabilities, including certain liabilities under
the federal securities laws.
OPINION OF MFS' FINANCIAL ADVISOR
MFS retained Gleacher NatWest to act as MFS' financial advisor in connection
with the Merger and related matters based upon its qualifications, expertise
and reputation, as well as Gleacher NatWest's prior investment banking
relationship and familiarity with MFS. At the April 29, 1996 meeting of the
MFS Board of Directors, Gleacher NatWest delivered a written opinion to the
MFS Board of Directors to the effect that, as of such date, the Exchange Ratio
offered by MFS to UUNET stockholders is fair from a financial point of view to
MFS and its stockholders.
THE FULL TEXT OF GLEACHER NATWEST'S OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED, AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX E TO THIS JOINT
PROXY STATEMENT-PROSPECTUS. MFS STOCKHOLDERS ARE URGED TO READ THE
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GLEACHER NATWEST OPINION CAREFULLY AND IN ITS ENTIRETY. THE SUMMARY OF THE
OPINION OF GLEACHER NATWEST SET FORTH IN THIS JOINT PROXY STATEMENT-PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
GLEACHER NATWEST'S OPINION IS ADDRESSED TO THE MFS BOARD OF DIRECTORS AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF MFS CAPITAL STOCK AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE MFS ANNUAL MEETING.
In connection with rendering its opinion, Gleacher NatWest, among other
things: (i) analyzed the historical publicly filed financial statements of
UUNET and MFS; (ii) discussed the past and current operations, the financial
condition and the prospects of UUNET with the management of MFS and the
management of UUNET, and reviewed with the management of MFS its due diligence
of UUNET; (iii) reviewed with the management of MFS certain business plans of
MFS, certain projections prepared by and pertaining to UUNET, certain
financial projections concerning UUNET prepared by the management of MFS and
certain estimates of financial synergies occurring from the business
combination resulting from the merger as prepared by MFS; (iv) reviewed the
historical market prices and reported trading volumes of MFS Common Stock and
UUNET Common Stock; (v) compared the financial performance of UUNET with, and
reviewed the prices and reported trading activity of the securities of,
certain publicly traded companies whose operating characteristics and/or
industry focus resemble those of UUNET; (vi) reviewed the financial terms of
selected precedent transactions of publicly traded companies with high
projected growth rates; (vii) performed a discounted cash flow analysis of
UUNET based upon public estimates and the financial information provided to it
as referred to above; and (viii) reviewed such other information and performed
such other analyses as it deemed appropriate.
In rendering its opinion, Gleacher NatWest assumed and relied upon, without
assuming responsibility for independent verification, the accuracy and
completeness of the information reviewed by it. With respect to the financial
projections provided to it, Gleacher NatWest assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgments of the senior management of MFS and UUNET as to the future financial
performance of MFS and UUNET. Gleacher NatWest also assumed based upon the
information which had been provided to it and without assuming responsibility
for independent verification thereof that no material undisclosed or
contingent liability exists with respect to MFS or UUNET. Gleacher NatWest's
opinion is based necessarily on the economic, market, and other conditions as
in effect on the date of its opinion, and the information made available to
it.
The following is a summary of the analyses presented by Gleacher NatWest to
the MFS Board of Directors on April 29, 1996 in connection with rendering its
opinion.
Transaction Summary. Gleacher NatWest reviewed the principal terms of the
proposed transaction, noting that it is based upon an exchange ratio of
1.777776 shares (as adjusted for the MFS 2-for-1 stock split effective April
26, 1996) of MFS Common Stock for each outstanding share of UUNET Common
Stock. Gleacher NatWest explained that based upon MFS' closing stock price of
$34.50 (as adjusted for the stock split) on April 26, 1996, each UUNET
stockholder would receive $61.33 in value, representing a 37% premium to the
UUNET closing stock price of $44.75 on April 26, 1996.
Comparable Company Analysis. Gleacher NatWest reviewed the relative
performance and value of UUNET by comparing certain market trading statistics
for UUNET with the following five companies whose operating characteristics
and/or industry focus resemble those of UUNET: Netscape Communications
Corporation, PSI, NETCOM, Verity, Inc. and Spyglass, Inc. (the "Comparables").
Market information used in ratios provided below is as of April 26, 1996,
except for in the case of UUNET, which is valued at a price based on MFS'
closing stock price on April 26, 1996 multiplied by the exchange ratio of
1.777776 shares. This analysis showed that the ratio of aggregate market value
to revenues from the most recent quarter multiplied by four (the "LQA
revenues") was 11.4x for UUNET compared to 13.9x in the case of the median of
a range of multiples from 2.4x to 21.7x for the Comparables, and that the
ratio of aggregate market value to revenues estimates for
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1996 and 1997 was 8.0x and 4.2x, respectively for years 1996 and 1997, for
UUNET compared to 12.2x and 8.2x in the case of the median of a range of
multiples ranging from 1.9x to 18.1x for 1996 estimated revenues, and 0.9x to
12.3x for 1997 estimated revenues for the Comparables, in each case based upon
estimates of various equity research analysts.
Gleacher NatWest also reviewed the 5-year projected earnings growth rate of
UUNET and the Comparables. Based upon Institutional Brokers Estimate System
("IBES") estimates as of April 18, 1996, UUNET's projected growth was 70%
compared to 50% in the case of the median of a range of projected growth rates
from 50% to 90% for the Comparables. IBES is a data service that monitors and
publishes compilations of earnings estimates produced by selected research
analysts regarding companies of interest to institutional shareholders.
Comparable Transaction Analysis. Gleacher NatWest reviewed the premiums paid
for certain selected high-growth, technology companies in transactions with a
value of over $700 million. Target projected growth rates, premiums paid to
target price one week prior to announcement, multiples of LQA revenues and
multiples of LQA revenues relative to growth rate implied by the consideration
to be received by stockholders of UUNET in the Merger were compared with
growth rates, premiums paid, and multiples paid in other comparable merger
transactions from 1994 through April 22, 1996. The comparison included a total
of six transactions. The transactions examined were (target/acquiror):
StrataCom/Cisco Systems; Sierra On-Line/CUC International; Davidson &
Associates/CUC International; Tivoli Systems/IBM; NexGen/Advanced Micro
Devices; and Powersoft/Sybase. The analysis showed a target projected growth
rate for the comparables of 34%, compared to 70% for UUNET. The median of the
premiums paid to target price was 32% (in a range of 2% to 56%) for the
comparable transactions, compared to 38% for the Merger, based on an MFS share
price of $34.50. In terms of the LQA multiple of revenues, the median for the
comparables was 7.9x (in a range of 3.4x to 13.0x), compared to 11.4x for the
Merger. In terms of the LQA revenues multiple relative to projected growth
rates implied by the transaction, the median for the comparables was 20.6 (in
a range of 12.2 to 43.5), compared to 16.2 for the Merger.
No company or transaction used in the comparable company and comparable
transaction analyses is identical to UUNET or the Merger. Accordingly, an
analysis of the results of the foregoing necessarily involves complex
considerations and judgments concerning differences in financial and operating
characteristics of UUNET and other factors that could affect the public
trading value of the companies to which they are being compared. Mathematical
analysis (such as determining the average or median) is not in itself a
meaningful method of using comparable transaction data or comparable company
data.
Discounted Cash Flow Analysis. Gleacher NatWest performed a discounted cash
flow analysis to calculate the present value per share of UUNET using
financial projections for UUNET through 2000 that reflected a compounded
earnings growth rate in line with the consensus analyst estimates of 70%.
Gleacher NatWest utilized a discount rate of 20.0% and earnings before
interest, taxes, depreciation and amortization ("EBITDA") terminal value
multiples ranging from 12.0x to 14.0x to apply to forecasted EBITDA for the
year 2000. This analysis showed a range of present values from $55 to $63 per
share for UUNET assuming no synergies. The analysis showed a range of present
values from $70 to $80 per share for UUNET assuming operating cost synergies
and incremental revenue flow from a phased-in co-carrier environment (based on
MFS management estimates). This analysis did not purport to be indicative of
actual values or expected values of the shares of UUNET Common Stock before or
after the Merger.
Pro Forma Analysis of the Merger. Gleacher NatWest analyzed the pro forma
effect of the Merger on MFS' revenues and revenue growth rate, EBITDA, and
leverage ratio. This analysis assumed that the Merger would completed on
August 1, 1996. Such analysis was based on historical and estimated revenues
and EBITDA for fiscal years ended 1995 through 1998 for MFS and UUNET. The
estimates for MFS were prepared by MFS management, and estimates for UUNET
assumed a compounded earnings growth rate in line with the consensus analyst
estimates of 70%. This analysis showed that, based upon such projections, the
Merger would result over the analysis period in an increase in the pro forma
MFS revenue growth rate. Gleacher NatWest also noted that
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based upon such projections the Merger would allow MFS to report positive
EBITDA earlier than currently expected and to reduce MFS' ratio of total debt
to book capitalization.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. Gleacher
NatWest believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering all analyses, would
create an incomplete view of the process underlying its opinion and the
presentation to the MFS Board of Directors. Gleacher NatWest has not indicated
that any of the analyses which it performed had a greater significance from
any other. In addition, Gleacher NatWest may have deemed various assumptions
more or less probable than other assumptions, so that the ranges of valuations
resulting from any particular analysis described above should not be taken to
be Gleacher NatWest's view of the actual value of UUNET.
In performing its analyses, Gleacher NatWest made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of MFS or UUNET. The
analyses performed by Gleacher NatWest are not necessarily indicative of
actual values, which may be significantly more or less favorable than
suggested by such analyses. Such analyses were prepared solely as a part of
Gleacher NatWest's analysis of the fairness of the Exchange Ratio to MFS and
its stockholders and were provided to the MFS Board of Directors in connection
with the delivery of Gleacher NatWest's opinion. The analyses do not purport
to be appraisals or necessarily reflect the prices at which businesses or
securities might actually be sold, which are inherently subject to
uncertainty. In addition, as described above, Gleacher NatWest's opinion and
presentation to the MFS Board of Directors was one of many factors taken into
consideration by the MFS Board of Directors in making its determination to
approve the Merger. Consequently, the Gleacher NatWest analyses described
above should not be viewed as determinative of the MFS Board of Directors' or
MFS management's opinion with respect to the value of UUNET.
Gleacher NatWest is an internationally recognized investment banking and
advisory firm that regularly engages in the valuation of businesses and their
securities in connection with mergers and acquisitions.
In the past, Gleacher NatWest and its affiliates have provided financial
advisory services to MFS. Pursuant to an engagement letter dated June 8, 1993,
MFS agreed to pay Gleacher NatWest a fee in the form of warrants to acquire
1.5 million shares of MFS Common Stock at a stock price of $13.125 for all
advisory services rendered during the period from June 8, 1993 to June 8,
1996. MFS also agreed to sell 72,000 shares of MFS Common Stock to Gleacher
NatWest at a price equal to $11.15 per share (representing 85% of the closing
per share price of $13.25 on June 7, 1993). Upon completion of the
transaction, MFS will also pay Gleacher NatWest a cash fee of $1.0 million. In
addition, MFS has agreed, among other things, to reimburse Gleacher NatWest
for all reasonable out-of-pocket expenses incurred in connection with the
services provided by Gleacher NatWest, and to indemnify and hold harmless
Gleacher NatWest and certain related parties from and against certain
liabilities and expenses, including certain liabilities under the federal
securities laws, in connection with its engagement.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL INFORMATION ONLY. IT
DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE MERGER. IN
ADDITION, IT DOES NOT DISCUSS THE FEDERAL INCOME TAX CONSIDERATIONS THAT MAY
BE RELEVANT TO CERTAIN PERSONS, INCLUDING HOLDERS OF OPTIONS OR WARRANTS, AND
MAY NOT APPLY TO CERTAIN HOLDERS SUBJECT TO SPECIAL TAX RULES, INCLUDING
DEALERS IN SECURITIES AND FOREIGN HOLDERS. THE DISCUSSION IS BASED UPON
CURRENTLY EXISTING PROVISIONS OF THE CODE, EXISTING TREASURY REGULATIONS
THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE
FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE
CONTINUING VALIDITY OF THIS DISCUSSION.
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EACH HOLDER OF UUNET COMMON STOCK SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR
WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO SUCH HOLDER,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
It is a condition to the consummation of the Merger that UUNET receive an
opinion from Heller Ehrman White & McAuliffe and that MFS receive an opinion
from Skadden, Arps, Slate, Meagher & Flom to the effect that, based upon the
facts, representations and assumptions set forth in such opinions, the Merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Code. The representations and assumptions upon which these opinions will be
based include certain representations by MFS and UUNET to the effect that as
of the Effective Date, there will be no plan or intention on the part of the
UUNET stockholders to sell, exchange, transfer by gift or otherwise dispose of
more than 50% of the shares of MFS Common Stock received in the Merger and a
representation by certain significant UUNET stockholders to the effect that as
of the Effective Date, there will be no plan or intention on the part of such
UUNET stockholder to sell, exchange, transfer by gift or otherwise dispose of
any or more than certain amounts, as the case may be, of the shares of MFS
Common Stock received by such UUNET stockholder in the Merger (the "continuity
of interests representations").
The following are material federal income tax consequences of the Merger
that result from the Merger qualifying as a "reorganization" under the Code:
(i) no gain or loss will be recognized by the stockholders of UUNET upon
their receipt of MFS Common Stock in exchange for their UUNET Common Stock,
except that stockholders who receive cash proceeds for fractional interests
in MFS Common Stock will recognize gain or loss equal to the difference
between such proceeds and the tax basis allocated to their fractional share
interests, and such gain or loss will constitute capital gain or loss,
assuming that the stockholder holds such UUNET Common Stock as a capital
asset at the Effective Date;
(ii) the tax basis of the shares of MFS Common Stock received by the
stockholders of UUNET will equal the tax basis of their UUNET Common Stock
exchanged therefor (less any portion of such basis allocable to any
fractional interest in any share of MFS Common Stock);
(iii) the holding period of the MFS Common Stock in the hands of the
UUNET stockholders will include the holding period of their UUNET Common
Stock exchanged therefor, assuming that the stockholder holds such UUNET
Common Stock as a capital asset at the Effective Date; and
(iv) no gain or loss will be recognized by MFS, UUNET or Sub in the
Merger.
The opinions of counsel are not binding upon the Internal Revenue Service
("IRS"), and the IRS or a court may disagree with the conclusions set forth
above. In addition, if any of the facts, representations or assumptions which
form the basis for such opinions, including the continuity of interest
representations, are not correct, the conclusions reached in such opinions may
not apply and the Merger could be treated as a taxable exchange by UUNET
stockholders of their shares of UUNET Common Stock for shares of MFS Common
Stock.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase for accounting and financial
reporting purposes. Under the purchase method of accounting, the purchase
price of UUNET, including direct costs of the Merger, will be allocated to the
assets acquired and liabilities assumed based upon their estimated relative
fair values, with the excess purchase consideration allocated to goodwill. The
results of MFS' operations will include the results of operations of UUNET
commencing at the Effective Date.
The Unaudited Pro Forma Combined Condensed Financial Statements describing
the pro forma effects of the Merger appearing elsewhere in this Joint Proxy
Statement-Prospectus are based upon certain assumptions and allocate the
purchase price to assets and liabilities based upon preliminary estimates of
their respective fair
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values. The unaudited pro forma adjustments and combined amounts are included
for informational purposes only. If the Merger is consummated, MFS' financial
statements will reflect the effects of acquisition adjustments only from the
Effective Date. The actual allocation of the purchase price may differ
significantly from the allocation reflected in the Unaudited Pro Forma
Combined Condensed Financial Statements.
CERTAIN LEGAL MATTERS
Except as set forth below, no federal or state regulatory requirements or
approvals (other than those that arose in connection with the registration of
MFS Common Stock to be issued in the Merger and the effectiveness of this
Joint Proxy Statement-Prospectus, which have already been obtained, and
certain notice filings after the Effective Date) must be complied with or
obtained in connection with the Merger.
Pursuant to the requirements of the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), UUNET, MFS and certain stockholders
of UUNET have filed Notification and Report Forms for review under the HSR Act
with the Federal Trade Commission (the "FTC") and the Antitrust Division of
the Department of Justice (the "Antitrust Division"). The waiting period
required under the federal antitrust laws has expired.
The FTC and the Antitrust Division frequently scrutinize the legality of
transactions such as the Merger under the antitrust laws. At any time before
or after the Effective Date, the FTC or the Antitrust Division could take such
action under the antitrust laws as it deems necessary or desirable in the
public interest, including seeking to enjoin the Merger or seeking the
divestiture of substantial assets of MFS, UUNET or their respective
subsidiaries. State Attorneys General and private parties may also bring legal
actions under the federal or state antitrust laws under certain circumstances.
Based upon an examination of information available to UUNET and MFS relating
to the businesses in which MFS, UUNET and their respective subsidiaries are
engaged, UUNET and MFS believe that the consummation of the Merger will not
violate the antitrust laws. Nevertheless, there can be no assurance that a
challenge to the proposed Merger on antitrust grounds will not be made or, if
such a challenge is made, that UUNET and MFS will prevail. Consummation of the
Merger is conditioned upon, among other things, the absence of any preliminary
or permanent injunction or other order issued by any federal or state court in
the United States which prevents the consummation of the Merger.
FEDERAL SECURITIES LAW CONSEQUENCES
All MFS Common Stock issued in connection with the Merger will be freely
transferable, except that any MFS Common Stock received by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act)
of UUNET or MFS prior to the Merger may be sold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act with
respect to affiliates of UUNET, or Rule 144 under the Securities Act with
respect to persons who are or become affiliates of MFS, or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of UUNET or MFS generally include individuals or entities that control, are
controlled by, or are under common control with, such party and may include
certain officers and directors of such party as well as principal stockholders
of such party.
Affiliates may not sell their shares of MFS Common Stock acquired in
connection with the Merger, except pursuant to an effective registration under
the Securities Act covering such shares or in compliance with Rule 145 (or
Rule 144 under the Securities Act in the case of persons who become affiliates
of MFS) or another applicable exemption from the registration requirements of
the Securities Act. In general, under Rule 145, for two years following the
Effective Date an affiliate (together with certain related persons) would be
entitled to sell shares of MFS Common Stock acquired in connection with the
Merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144.
Additionally, the number of shares to be sold by an affiliate (together with
certain related persons and certain persons acting in concert) within any
three-month period for purposes of Rule 145 may not exceed the greater of 1%
of the outstanding shares of MFS Common Stock or the average weekly trading
volume of such stock during the four calendar weeks preceding such sale. Rule
145 would only remain available, however, to affiliates if MFS remained
current
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with its informational filings with the Commission under the Exchange Act. Two
years after the Effective Date, an affiliate would be able to sell such MFS
Common Stock without such manner of sale or volume limitations provided that
MFS was current with its Exchange Act informational filings and such affiliate
was not then an affiliate of MFS. Three years after the Effective Date, an
affiliate would be able to sell such shares of MFS Common Stock without any
restrictions so long as such affiliate had not been an affiliate of MFS for at
least three months prior thereto. See "THE MERGER AGREEMENT--Covenants."
LISTING
It is a condition to the Merger that the shares of MFS Common Stock to be
issued in connection with the Merger be authorized for listing on Nasdaq,
subject to official notice of issuance, which condition has been satisfied.
APPRAISAL RIGHTS
UNDER THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE, THE HOLDERS OF
UUNET COMMON STOCK AND MFS CAPITAL STOCK ARE NOT ENTITLED TO ANY APPRAISAL
RIGHTS WITH RESPECT TO THE MERGER.
CERTAIN EFFECTS OF THE STOCK OPTION AGREEMENT AND TERMINATION FEE
As a condition to entering into the Merger Agreement, MFS required certain
stockholders of UUNET to enter into the Stock Option Agreement pursuant to
which such stockholders' (i) agreed to vote their shares of UUNET Common Stock
in favor of the approval of the Merger Agreement and against any proposal for
any recapitalization, merger (other than the Merger), sale of assets or other
business combination between UUNET and any person or entity (other than MFS or
Sub) or any other action or agreement that would result in a breach of the
Merger Agreement or result in any condition of the Merger Agreement not being
fulfilled, (ii) granted irrevocable proxies in favor of MFS and Sub to so vote
their shares, and (iii) issued to MFS an Option to purchase, such
stockholders' shares of UUNET Common Stock held on the UUNET Record Date and
the date of exercise of the Option, respectively (equal to approximately 59.5%
or 19,300,317 shares, of the issued and outstanding shares of UUNET Common
Stock as of the UUNET Record Date) for the Exchange Ratio. The Option may only
be exercised upon the occurrence of certain events, which generally relate to,
or are designed to culminate in, the acquisition of control of, or a
significant equity interest in or significant assets of, UUNET by a third
party. See "THE STOCK OPTION AGREEMENT."
Certain aspects of the Stock Option Agreement, as well as certain aspects of
the $60 million termination fee payable by UUNET provided for in the Merger
Agreement, may have the effect of discouraging persons who might now or prior
to the consummation of the Merger be interested in acquiring all of or a
significant interest in UUNET from considering or proposing such an
acquisition. See "THE MERGER AGREEMENT-- Termination; Fees and Expenses" and
"THE STOCK OPTION AGREEMENT--Exercise of the Option."
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THE MERGER AGREEMENT
The following description of the Merger Agreement is necessarily a summary
thereof and is therefore qualified in its entirety by reference to the Merger
Agreement, a copy of which is attached to this Joint Proxy Statement-
Prospectus as Annex A and incorporated herein by reference. Stockholders of
UUNET and MFS are urged to read the Merger Agreement in its entirety.
THE MERGER
The Merger Agreement provides that, subject to the approval of the Merger by
the stockholders of UUNET and the approval of the MFS Share Proposal by the
stockholders of MFS and the satisfaction or waiver of the other conditions to
the Merger, Sub will be merged with and into UUNET in accordance with Delaware
law, whereupon the separate existence of Sub will cease and UUNET will be the
Surviving Corporation of the Merger. On the Effective Date, the conversion of
UUNET Common Stock and the conversion of shares of the common stock of Sub
pursuant thereto will be effected as described below. The Certificate of
Incorporation and By-laws of the Surviving Corporation will be amended and
restated in their entirety to read as the Certificate of Incorporation and By-
laws of Sub, as amended pursuant to the terms of the Merger Agreement. The
directors of Sub immediately prior to the Effective Date, John W. Sidgmore and
Richard L. Adams, Jr. will become the directors of the Surviving Corporation
and the officers of UUNET immediately prior to the Effective Date will be the
officers of the Surviving Corporation, in each case until their respective
successors are duly elected and qualified.
EFFECTIVE DATE
Following the adoption of the Merger Agreement and the MFS Share Proposal
and subject to satisfaction or waiver of certain terms and conditions,
including conditions to closing, contained in the Merger Agreement, the Merger
will become effective on such date as the Certificate of Merger is duly filed
with the Secretary of State of Delaware or at such time thereafter as is
provided in such Certificate. The filing of the Certificate of Merger will be
made as soon as practicable after all conditions contemplated by the Merger
Agreement have been satisfied or waived.
TERMS OF THE MERGER
At the Effective Date:
(i) each share of UUNET Common Stock held by UUNET or any subsidiary of
UUNET or held by MFS, Sub or any other subsidiary of MFS on the Effective
Date will be canceled, and no payment will be made with respect thereto;
(ii) each remaining outstanding share of UUNET Common Stock will be
converted into and represent the right to receive 1.777776 shares of MFS
Common Stock, with cash in lieu of fractional shares. Each share of new MFS
Common Stock issued in connection with the Merger will be accompanied by
one MFS Right; and
(iii) each issued and outstanding share of the capital stock of Sub will
be converted into and represent one fully paid and nonassessable share of
common stock, par value $.01 per share, of the Surviving Corporation.
As of the Effective Date, present holders of UUNET Common Stock will cease
to have any rights as holders of such shares, but will have the rights of
holders of MFS Common Stock. After the Effective Date, the stock transfer
books of UUNET will be closed and there will be no further transfers of UUNET
Common Stock. See "THE MERGER--Conversion of Shares," "--Procedures for
Exchange of Certificates" and "COMPARISON OF STOCKHOLDER RIGHTS."
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FRACTIONAL SHARES
Fractional shares of MFS Common Stock will not be issued in connection with
the Merger. In lieu of any such fractional share, each holder of UUNET Common
Stock who would otherwise have been entitled to a fraction of a share of MFS
Common Stock upon surrender of certificates for exchange will be paid cash
(without interest) in an amount equal to such holder's proportionate interest
in the net proceeds from the sale or sales in the open market by the Exchange
Agent, on behalf of all such holders, of the aggregate fractional MFS Common
Stock issued pursuant to the Merger Agreement. As soon as practicable
following the Effective Date, the Exchange Agent will determine the excess of
(i) the number of full shares of MFS Common Stock delivered to the Exchange
Agent by MFS over (ii) the aggregate number of full shares of MFS Common Stock
to be distributed to holders of UUNET Common Stock (the "Excess MFS Shares"),
and the Exchange Agent, as agent for the former holders of UUNET Common Stock,
will sell the Excess MFS Shares at the prevailing prices on Nasdaq. The
Exchange Agent will deduct from the proceeds of the sale of the Excess MFS
Shares all commissions and transfer taxes incurred in connection with such
sale of Excess MFS Shares. Until the net proceeds of such sale have been
distributed to the former stockholders of UUNET, the Exchange Agent will hold
such proceeds in trust for such former stockholders. As soon as practicable
after the determination of the amount of cash to be paid to former
stockholders of UUNET in lieu of any fractional interests, the Exchange Agent
will make available such amounts to such former stockholders.
SURRENDER AND PAYMENT
The Merger Agreement provides that prior to the Effective Date, MFS will
appoint Continental Stock Transfer & Trust to act as the Exchange Agent for
the Merger. On the Effective Date, MFS will make available, and each holder of
UUNET Common Stock will be entitled to receive, upon surrender to the Exchange
Agent of one or more certificates representing UUNET Common Stock for
cancellation, certificates representing the number of shares of MFS Common
Stock into which such shares are converted in the Merger and cash in
consideration of fractional shares, as described above. MFS Common Stock into
which UUNET Common Stock will be converted in the Merger will be deemed to
have been issued at the Effective Date.
No dividends or other distributions that are declared or made on MFS Common
Stock will be paid to persons entitled to receive certificates representing
MFS Common Stock until such persons surrender their certificates representing
UUNET Common Stock. Upon such surrender, there will be paid to the person in
whose name the certificates representing such MFS Common Stock will be issued
any dividends or other distributions which will have become payable with
respect to such MFS Common Stock in respect of a record date after the
Effective Date. In no event will the person entitled to receive such dividends
be entitled to receive interest on such dividends. In the event that any
certificates representing shares of MFS Common Stock are to be issued in a
name other than that in which the certificates representing shares of UUNET
Common Stock surrendered in exchange therefore are registered, it is a
condition of such exchange that the certificate or certificates so surrendered
be properly endorsed or be otherwise in proper form for transfer and that the
person requesting such exchange pay to the Exchange Agent any transfer or
other taxes required by reason of the issuance of certificates for such shares
of MFS Common Stock in a name other than that of the registered holder of the
certificate surrendered, or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable. Notwithstanding the
foregoing, neither MFS nor UUNET will be liable to any holder of shares of
UUNET Common Stock for any such shares of UUNET Common Stock (or dividends or
distributions with respect thereto) or cash delivered to a public official
pursuant to any abandoned property, escheat or similar law, rule, regulation,
statute, order, judgment or decree.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
HOLDERS OF UUNET COMMON STOCK PROMPTLY FOLLOWING THE EFFECTIVE DATE AS TO THE
METHOD OF EXCHANGING CERTIFICATES FORMERLY REPRESENTING SHARES OF UUNET COMMON
STOCK FOR CERTIFICATES REPRESENTING SHARES OF MFS COMMON STOCK. SEE "THE
MERGER--CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES."
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STOCKHOLDERS OF UUNET SHOULD NOT SEND CERTIFICATES REPRESENTING THEIR SHARES
TO UUNET OR TO THE EXCHANGE AGENT PRIOR TO RECEIPT OF THE TRANSMITTAL LETTER.
STOCK OPTIONS AND STOCK PURCHASE PLAN
At or prior to the Effective Date, UUNET and MFS will take all action
necessary to cause the assumption by MFS as of the Effective Date of the
options to purchase UUNET Common Stock, whether vested or unvested, issued
under UUNET's 1995 Performance Option Plan, Incentive Stock Option Plan,
Equity Incentive Plan and Nonemployee Directors Stock Option Plan (the "Stock
Option Plans") or pursuant to separate option agreements outstanding as of the
Effective Date (collectively, the "Outstanding Options"). Each of the
Outstanding Options will be converted without any action on the part of the
holder thereof into an option to purchase shares of MFS Common Stock as of the
Effective Date. The number of shares of MFS Common Stock that the holder of an
assumed Outstanding Option will be entitled to receive upon the exercise of
such option will be a number of whole shares determined by multiplying the
number of shares of UUNET Common Stock subject to such option, determined
immediately before the Effective Date, by the Exchange Ratio. The option price
of each share of MFS Common Stock subject to an Outstanding Option will be the
amount (rounded up to the nearest whole cent) obtained by dividing the
exercise price per share of UUNET Common Stock at which such option is
exercisable immediately before the Effective Date by the Exchange Ratio. The
assumption and substitution of options as provided in the Merger Agreement
will not give the holders of such options additional benefits or additional
vesting rights (other than rights to the acceleration of vesting or the lapse
of the right of repurchase caused by the Merger under existing contractual
arrangements) which they did not have immediately prior to the Effective Date
or relieve the holders of any obligations or restrictions applicable to their
options or the shares obtainable upon exercise of the options. After the
Effective Date, the Stock Option Plans will be continued in effect by MFS
subject to amendment, modification, suspension, abandonment or termination as
provided therein, and the Stock Option Plans as so continued will relate only
to the issuance of MFS Common Stock as provided in the Merger Agreement. No
later than one day after the Effective Date of the Merger, MFS shall file a
Registration Statement on Form S-8 relating to the assumed Outstanding
Options.
Upon the earlier to occur of July 31, 1996 or the trading day immediately
preceding the Effective Date, all then outstanding rights to acquire shares of
UUNET Common Stock under UUNET's Employee Stock Purchase Plan (the "Stock
Purchase Plan") will be exercised for the purchase of shares of UUNET Common
Stock. No later than the close of the second trading day immediately preceding
the Effective Date (but not prior to the exercise mentioned in the preceding
sentence), the Board of Directors of UUNET will terminate the Stock Purchase
Plan and all outstanding options to purchase UUNET Common Stock under such
plan. All funds contributed to such Stock Purchase Plan that were not used to
purchase shares of UUNET Common Stock will be returned, in cash, to
participants of the Stock Purchase Plan as soon as administratively feasible
after such termination date, in accordance with the terms of the Stock
Purchase Plan.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of UUNET and MFS to consummate the Merger are subject to the
satisfaction of certain conditions, including: (i) the approval and adoption
of the Merger Agreement and the transactions contemplated thereby by a
majority of the outstanding shares of UUNET Common Stock; (ii) the MFS Share
Proposal shall have been approved by the requisite vote of the holders of MFS
Capital Stock; (iii) the authorization for listing on Nasdaq upon official
notice of issuance of the MFS Common Stock issuable to UUNET stockholders
pursuant to the Merger Agreement, which has occurred; (iv) the waiting period
applicable to the consummation of the Merger under the HSR Act has expired or
been terminated (which occurred on June 19, 1996); (v) the Registration
Statement for the MFS Common Stock to be issued in connection with the Merger
becoming effective in accordance with the provisions of the Securities Act and
not being the subject of any stop order suspending effectiveness issued by the
Commission; and (vi) the absence of any preliminary or permanent injunction or
other order by any federal or state court in the United States which prevents
the consummation of the Merger (each party agreeing to use its best efforts to
have any such injunction lifted).
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The obligation of UUNET to consummate the Merger is also subject to the
satisfaction of the following further conditions (unless waived by UUNET): (i)
MFS and Sub having performed in all material respects all of their agreements
contained in the Merger Agreement required to be performed on or prior to the
Effective Date, and the representations and warranties of MFS and Sub
contained in the Merger Agreement are true in all material respects, when made
and on and as of the Effective Date, except to the extent they relate to a
specific date; (ii) UUNET having received the opinion of Heller Ehrman White &
McAuliffe, counsel to UUNET, to the effect that as of the Effective Date, the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code; (iii) receipt of certain
specified third party consents; and (iv) MFS having taken all action necessary
to cause John W. Sidgmore, Richard L. Adams, Jr. and an individual designated
by UUNET and acceptable to MFS to become members of the Board of Directors of
MFS subject to consummation of the Merger.
The obligations of MFS and Sub to consummate the Merger are also subject to
the satisfaction of the following further conditions (unless waived by MFS):
(i) UUNET shall have performed in all material respects all of its obligations
contained in the Merger Agreement required to be performed by it on or prior
to the Effective Date, and the representations and warranties of UUNET
contained in the Merger Agreement are true in all material respects, when made
and on and as of the Effective Date, except to the extent they relate to a
specific date; (ii) MFS having received an opinion of Skadden, Arps, Slate,
Meagher & Flom, tax counsel to MFS, to the effect that as of the Effective
Date the Merger will be treated for federal income tax purposes as a
reorganization within the meaning of Section 368(a) of the Code; (iii) receipt
of certain specified third party consents; and (iv) MFS having received the
Affiliate Letters as defined in the Merger Agreement.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of MFS,
Sub and UUNET relating to, among other things, the following matters (which
representations and warranties are subject, in certain cases, to specified
exceptions): (i) the due organization, power and standing of, and similar
corporate matters with respect to, each of UUNET, MFS and Sub; (ii) each of
UUNET's and MFS' capitalization; (iii) the authorization, execution, delivery,
performance and enforceability of the Merger Agreement by each such party and
of the transactions contemplated thereby; (iv) the absence of any conflict
with each of UUNET, MFS' and Sub's Certificate of Incorporation, By-Laws and
material agreements and instruments and compliance with applicable laws; (v)
reports and other documents filed with the Commission and other regulatory
authorities and the accuracy of the information contained therein; (vi) the
absence of certain changes or events having a material adverse effect on the
financial condition, business or results of operations of UUNET and MFS; (vii)
the absence of any default under UUNET's and MFS' employee benefit plans and
compliance with ERISA; and (viii) compliance with applicable laws.
CONDUCT OF BUSINESS PENDING THE MERGER
Prior to the Effective Date, unless MFS otherwise agrees in writing, UUNET
will, and will cause its subsidiaries to, carry on their respective businesses
in the usual, regular and ordinary course in substantially the same manner as
previously conducted, and will, and will cause its subsidiaries to, use all
reasonable efforts to preserve intact their present business organizations,
keep available the services of their present officers and employees and
preserve their relationships with customers, suppliers and others having
business dealings with them to the end that their goodwill and on-going
businesses will be unimpaired at the Effective Date, except for any impairment
which would not have a material adverse effect. UUNET will, and will cause its
subsidiaries to: (i) maintain insurance coverages and its books, accounts and
records in the usual manner consistent with prior practices; (ii) comply in
all material respects with all laws, ordinances and regulations of
governmental entities applicable to UUNET and its subsidiaries; (iii) maintain
and keep its properties and equipment in good repair, working order and
condition, ordinary wear and tear excepted; and (iv) perform in all material
respects its obligations under all contracts and commitments to which it is a
party or by which it is bound, in each case other
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than where the failure to so maintain, comply or perform, either individually
or in the aggregate, would have a material adverse effect on UUNET.
Except as required or permitted by the Merger Agreement, UUNET will not and
will not propose to: (i) sell or pledge or agree to sell or pledge any capital
stock owned by it in any of its subsidiaries; (ii) amend its Certificate of
Incorporation or By-laws; (iii) split, combine or reclassify its outstanding
capital stock, or declare, set aside or pay any dividend or other distribution
payable in cash, stock or property; or (iv) directly or indirectly redeem,
purchase or otherwise acquire or agree to redeem, purchase or otherwise
acquire any shares of UUNET capital stock except for the repurchase, at cost
of shares of UUNET Common Stock upon termination of certain employees',
consultants' or directors' relationship with UUNET pursuant to existing
contractual rights of repurchase in favor of UUNET.
UUNET will not, nor will it permit any of its subsidiaries to: (i) except as
required by the Merger Agreement, issue, deliver or sell or agree to issue,
deliver or sell any additional shares of, or rights of any kind to acquire any
shares of, its capital stock of any class, any option, rights or warrants to
acquire, or securities convertible into, shares of capital stock other than
issuances of options to purchase UUNET Common Stock under the Stock Option
Plans on or after the date of the Merger Agreement to employees of UUNET or
its subsidiaries in the ordinary course of business and consistent with past
practice, other than to such employees who are executive officers of UUNET
("Permitted Options"), or issuances of UUNET Common Stock pursuant to certain
transactions proposed by UUNET, the Stock Purchase Plan or the exercise of
options outstanding on the date of the Merger Agreement or Permitted Options;
(ii) acquire, lease or dispose or agree to acquire, lease or dispose of any
capital assets or any other assets other than in the ordinary course of
business or in connection with any additional deployment or expansion of
network infrastructure requested by Microsoft; (iii) incur additional
indebtedness or encumber or grant a security interest in any asset or enter
into any other material transaction other than in each case (a) in the
ordinary course of business, (b) pursuant to any extension of credit by
Microsoft, or (c) pursuant to credit facilities not to exceed an aggregate of
$40 million; (iv) acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, in each case in this clause (iv)
which are material, individually or in the aggregate, to UUNET and its
subsidiaries taken as a whole, except that UUNET may acquire or create new
wholly owned subsidiaries in the ordinary course of business and as
contemplated in certain proposed transactions; (v) authorize any capital
expenditures in excess of UUNET's 1996 capital expenditure budget (provided to
MFS prior to April 29, 1996), except for capital expenditures funded by an
increase in credit facilities with Microsoft; or (vi) enter into any contract,
agreement, commitment or arrangement with respect to any of the foregoing.
Except as disclosed to MFS, UUNET will not, nor will it permit, any of its
subsidiaries to, except as required to comply with applicable law and except
as otherwise permitted by the Merger Agreement: (i) adopt, enter into,
terminate or amend any bonus, profit sharing, compensation, severance,
termination, stock option, pension, retirement, deferred compensation,
employment or other MFS benefit plan, agreement, trust, fund or other
arrangement for the benefit or welfare of any director, officer or current or
former employee other than in the ordinary course of business consistent with
past practice; (ii) increase in any manner the compensation or fringe benefit
of any director, officer or employee (except for normal increases in the
ordinary course of business that are consistent with past practice and that,
in the aggregate, do not result in a material increase in benefits or
compensation expense to UUNET and its subsidiaries relative to the level in
effect prior to such amendment and except for increases pursuant to UUNET's
pending 1996 salary increases, in an aggregate amount not to exceed 15% of the
base salary of current employees); (iii) pay any benefit not provided under
any existing plan or arrangement; (iv) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or UUNET
benefit plan (including, without limitation, the grant of stock options, stock
appreciation rights, stock based or stock related awards, performance units or
restricted stock, or the removal of existing restrictions in any benefit plans
or agreements or awards made thereunder), other than such plans and
arrangements (other than stock options) which are made in the ordinary course
of business consistent with past practice including Permitted Options; (v)
take any action to fund or in any other way secure the payment of
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compensation or benefits under any employee plan, agreement, contract or
arrangement or UUNET benefit plan other than in the ordinary course of
business consistent with past practice; or (vi) adopt, enter into, amend or
terminate any contract, agreement, commitment or arrangement to do any of the
foregoing.
UUNET will not, nor will it permit any of its subsidiaries to, make any
investments in non-investment grade securities exceeding $1 million; provided,
however, that UUNET will be permitted to create new wholly owned subsidiaries
in the ordinary course of its business or pursuant to certain proposed
transactions.
UUNET will not, nor will it permit any of its subsidiaries to, take or cause
to be taken any action (other than in the ordinary course of business
consistent with past practices), with respect to accounting policies or
procedures (including, without limitation, procedures with respect to the
payment of accounts payable and collection of accounts receivable).
Prior to the Effective Date, unless UUNET otherwise agrees in writing: (i)
MFS will, and will cause its subsidiaries to, carry on their respective
businesses in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted; (ii) MFS will, and will cause its subsidiaries
to, use all reasonable efforts to preserve intact their present business
organizations, keep available the services of their present officers and
employees and preserve their relationships with customers, suppliers and
others having business dealings with them to the end that their goodwill and
on-going businesses will be unimpaired at the Effective Date; and (iii) from
the date of the Merger Agreement through the Effective Date, MFS will not pay
or declare any dividend or make any distribution with respect to MFS Common
Stock except as provided by the Merger Agreement.
COVENANTS
Each of UUNET and MFS and their respective subsidiaries will give the other
access throughout the period prior to the Effective Date to its properties,
books, contracts, commitments, records and personnel. UUNET and MFS have
further agreed to prepare and file with the Commission a registration
statement consisting of a joint proxy statement and a prospectus with respect
to the MFS Common Stock to be issued in connection with the Merger and MFS has
agreed to make all necessary filings with respect to the transactions
contemplated by the Merger under applicable state securities laws.
Prior to the Effective Date, UUNET has agreed to deliver to MFS a list
identifying all persons who were, in UUNET's reasonable judgment, at the UUNET
Record Date, "affiliates" of UUNET as that term is used in Rule 145 under the
Securities Act (the "Affiliates"). UUNET agreed to use all reasonable efforts
to obtain, and deliver to MFS, agreements from all Affiliates that they will
not sell MFS Common Stock unless such sale has been registered under the
Exchange Act, such sale is effected in compliance with Rule 145, or in the
opinion of counsel, or pursuant to a "no action" letter obtained from the
staff of the Commission, such sale is exempt from registration under the
Securities Act.
MFS has agreed to use its best efforts to list the MFS Common Stock issued
pursuant to the Merger on Nasdaq.
UUNET and MFS have filed notifications under the HSR Act in connection with
the Merger and the transactions contemplated thereby, and have agreed to
respond as promptly as practicable to any inquiries received from the FTC and
the Antitrust Division for additional information and documentation and to
respond as promptly as possible to all inquiries and requests from any State
Attorney General or other governmental authority in connection with antitrust
matters. The waiting period under the federal antitrust laws expired on
June 19, 1996.
UUNET and MFS have agreed to use all reasonable efforts to take, or cause to
be taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by the Merger Agreement,
including using all reasonable efforts to obtain all necessary waivers,
consents and approvals, to effect all necessary registrations
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and filings (including, but not limited to, filings under the HSR Act and with
all applicable governmental entities) and to lift any injunction or other
legal bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), subject, however, in the case of the Merger
Agreement and the MFS Share Proposal, to the appropriate vote of the
stockholders of UUNET and MFS. Notwithstanding the foregoing, there will be no
action required to be taken and no action will be taken in order to consummate
and make effective the transactions contemplated by the Merger Agreement if
such action, either alone or together with another action, would have a
material adverse effect on either UUNET or MFS.
Following the Effective Date, MFS will use its best efforts to conduct its
business, and will cause the Surviving Corporation to use its best efforts to
conduct its business, except as otherwise contemplated by the Merger
Agreement, in a manner which would not jeopardize the characterization of the
Merger as a reorganization within the meaning of Section 368(a) of the Code.
MFS agreed that from the date of the Merger Agreement until the Effective
Date, it would not participate in discussion or negotiations with, or enter
into any agreement pursuant to which MFS would acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial equity interest
in, or by any other manner, any business or any part thereof where either (i)
the acquired business is in the business of providing Internet access, (ii)
the acquisition would involve aggregate consideration in excess of
$500,000,000, or (iii) the acquisition could reasonably be expected to delay
the satisfaction of the conditions set forth in the Merger Agreement.
EFFECT ON EMPLOYEE BENEFIT PLANS
MFS agreed to honor in accordance with their terms, all employment,
severance and similar agreements to which UUNET or any subsidiary is a party
and all accrued benefits that are vested as of the Effective Date under any
UUNET benefit plan or Stock Option Plan, except as provided by the terms of
such agreement. MFS agreed to provide employees of UUNET and its subsidiaries
with credit for all service with UUNET or its affiliates for purposes of
vesting and eligibility under any employee benefit plan, program or
arrangement of MFS or its affiliates, including all employee equity incentive
programs of MFS. MFS agreed that employees of UUNET and its subsidiaries who
continue to be employed by MFS or its subsidiaries after the Effective Date
may continue to participate in their current UUNET sponsored employee benefit
programs for twelve months following the Effective Date. After the Effective
Date, employees of UUNET and its subsidiaries will be eligible to participate
in the appropriate employee equity incentive programs of MFS, as determined by
MFS in its sole discretion.
NO SOLICITATION
Neither UUNET nor any of its subsidiaries will, directly or indirectly, take
(nor will UUNET authorize or permit its subsidiaries, officers, directors,
employees, representatives, investment bankers, attorneys, accountants or
other agents or affiliates, to take) any action to (i) encourage, solicit or
initiate the submission of any Acquisition Proposal (as defined below), (ii)
enter into any agreement with respect to any Acquisition Proposal or (iii)
participate in any way in discussions or negotiations with, or furnish any
information to, any person in connection with, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal; provided,
however that UUNET or its Board may (a) furnish non-public information to, or
enter into discussions with any person or entity in connection with an
unsolicited bona fide written Acquisition Proposal by such person or entity,
if prior to furnishing such non-public information to, or entering into
discussions or negotiations with such person or entity, an executed
confidentiality agreement is received from such person or entity, (b) withdraw
UUNET's Board of Directors' recommendation of the Merger, if and only to the
extent that UUNET's Board of Directors believes in good faith (after
consultation with and based upon the advice of its financial advisor) that
such Acquisition Proposal would, if consummated, result in a transaction more
favorable to UUNET's stockholders than the Merger and the UUNET Board of
Directors determines in good faith after consultation with and based upon a
written opinion of its outside legal counsel that such withdrawal is necessary
for the directors to comply with their fiduciary
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duties to the stockholders under applicable Delaware law and that such
withdrawal will not affect the validity of the submission of the Merger
Agreement to the stockholders of UUNET pursuant to Delaware law or the
enforceability of the Stock Option Agreement or (c) comply with Rule 14e-
2(a)(2) or (3) promulgated under the Exchange Act with regard to an
Acquisition Proposal. UUNET will promptly communicate to MFS any solicitation
by UUNET and the terms of any proposal or inquiry, including the identity of
the person and its affiliates making the same, that it may receive in respect
of any such transaction, or of any such information requested from it or of
any such negotiations or discussions being sought to be initiated with it.
"Acquisition Proposal" means any proposed (a) merger, consolidation or similar
transaction involving UUNET, (b) sale, lease or other disposition directly or
indirectly by merger, consolidation, share exchange or otherwise of assets of
UUNET or its subsidiaries representing 10% or more of the consolidated assets
of UUNET and its subsidiaries, (c) issue, sale, or other disposition of
(including by way of merger, consolidation, share exchange or any similar
transaction) securities (or options, rights or warrants to purchase, or
securities convertible into, such securities) representing 10% or more of the
voting power of UUNET or (d) transaction in which any person will acquire
beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange
Act), or the right to acquire beneficial ownership or any "group" (as such
term is defined under the Exchange Act) will have been formed which
beneficially owns or has the right to acquire beneficial ownership of 25% or
more of the outstanding UUNET Common Stock.
INDEMNIFICATION
MFS and UUNET, as the Surviving Corporation, will jointly and severally
indemnify and hold harmless directors, officers, and agents of UUNET as
provided in UUNET's Certificate of Incorporation, By-laws or indemnification
agreements, in effect on the date of the Merger Agreement with respect to
matters occurring through the Effective Date. The Merger Agreement provides
that the By-laws and the Certificate of Incorporation of Sub will be amended
prior to the Effective Date to contain indemnification provisions identical to
those set forth in the By-laws and Certificate of Incorporation of UUNET as of
April 29, 1996, which provisions will continue in full force and effect for a
period of not less than six years from the Effective Date. The Merger
Agreement provides that, with respect to matters occurring prior to the
Effective Date, MFS will cause UUNET, as the Surviving Corporation, to
maintain directors' and officers' liability insurance policies as currently
maintained by UUNET for three years after the Effective Date to the extent
that such policies are obtainable at an annual cost of not greater than three
times UUNET's last annual premium prior to April 29, 1996; provided that if
such coverage is not available for such amount, UUNET, as the Surviving
Corporation, will purchase as much coverage as possible for such amount.
The Merger Agreement provides that under certain circumstances, MFS will
indemnify and hold harmless each member of UUNET's Board of Directors that has
executed, or whose affiliate or employer executed, a Stock Option Agreement
insofar as any loss, claim, damage, liability or expense arises solely out of,
or is based solely upon, a claim that such Director's fiduciary duty as a
member of UUNET's Board of Directors under Delaware law was breached by the
execution by him or his affiliate or employer, in his or its capacity as a
UUNET stockholder, of the Stock Option Agreement.
TERMINATION; FEES AND EXPENSES
The obligations of UUNET and MFS to consummate the Merger are subject to
various conditions as described above under "--Conditions to Consummation of
the Merger."
The Merger Agreement may be terminated at any time prior to the Effective
Date, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of UUNET as follows: (i) by mutual consent
of the Boards of Directors of UUNET and MFS; (ii) by either MFS or UUNET if
the Merger has not been consummated on or before November 30, 1996; (iii) by
UUNET if any of the conditions to its obligations to consummate the Merger
have not been met or waived by UUNET at such time as such condition is no
longer capable of satisfaction; (iv) by MFS if any of the conditions to its
obligations to consummate the Merger have not been met or waived by MFS at
such time as such condition is no longer capable of satisfaction;
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(v) in the event of a Purchase Event (as defined in this Joint Proxy
Statement-Prospectus under the caption "THE STOCK OPTION AGREEMENT--Exercise
of the Option"); (vi) by either MFS or UUNET, if the approval of UUNET's
stockholders to the Merger is not obtained at the UUNET Special Meeting; or
(vii) by either MFS or UUNET if the approval of MFS' stockholders to the MFS
Share Proposal is not obtained at the MFS Annual Meeting.
If the Merger Agreement is terminated by MFS because of a failure by the
UUNET stockholders to approve the Merger, the failure of UUNET to perform in
all material respects its agreements contained in the Merger Agreement on or
prior to the Effective Date or the failure of the representations and
warranties of UUNET contained in the Merger Agreement to be true in all
material respects when made and on and as of the Effective Date as if made on
and as of such date, except to the extent they relate to a particular date,
and within 18 months after the date of such termination, UUNET accepts or
recommends to its stockholders for approval an Acquisition Proposal that MFS
believes would result in a transaction more favorable to UUNET's stockholders
than the Merger and such Acquisition Proposal is consummated, UUNET is
obligated to pay MFS a fee of $60 million. If the Merger Agreement is
terminated by UUNET because of a failure by the MFS stockholders to approve
the MFS Share Proposal, the failure of MFS or Sub to perform in all material
respects their agreements contained in the Merger Agreement on or prior to the
Effective Date or the failure of the representations and warranties of MFS or
Sub contained in the Merger Agreement to be true in all material respects when
made and on and as of the Effective Date as if made on and as of such date,
except to the extent they relate to a particular date, MFS is obligated to pay
UUNET a fee of $60 million and, at UUNET's option, purchase 1,551,724 shares
of UUNET Common Stock for $90 million and, at UUNET's option, provide up to
$100 million of certain data communications services to UUNET at MFS' cost
over five years, with no more than $25 million in any one year.
Generally, all costs and expenses incurred in connection with the Merger
will be paid by the party incurring such expense.
AMENDMENT; WAIVER
The Merger Agreement provides that it may be amended by the parties thereto,
by or pursuant to action taken by the respective Boards of Directors, at any
time before or after approval thereof by the stockholders of UUNET and MFS,
but, after such approval, no amendment may be made which changes the Exchange
Ratio or which in any way materially adversely affects the rights of such
stockholders, without such further approval of such stockholders. The Merger
Agreement may not be amended except by an instrument in writing signed on
behalf of each of MFS, Sub and UUNET.
At any time prior to the Effective Date, the parties to the Merger
Agreement, by or pursuant to action taken by their respective Boards of
Directors, may: (i) extend the time for the performance of any of the
obligations or other acts of the other parties thereto; (ii) waive any
inaccuracies in the representations and warranties contained therein or in any
documents delivered pursuant thereto; and (iii) waive any compliance with any
of the agreements or conditions contained therein. Any agreement on the part
of a party to the Merger Agreement to any such extension or waiver will be
valid if set forth in an instrument in writing signed on behalf of such party.
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THE STOCK OPTION AGREEMENT
The following description of the Stock Option Agreement is necessarily a
summary thereof and is therefore qualified in its entirety by reference to the
Stock Option Agreement, a copy of which is attached to this Joint Proxy
Statement-Prospectus as Annex B and incorporated herein by reference.
NUMBER OF SHARES; EXERCISE PRICE
Pursuant to the terms of the Stock Option Agreement, certain stockholders of
UUNET have granted to MFS an irrevocable option (the "Option") to acquire all
of such stockholders' shares of UUNET Common Stock (the "Shares") held on the
date of Option exercise (19,300,317 shares as of the UUNET Record Date) for
the Exchange Ratio and cash in lieu of fractional shares. Each share of new
MFS Common Stock issued in connection with the Option exercise will be
accompanied by one MFS Right. The Option may only be exercised following the
occurrence of a Purchase Event (as defined below), and may be exercised only
once. The shares of UUNET Common Stock subject to the Stock Option Agreement
are held by the following stockholders (each a "UUNET Stockholder and
collectively the "UUNET Stockholders"): Richard L. Adams, Jr., John W.
Sidgmore, Les B. Strauss, Daniel C. Lynch, Microsoft Corporation, Menlo
Ventures IV, L.P., Menlo Evergreen V, L.P., New Enterprise Associates V,
Limited Partnership, Accel IV L.P and Accel Investors '93 L.P.
EXERCISE OF THE OPTION
The Option is exercisable, in whole but not in part, only upon the
occurrence of one of the following events (each a "Purchase Event"):
(i) any person (other than MFS or any subsidiary of MFS, having commenced
(as such term is defined in Rule 14d-2 under the Exchange Act), a tender
offer or exchange offer to purchase any shares of UUNET Common Stock such
that, upon consummation of such offer, such person would own or control 50%
or more of the then outstanding UUNET Common Stock, and the Board of
Directors of UUNET, within ten business days after such tender or exchange
offer shall have been so commenced, fails to recommend against acceptance
of such tender or exchange offer by its stockholders, and MFS delivers a
written notice of termination to UUNET within (20) business days after the
expiration of such 10 day period;
(ii) UUNET or any subsidiary of UUNET having authorized, recommended,
proposed or publicly announced an intention to authorize, recommend or
propose, or entered into, an agreement with any person (other than MFS or
any subsidiary of MFS) to (i) effect a merger, consolidation or similar
transaction involving UUNET or any of its material subsidiaries, (ii) sell,
lease or otherwise dispose of assets of UUNET or its subsidiaries
representing 10% or more of the consolidated assets of UUNET and its
subsidiaries (other than in the ordinary course of business) or (iii)
issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar consolidation, share exchange
or any similar transaction) securities (or options, rights or warrants to
purchase, or securities convertible into, such securities) representing 10%
or more of the voting power of UUNET or any of its subsidiaries; or
(iii) any person (other than MFS, any subsidiary of MFS, UUNET or any of
its subsidiaries in a fiduciary capacity) has acquired beneficial ownership
(as such term is defined in Rule 13d-3 under the Exchange Act) or the right
to acquire beneficial ownership of, or any "group" (as such term is defined
under the Exchange Act) shall have been formed which beneficially owns, or
has the right to acquire beneficial ownership of, 25% or more of the then
outstanding UUNET Common Stock.
The Option shall terminate and be of no further force and effect upon the
earliest to occur of (i) the Effective Date, (ii) 20 business days after the
termination of the Merger Agreement other than by reason of an event described
in clause (iii) or (iv) below, (iii) exercise of UUNET's right to terminate
the Merger Agreement because of a breach by MFS or Sub of any covenant or
agreement set forth in the Merger Agreement or the failure of any
representation or warranty of MFS or Sub under the Merger Agreement or of MFS
under the Stock Option Agreement to have been true in all material respects
when made or the failure of the stockholders of MFS to approve the Merger at
the MFS Annual Meeting, (iv) termination of the Merger Agreement pursuant to
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mutual consent of MFS and UUNET or the failure to consummate the Merger by
November 30, 1996, or (v) the failure of the closing of the purchase and sale
pursuant to the Option to occur within 30 business days of the date each UUNET
Stockholder is sent written notice of the exercise of the Option unless (A)
the reason for such failure relates to the inability to satisfy the conditions
to register the shares of MFS Common Stock pursuant to the Securities Act or
for the notification period under the HSR Act to have expired, in either case,
for reasons outside the control of MFS, and (B) MFS is diligently pursuing the
registration of such shares with the Commission or promptly providing all
necessary information to the FTC and the Antitrust Division as the case may
be. Notwithstanding the termination of the Option, MFS will be entitled to
purchase the Shares in accordance with the terms hereof if it has exercised
the Option prior to the termination date, unless clause (iii) or (v) above has
been triggered in which case the rights to exercise this Option will
immediately cease.
The consummation of a purchase or a repurchase pursuant to the Stock Option
Agreement is subject to, among other things, the registration of the shares of
MFS Common Stock to be issued upon Option exercise and obtaining any required
regulatory approvals. In the event that prior notification to or approval of
any regulatory authority is required in connection with such purchase, MFS
and, if applicable, a UUNET Stockholder will promptly file the required notice
or application for approval and will expeditiously process the same (and such
UUNET Stockholder will cooperate with MFS in the filing of any such notice or
application and the obtaining of any such approval), and the period of time
that otherwise would run shall run instead from the date on which, as the case
may be, (i) any required notification period has expired or been terminated or
(ii) such approval has been obtained, and in either event, any requisite
waiting period has passed. MFS included the issuance of shares of MFS Common
Stock under the Stock Option Agreement in the notifications under the HSR Act
filed with respect to the Merger.
ADJUSTMENT OF NUMBER OF SHARES SUBJECT TO OPTION
If on or after the date of the Stock Option Agreement there occurs any stock
dividend, stock split, recapitalization, combination or exchange of shares,
merger, consolidation, reorganization or other change or transaction of or by
UUNET, as a result of which shares of any class of stock, other securities,
cash or other property will be issued in respect of any Shares or if any
Shares shall be changed in the same or another class of stock or other
securities, then, upon exercise of the Option, MFS will receive for the
aggregate price payable upon exercise of the Option, all such shares of stock,
other securities, cash or other property issued, delivered or received with
respect to such Shares.
AGREEMENT TO VOTE
Each UUNET Stockholder agreed that from April 29, 1996, to the earlier to
occur of the termination of the Merger Agreement or the Effective Date, at any
meeting of the stockholders of UUNET, however called, and in any action by
consent of the stockholders of UUNET, such UUNET Stockholder will vote the
Shares (19,300,317 shares of UUNET Common Stock, representing approximately
59.5% of the outstanding UUNET Common Stock at the UUNET Record Date) (a) in
favor of the Merger, the Merger Agreement (as amended from time to time) and
the transactions contemplated by the Merger Agreement and (b) against any
proposal for any recapitalization, merger (other than the Merger), sale of
assets or other business combination between UUNET and any person or entity
(other than MFS or Sub) or any other action or agreement that would result in
a breach of any covenant, representation or warranty or any other obligation
or agreement of UUNET under the Merger Agreement or which would result in any
of the conditions to the Merger Agreement not being fulfilled.
GRANT OF PROXY
Each UUNET Stockholder granted an irrevocable proxy in favor of MFS and Sub
to vote all of such UUNET Stockholder's Shares: (i) in favor of the Merger,
the Merger Agreement (as amended from time to time) and the transactions
contemplated by the Merger Agreement; and (ii) against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between UUNET and any person or entity (other than MFS or
Sub) or any other action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or agreement of
UUNET under the Merger
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Agreement or which would result in any of the conditions to the Merger
Agreement not being fulfilled. The irrevocable proxy granted by each UUNET
Stockholder terminates upon the earlier to occur of the Effective Date or the
termination of the Merger Agreement.
RESTRICTIONS ON TRANSFER
Each UUNET Stockholder agreed that, from April 29, 1996 to the termination
of the rights of MFS under the Stock Option Agreement, it will not offer or
agree to sell, transfer, tender, assign, hypothecate or otherwise dispose of,
or create or permit to exist any encumbrance on the Shares owned by such UUNET
Stockholder at any time prior to the Effective Date; provided that Mr. Adams
may sell, gift or otherwise transfer 325,000 shares of UUNET Common Stock and
3,371 shares of UUNET Common Stock issuable upon exercise of outstanding
options.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
EACH UUNET STOCKHOLDER SHOULD CONSULT SUCH HOLDER'S TAX ADVISOR WITH RESPECT
TO THE SPECIFIC TAX CONSEQUENCES OF THE EXERCISE OF THE OPTION TO SUCH HOLDER,
INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
Exercise of the Option by MFS will result in a taxable capital gain to the
UUNET Stockholders measured by the difference between the fair market value of
the MFS stock delivered as the exercise price to a particular UUNET
Stockholder at the time of exercise and such UUNET Stockholder's basis in its
shares of UUNET Common Stock, unless such Option exercise is treated as part
of a larger transaction qualifying as a reorganization within the meaning of
Section 368(a) of the Code.
MFS VOTING AGREEMENT
The following description of the MFS Voting Agreement is necessarily a
summary thereof and is therefore qualified in its entirety by reference to the
MFS Voting Agreement, a copy of which is attached as Annex C to this Joint
Proxy Statement-Prospect and incorporated herein by reference.
VOTING AGREEMENT
Pursuant to the MFS Voting Agreement, dated as of April 29, 1996, certain
stockholders of MFS have agreed that during the time the MFS Voting Agreement
is in effect, at any meeting of the MFS stockholders, however called, and in
any action by written consent of the MFS stockholders, such stockholders will
vote in favor of the MFS Share Proposal and have granted irrevocable proxies
in favor of UUNET to vote all of such stockholders' shares of MFS Common Stock
held as of the MFS Record Date in favor of the MFS Share Proposal.
The shares of MFS Common Stock subject to the terms the MFS Voting Agreement
and the irrevocable proxies (15,307,777 shares of MFS Common Stock or
approximately 12.1% of the outstanding shares of MFS Common Stock and
representing approximately 5.5% of the outstanding voting power of the MFS
Capital Stock as of the MFS Record Date) are held by the following MFS
stockholders: James Q. Crowe, Howard Gimbel, William L. Grewcock, Royce J.
Holland, Richard R. Jaros, Robert E. Julian, Ronald W. Roskens, Walter Scott,
Jr., Kenneth E. Stinson and Michael B. Yanney.
NO DISPOSITION OR ENCUMBRANCE OF SHARES AND OPTIONS
Each stockholder agreed that, from April 29, 1996 until the termination of
the MFS Voting Agreement, he will not, and will not offer or agree to, sell,
transfer, tender, assign, hypothecate or otherwise dispose of, or create or
permit to exist any encumbrance on the shares of MFS Common Stock subject to
the terms of the MFS Voting Agreement at any time prior to the Effective Date.
TERMINATION
The MFS Voting Agreement terminates upon the earlier of the Effective Date
or November 30, 1996.
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BUSINESS OF UUNET
UUNET is a leading worldwide provider of a comprehensive range of Internet
access options, applications, and consulting services to businesses,
professionals and on-line services providers. UUNET provides both dedicated
and dial-up Internet access, and other applications and services which include
Web server hosting and integration services, client software and security
products, training, and network integration and consulting services. UUNET
estimates that its current customer base includes over 22,000 business and
professional accounts.
UUNET's objective is to be the leading supplier worldwide to businesses and
professionals of complete communications solutions using Internet-related
technologies. UUNET intends to achieve this position by continuing to focus
on: expanding operations worldwide; expanding its high performance network
infrastructure; expanding its sales, marketing and advertising efforts to
reach its targeted customers more effectively; integrating and expanding its
suite of value-added products and services; and building and leveraging
relationships with strategic partners.
UUNET's network infrastructure, following the acquisition of UUNET PIPEX, of
a 40 percent interest in EUnet Germany and of an additional 31 percent
interest in UUNET Canada, allowed local access to users in 543 POPs, including
288 outside of the United States as of April 1, 1996. UUNET plans to continue
to expand its network to allow local access to users in numerous additional
cities worldwide. UUNET's network infrastructure includes a high capacity
frame relay-based network backbone comprised primarily of 45 Mbps, DS-3 leased
lines in the U.S. and fractional DS-3 leased lines internationally. UUNET is
expanding and enhancing its network infrastructure which is designed to be
scaleable to meet increased user demand.
UUNET has a strategic relationship with Microsoft in which UUNET is
developing, operating and maintaining a large-scale, high speed, dial-up and
ISDN TCP/IP access network as part of its overall network infrastructure. This
network is the primary Internet dial-up network and infrastructure for
Microsoft, including The Microsoft Network. The Microsoft relationship
provides UUNET with the opportunity to accelerate the expansion of the
capacity and geographic coverage of its network infrastructure both
domestically and internationally.
UUNET initiated a major international expansion in 1995, which included
establishing international gateway hubs in 13 countries and building
facilities to allow local access to users in nine cities in Europe, seven
cities in Canada, two cities in Asia, and one city in Australia. In addition,
UUNET acquired UUNET PIPEX, the largest Internet access provider in the United
Kingdom. In December 1995, UUNET agreed to acquire 40 percent of the equity of
EUnet Germany, a leading Internet services provider in Germany; the
acquisition closed in February 1996. UUNET increased its equity ownership of
UUNET Canada to 51 percent on April 1, 1996. This expansion plan capitalizes
on the opportunity to build network infrastructure for The Microsoft Network,
while providing significant capacity for UUNET to utilize for its other
customers.
UUNET intends to accelerate the international expansion begun in 1995 by
pursuing several avenues, including acquiring other Internet services
providers and complementary businesses and technologies in various target
countries and obtaining international telecommunications facilities, including
significant undersea and European terrestrial fiber optic cable capacity.
UUNET believes this new international network infrastructure will
significantly decrease its per unit cost of bandwidth and that revenues from
customers, including significant revenues from Microsoft, will substantially
support the expense of this enhancement and expansion of the network
infrastructure. There can be no assurance that UUNET will be able to achieve
any of its stated objectives, plans or beliefs as to the future scope or
success of its operations.
UUNET is the owner of the following trademarks: UUNET (R), UUNET
TECHNOLOGIES (R) (logo mark), UUNET TECHNOLOGIES (globe design) (TM),
10PLUS (R), ALTERDIAL (R), ALTERNET (R), ALTERNET (design) (TM), BUSINESS
ONLINE (TM), Internet at Work (TM), Internet 9 to 5 (TM), and LANGUARDIAN (R).
UUNET PIPEX is the owner of the following trademarks: Unipalm, Unipalm (logo
mark), PIPEX, PIPEX International and Mail-It.
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INDUSTRY BACKGROUND
The Internet
The Internet is a global collection of computer networks cooperating to
enable commercial organizations, educational institutions, government agencies
and individuals to communicate electronically, access and share information
and conduct business. The Internet originated with the ARPAnet, a restricted
network started in 1969 by the United States Department of Defense Advanced
Research Projects Agency to provide efficient and reliable long-distance data
communications among the disparate computer systems used by government funded
researchers and organizations. Unlike other public and private
telecommunications networks that are managed by businesses, government
agencies and other entities, the Internet is a cooperative interconnection of
many such public and private networks. The networks that comprise the Internet
are connected in a variety of ways, including by the public switched telephone
network and by high speed, dedicated leased lines. Communications on the
Internet are enabled by TCP/IP, an internetworking standard that enables
communication across the Internet regardless of the hardware and software
used.
Expansion of Internet Use
Recent technological advances, including increases in microprocessor speed
and the development of easy-to-use graphical user interfaces, combined with
cultural and business changes, have led to the Internet being integrated into
the activities of individuals and the operations and strategies of commercial
organizations. For example, a growing number of employees within organizations
have access to corporate networks, thereby increasing the amount of electronic
communication both within and between organizations. In addition, the rapid
growth of the installed base of home PCs equipped with communication devices
such as modems has created the ability to communicate electronically from
home. These technological, cultural and business trends have led to an
increase in the number of on-line services and Internet access providers. More
recently the development of World Wide Web technology and associated easy-to-
use software has made the Internet easier to navigate and more accessible to a
larger number of users and for a broader range of applications. While there
has been significant media interest in use of the Internet by consumers,
business and professional organizations currently represent a more significant
percentage of Internet use. These organizations increasingly are recognizing
that the Internet can enhance communications, both among their geographically
distributed locations and employees, and with their business partners and
customers. In addition, businesses are realizing that the Internet can enable
many applications which were previously unavailable or cost-prohibitive. For
example, small and medium-sized businesses can establish and maintain a global
presence, and market and distribute their products and services
electronically.
Despite growing interest in the many commercial uses of the Internet, many
businesses have been deterred from purchasing Internet access services for a
number of reasons. These include: inconsistent quality of service; a lack of
wide availability of cost-effective high speed options; a limited number of
local access points for corporate users; inability to integrate business
applications on the Internet; the need to deal with multiple and frequently
incompatible vendors; inadequate protection of the confidentiality of stored
data and information moving across the Internet; and a lack of tools to
simplify Internet access and use.
THE UUNET SOLUTION
UUNET provides a comprehensive range of Internet access options,
applications and consulting services tailored to meet the needs of businesses
and professionals. UUNET's solution has been designed to address many of the
issues that have discouraged businesses and professionals from using the
Internet in the past. The UUNET solution is based upon UUNET's high
performance, domestic and international network infrastructure designed
specifically to provide reliable Internet connectivity to businesses with
demanding throughput requirements.
UUNET makes available to customers a variety of products and services,
including Web server hosting and content development services, client software
and security products and training, all of which can be integrated by UUNET
through its network integration and consulting services. UUNET enables
Internet users to purchase
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access, applications and services, including integration services, through a
single source. UUNET's products and services are supported by a technical
staff that is highly experienced in Internet operations and services. UUNET's
network operations center monitors traffic across UUNET's network 24 hours per
day, seven days per week.
THE UUNET STRATEGY
UUNET's objective is to be the leading supplier worldwide to businesses and
professionals of complete communications solutions using Internet-related
technologies. Certain of the statements in the section captioned "BUSINESS OF
UUNET" are based upon management's current expectations. These statements are
forward looking and actual results may differ materially. UUNET intends to
achieve its objective by focusing on five key elements:
Expand Operations Worldwide. The rate of growth of Internet use worldwide
has accelerated in the past year. In order to take advantage of the worldwide
growth of Internet use and accelerate UUNET's international expansion, UUNET
significantly expanded its operations outside the U.S. during 1995. In
November 1995, UUNET acquired UUNET PIPEX, the largest Internet access
provider in the United Kingdom. In January 1996, UUNET agreed to increase its
equity ownership of UUNET Canada to 51 percent. In February 1996, UUNET
completed the acquisition of 40 percent of the shares of EUnet Germany, and on
April 1, 1996, UUNET acquired the additional interest in UUNET Canada. UUNET
intends to accelerate its geographic expansion and expects to pursue various
partnering arrangements to facilitate this expansion, including joint
ventures, acquisitions and commercial arrangements. UUNET believes that these
acquisitions are important steps in its worldwide expansion strategy.
Expand High Performance Infrastructure. UUNET is continuing to expand its
high performance network infrastructure which is designed to ensure
reliability, availability and higher capacity. UUNET's network infrastructure
includes 14 international gateway hubs and, following the acquisition of UUNET
PIPEX, a 40 percent interest in EUnet Germany, and an additional 31 percent
interest in UUNET Canada, allowed local access to users in 543 POPs, including
288 outside the U.S. as of April 1, 1996. UUNET plans to continue to expand
its network infrastructure to allow local access to users in numerous
additional POPs worldwide, in part, by obtaining significant undersea fiber
optic cable capacity. UUNET believes this added capacity will significantly
decrease UUNET's per unit cost of bandwidth and that revenues from customers,
including significant revenues from Microsoft, will substantially support the
expense of this enhancement and expansion of the network infrastructure.
Increase Focused Marketing Efforts. UUNET is continuing to expand its sales,
marketing and advertising efforts to reach large commercial accounts,
professionals and resellers more effectively. UUNET also intends to coordinate
its and its subsidiaries' focus on worldwide brand recognition and awareness
of their product and service offerings.
Expand and Integrate Product and Service Offerings. UUNET is continuing to
integrate and further expand its suite of value-added products and services to
provide customers with a complete communications solution using Internet
technologies, including enhanced security products and consulting services,
additional access and software options, and a broader range of Web server
hosting and content development services.
Build and Leverage Relationships with Strategic Partners. UUNET is
continuing to build and leverage strategic relationships with providers of on-
line services, Internet applications, and other products and services in
targeted industries. UUNET expects these relationships to help increase its
geographic coverage and network capacity, expand its product and service
offerings, and more effectively reach its targeted markets.
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INTERNATIONAL EXPANSION PLAN
UUNET initiated a major international expansion in 1995. UUNET has
established international gateway hubs in 14 countries (Australia, Belgium,
Canada, France, Germany, Hong Kong, Italy, Japan, The Netherlands, Singapore,
Spain, Sweden, Switzerland, the United Kingdom), which provide service in
seven cities in Canada (Calgary, Edmonton, Montreal, Ottawa, Toronto,
Vancouver, Winnipeg); nine cities in Europe (Amsterdam, Brussels, Cologne,
London, Madrid, Milan, Paris, Stockholm, Zurich); three cities in Asia (Hong
Kong, Singapore, Tokyo); and in Sydney, Australia. These hubs concentrate and
route data traffic from UUNET's dedicated and dial-up customers as well as
from the dial-up customers of The Microsoft Network. Microsoft has agreed to
pay an operating fee and a management fee in connection with these hubs. See
"--Microsoft Relationship." See Note 8 of the Notes to UUNET Consolidated
Financial Statements for results of operations and identifiable assets
attributable to the geographic regions in which UUNET engages in business.
UUNET intends to accelerate the international expansion begun in 1995 by
pursuing several avenues, including acquiring other Internet services
providers and complementary businesses and technologies in various target
countries and obtaining international telecommunications facilities, including
significant undersea fiber optic cable capacity. See "--Network
Infrastructure."
UUNET PIPEX
In November 1995, UUNET acquired UUNET PIPEX for an aggregate of 3,338,009
shares of UUNET Common Stock. UUNET PIPEX is the largest Internet access
provider in the United Kingdom. UUNET PIPEX conducts business principally in
the United Kingdom and has investments and other relationships with Internet
services providers operating in selected countries in Europe and Africa. UUNET
PIPEX offers both dedicated and dial-up Internet access and a range of
networking software based on the TCP/IP protocols.
UUNET PIPEX's network is an international data network service which allows
its subscribers to connect to the Internet and each other. This network
infrastructure currently allows local access from 86 points of presence in the
United Kingdom and, through its associated entities, in 21 other countries
including Belgium, the Czech Republic, France, Germany, Hungary, Portugal,
South Africa and Spain. UUNET PIPEX's backbone network infrastructure
currently consists primarily of Cisco 7000 routers interconnected with 2 Mbps
lines and an aggregate of 6 Mbps of trans-Atlantic bandwidth. UUNET PIPEX
connects to more than 19 other service providers throughout the world. UUNET
PIPEX estimates it had approximately 8,100 business and professional accounts
as of March 31, 1996.
As part of providing comprehensive Internet solutions, UUNET PIPEX resells
Internet-related software to its customers including software developed by FTP
Software, Inc., Sun Technology Enterprises, Inc., Netscape Communications
Corporation and others, as well as Mail-It, UUNET PIPEX's own electronic mail
package for Microsoft Windows users.
As of March 31, 1996, UUNET PIPEX had 271 employees, including 133 in sales
and marketing, 106 in network operations and technical support and 32 in
general and administrative functions.
UUNET PIPEX's network operations center in Cambridge, England offers
technical support 24 hours per day seven days per week, which after normal
business hours, is provided on an on-call basis.
UUNET PIPEX's principal offices are located in Cambridge, England, where it
currently leases approximately 25,500 square feet under a sublease that
terminates in December 1996. In January 1996, UUNET PIPEX entered into a lease
for 45,000 square feet in a new building in Cambridge and has begun to
consolidate its operations and move into this facility.
EUnet Germany
In December 1995, UUNET agreed to acquire a 40 percent equity ownership
interest in EUnet Germany, a leading Internet service provider in Germany; the
transaction closed in February 1996. UUNET paid $1.6 million
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in cash for its interest in EUnet Germany. EUnet Germany provides a
comprehensive range of Internet access options, applications and consulting
services to businesses, professionals, and, since March 1995, to consumers.
EUnet Germany's revenues are primarily derived from recurring monthly
connectivity fees, installation and startup charges, and sales of related
equipment, applications and services. EUnet Germany has made significant
investments in developing and expanding its network infrastructure which,
prior to January 1995, were primarily funded by cash flow from operations.
After receiving an equity investment in January 1995, EUnet Germany
accelerated the expansion of its network infrastructure and internal
operations. EUnet Germany hired additional network engineers and senior
managers, greatly increased its network operations workforce, significantly
enhanced its product and services portfolio, and upgraded its network
infrastructure. In anticipation of future growth, EUnet Germany expects to
continue to make significant investments in its network infrastructure and its
corporate operations throughout 1996. EUnet Germany's unaudited results for
the fiscal year ended December 31, 1995 included a loss of approximately $3.8
million on revenues of approximately $8.6 million; EUnet Germany expects to
continue to incur operating losses during 1996, and UUNET, through a
combination of loans and capital contributions, will fund UUNET's share of
such losses.
EUnet Germany operated as of April 1, 1996, 29 POPs on a 2 Mbps leased-line
backbone network covering nearly 80 percent of Germany. Each POP consists of a
Cisco 4500 router and an Ascend MAX 4000 HP with Digital Modem Cards, and is
fully controlled by EUnet Germany. Each POP supports dial-up, ISDN and leased
line connections up to 2 Mbps. EUnet Germany also supports dial-up connections
using public X.25 service. A support hotline is available from 8:00 a.m. to
6:00 p.m. from Monday through Friday for customer calls. At other times the
network operations personnel can be paged in case of any problems. The network
is monitored on a 24 hour basis by on-call personnel.
EUnet Germany provides a comprehensive range of Internet access services,
applications and consulting services ranging from simple dial-up Internet
access, leased line Internet access, Closed-User-Group Networks to special
consulting services, including Web hosting. EUnet Germany's customers include,
among others, several technology companies, banks, municipalities, and
publishers. As of March 31, 1996, EUnet Germany had approximately 3,600
accounts.
EUnet Germany leases approximately 1,220 square meters in Dortmund. As of
March 31, 1996, EUnet Germany employed 92 people, with 9 in management, 26 in
marketing and sales, 14 in administration and 43 in network operations.
UUNET Canada
In January 1996, UUNET agreed to increase its equity ownership of UUNET
Canada from 20 percent to 51 percent and enter into certain cooperative
commercial arrangements with UUNET Canada. The transaction closed on April 1,
1996. UUNET issued 27,079 shares of UUNET Common Stock and paid approximately
$3.6 million in cash for the additional 31 percent interest in UUNET Canada.
UUNET Canada has provided Internet services in Canada since July 1991 and has
been associated with UUNET since its formation.
UUNET Canada allows local access to users in 13 Canadian POPs, with all
sites using primarily Cisco and Ascend equipment, and offers dedicated ISDN
access and leased lines. UUNET Canada's network infrastructure currently
consists of a combination of T-1, fractional T-1 and frame relay links. As of
March 31, 1996, UUNET Canada had approximately 550 business and professional
customers. UUNET Canada incurred an operating loss of approximately $75,000
for its fiscal year ended July 31, 1995 on revenues of approximately $1.6
million. UUNET Canada's facilities include 10,700 square feet in Toronto,
Canada occupied pursuant to a lease expiring in 2005.
As of March 31, 1996, UUNET Canada had 31 employees, with 3 in management, 7
in marketing and sales, 4 in administration and 17 in network operations.
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NETWORK INFRASTRUCTURE
UUNET's network infrastructure is based on its own 45 Mbps, DS-3 leased
line, frame relay-based network of Cascade switches supporting Cisco 7000
routers. This network infrastructure enables customers to access the Internet
through dedicated lines or by placing a local telephone call (dial-up) through
a modem to the nearest UUNET POP. Once connected, the customer's traffic is
routed through UUNET's network infrastructure to the desired Internet
location, whether on UUNET's network or elsewhere on the Internet.
UUNET continues to upgrade its network infrastructure in response to the
increase in the number of customers purchasing UUNET's Internet access
services, particularly UUNET's high-speed T-1 and 56 Kbps access options.
UUNET believes that this network infrastructure provides the higher bandwidth,
increased throughput and reliability, capacity and a geographic coverage UUNET
believes is required by businesses and professionals using the Internet at a
lower cost than its previous infrastructure. UUNET's network infrastructure,
following the acquisition of UUNET PIPEX, a 40 percent interest in EUnet
Germany, and an additional 31 percent interest in UUNET Canada, allows local
access to users in 543 POPs, including 288 outside of the U.S. as of April 1,
1996.
Dial-up customers call into the ISDN/28.8 access router via ISDN or analog
modem service provided by their local exchange carrier. The ISDN/28.8 access
router relays the data to the routing engine for further processing. Dedicated
customers are connected directly to the customer access switch, which relays
the data to the routing engine. The routing engine relays the data to the
appropriate backbone switch for delivery to the destination. The DS-3
bandwidth manager is used to connect the DS-3 frame-relay circuits from other
hubs to the local backbone switch.
UUNET has agreements with WorldCom and MFS to provide UUNET with data
communications facilities and capacity and physical space for network
equipment domestically. UUNET has received substantial discounts in exchange
for minimum usage commitments. Since entering into these agreements, UUNET has
regularly met the minimum usage requirements and has been eligible for the
discounts. Under the agreements WorldCom has committed to provide physical
space in the locations necessary to service the cities where UUNET expects to
provide local access and has agreed to provide data communications facilities
serving those cities, as required. UUNET has agreements with GEIS and Cable
and Wireless to provide UUNET with data communications facilities and capacity
and physical space for network equipment internationally.
The routers used in UUNET's network infrastructure are supplied solely by
Cisco. In addition, the switches, modems and bandwidth managers primarily used
in UUNET's network infrastructure are supplied solely by Cascade, Ascend and
OnStream, respectively. UUNET purchases these components pursuant to purchase
orders placed from time to time, does not carry significant inventories of
these components and has no guaranteed supply arrangements.
UUNET intends to obtain significant fiber optic cable capacity in order to
facilitate the enhancement and expansion of its international network backbone
infrastructure. The capacity on each route would be 45 Mbps DS-3 where
available and 34 Mbps E-3 otherwise. UUNET currently leases capacity on
certain of these cable routes and believes that obtaining additional capacity
through one or more long-term arrangements would improve high-speed network
performance and would provide the additional capacity required to meet market
growth, while significantly reducing UUNET's per unit cost of providing
Internet access internationally. UUNET believes that revenues from customers,
including significant revenues from Microsoft, will substantially support this
enhancement and expansion of its network infrastructure.
UUNET has initiated the process of obtaining this initial capacity, which
will take at least several months to complete. UUNET intends to deploy a
significant portion of the capacity during 1996 and the remainder in 1997, but
the timing may vary depending upon availability and cost of capacity and other
factors. UUNET will need a partner, such as the local Postal Telephone and
Telegraph ("PTT") company, in each foreign jurisdiction where a cable
terminates. UUNET has initiated negotiations with various potential partners
who have indicated interest in working with UUNET, and to date, UUNET has
entered into an agreement with one such partner. In
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Australia, UUNET has entered into an arrangement with Optus Networks Pty
Limited ("Optus") to obtain the desired capacity. UUNET and Optus share the
capital expenditure requirements equally, and UUNET has an option to acquire
Optus' interest after three years. There can be no assurance that the Optus
arrangement will be successful, that UUNET will obtain the required assistance
of additional parties or that UUNET will be able to acquire the capacity as
currently contemplated or that its needs or resources will not dictate a
change in the capacity desired. It is anticipated that in light of the
proposed Merger, UUNET's requirements relating to fiber optic cable capacity,
both in the United States and internationally, will be refined as a result of
the anticipated benefits from the Merger.
PRODUCTS AND SERVICES
UUNET provides its customers with a comprehensive range of Internet access
options, applications and consulting services. UUNET believes that over time
its strategic focus on business applications for the Internet will play an
increasing role in differentiating UUNET from its competitors.
Access Options
The following tables describe UUNET's primary Internet access options as of
March 31, 1996.
Dedicated Internet Access
<TABLE>
<CAPTION>
SERVICE TYPE CURRENT LIST PRICE SUMMARY DESCRIPTION
- ------------ -------------------------- ----------------------------
<S> <C> <C>
High Bandwidth $1,500-$49,000/month; Very high speed service for
$5,000-$6,000 startup fee very large businesses or
organizations with demanding
throughput requirements
T-1 $995-$3,000/month; High speed service for large
$3,000-$5,000 startup fee businesses or organizations
with significant throughput
requirements
Wholesale $1,250-$49,000/month; High speed service for those
$4,000-$12,000 startup fee intending to resell Internet
access
56 Kbps $595-$695/month; Medium speed service via
$495-$795 startup fee dedicated lines or frame-
relay for small to mid-size
business
Dial-up Internet Access
<CAPTION>
SERVICE TYPE CURRENT LIST PRICE SUMMARY DESCRIPTION
- ------------ -------------------------- ----------------------------
<S> <C> <C>
Internet 9 to 5 $70--$395/month; High speed dial-up access,
$195--$395 startup fee plus Performance
Technology's Instant
Internet LAN to Internet
connectivity hardware and
software
AlterDial $30/month (includes 25 Low speed access for
hours/month); occasional use
$2.00/hour for additional
usage; $25 startup fee
ISDN Workgroup $295--$495/month; Medium speed access for very
$395--$495 startup fee small businesses or LAN-
based workgroups
UUCP $36/month base fee, plus UUCP protocol based service
$2.60--$16/hour for those only requiring
electronic mail and news
access
</TABLE>
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These Internet access options are sold in the U.S. and in many foreign
countries for U.S. Internet access. They are also offered under varying names
and different prices in the United Kingdom and Germany and also will be
offered in Canada. Due to various factors, such as available
telecommunications technology, foreign government regulation, and market
demand, the service options offered outside of the U.S. by UUNET or its
subsidiaries vary as to speed, price and suitability for various purposes.
Security Products and Services
UUNET addresses the confidentiality and security concerns of its customers
by offering the following security products and services. UUNET intends to
continue to expand its portfolio of security-related products to meet its
customers needs.
LanGuardian. LanGuardian, a UUNET-developed hardware security product, is
designed to encrypt and decrypt selected data as it leaves and arrives at a
site in order to render communications unintelligible to unauthorized readers
while it is being transmitted across the Internet. A LanGuardian must be
installed at each site sending and receiving encrypted data. LanGuardian
currently sells for between $5,000 and $8,000 depending upon the model
purchased.
Gauntlet. Gauntlet is resold by UUNET under license from Trusted Information
Systems, Inc. Gauntlet is a firewall software product (a system placed between
networks designed to prevent unauthorized access through the Internet to a
customer's network and proprietary data). Gauntlet typically sells for
$15,000, including hardware and installation.
Consulting Services. UUNET performs security audits of customers' facilities
for a daily fee.
Web Services
UUNET makes various services available to customers, including the design,
development, hosting and maintenance of home pages and content on the World
Wide Web. UUNET will install and maintain home pages on a UUNET server for
customers concerned with the cost, difficulty or security of maintaining home
pages on their own network. Customers may choose from a standard hosting
service, which places customers' information on a server connected to UUNET's
network at 1.5 Mbps, or a premium hosting service, which places their
information on a server connected to UUNET's backbone via a 10 Mbps link.
Pricing ranges from $300- $5,400 per month. In January 1996, UUNET introduced
the Secure Web hosting service, which supports encryption software designed to
provide complete end-to-end security for commercial and other confidential
applications. UUNET also offers enhanced Web reporting services and shared
file transfer protocol ("FTP") site hosting, allowing users to offer FTP
download services from UUNET facilities.
Other Products and Services
UUNET provides additional related products and services that are often
required by UUNET's business customers, including hardware, such as network
equipment from Cisco and Ascend and Instant Internet from Performance
Technology; digital modems and cabling; software, such as Chameleon from
NetManage and Internet in a Box from Spry (a division of CompuServe);
tutorials, such as seminars to educate current and potential customers about
Internet access options and applications available from UUNET; and various
consulting services, such as integrating various Internet access services and
applications.
MICROSOFT RELATIONSHIP
In December 1994, UUNET and Microsoft entered into a strategic relationship
for the development, operation and maintenance of a large-scale high speed
dial-up and ISDN TCP/IP access network which is the primary Internet dial-up
network and infrastructure for Microsoft, including The Microsoft Network.
This relationship provides UUNET with the opportunity to accelerate the
expansion of the geographic coverage and capacity of its network
infrastructure domestically and internationally. The access network is an
integral part of
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the dial-up and ISDN component of UUNET's upgraded network infrastructure. As
a result, the geographic coverage of the access network is the same as that of
UUNET's overall network infrastructure.
In the U.S., UUNET has available 40 percent of the access network's dial-up
capacity between 6:00 a.m. and 6:00 p.m. on business days to sell to its other
customers, and 60 percent is available to Microsoft. At all other times
(nights, weekends and holidays), 15 percent of the access network's dial-up
capacity is available to UUNET and 85 percent is available to Microsoft.
Outside of the U.S., UUNET's share of the capacity varies on a country by
country basis.
Microsoft and UUNET have agreed upon the schedule for deployment of the
network, and Microsoft is obligated to pay an operating fee equal to the cost
of constructing, maintaining and operating the U.S. and Canadian dial-up
network and the first 14 international gateway hubs and to pay a management
fee regardless of any delay by Microsoft in its use of the network. The terms
of construction, maintenance and operation (including the allocation of costs
and the payment of fees) of international gateway hubs beyond the initial 14
such hubs are subject to future agreement between Microsoft and UUNET. UUNET
expects that the terms of any funding or revenues from Microsoft relating to
additional international hubs, if any, will be different from those of the
Microsoft Agreement. In addition, UUNET and Microsoft have an understanding
that providers of Internet access services (such as the PTTs) will begin to
bear certain of the costs of the 14 international gateway hubs. As this
begins, Microsoft's share of such costs will decrease, and UUNET will become
more dependent upon such providers and other customers for revenues to support
such costs. Microsoft continues to evolve its international strategy for The
Microsoft Network, and its final strategy may differ materially from that
originally anticipated.
Microsoft agreed to lend UUNET up to $26.0 million to finance the purchase
of equipment used in construction of the network, which amount was increased
subsequent to March 31, 1996, by $22.2 million to a total of $48.2 million;
$3.2 million remained available for borrowing as of March 31, 1996. Principal
and interest at the greater of 7.74 percent per annum or the applicable
federal rate in effect from time to time (5.34 percent at March 31, 1996) are
payable by UUNET quarterly over five years on each advance under the loan.
Interest on the loan and depreciation on the equipment purchased with the loan
proceeds are included in the operating fee that will be paid by Microsoft.
UUNET owns the equipment and Microsoft retains a security interest in the
network equipment and in UUNET's revenues from the network. Depending upon
UUNET's success in meeting certain operational criteria agreed upon between
UUNET and Microsoft, the management fee payable by Microsoft to UUNET varies
between six percent and ten percent of the operating costs to be funded by
Microsoft (exclusive of interest on the loan) and may be temporarily suspended
in the event of a sustained operational failure of the network. Revenues from
Microsoft accounted for approximately 20, 34 and 37 percent of UUNET's
consolidated revenues for the year ended December 31, 1995 and the quarters
ended December 31, 1995 and March 31, 1996, respectively.
As part of the relationship, Microsoft purchased 1,664,000 shares of UUNET
Series D Preferred Stock at $2.34 per share and, for no separate
consideration, a warrant to purchase 2,500,000 shares of UUNET Series E
Preferred Stock with an exercise price of $5.00 per share which Microsoft
exercised immediately prior to the closing of UUNET's initial public offering.
The preferred stock converted to UUNET Common Stock upon the initial public
offering. Microsoft owns approximately 13 percent of outstanding UUNET Common
Stock.
UUNET has established a separate division to deploy and operate the
Microsoft dial-up access network. All division employees are UUNET employees,
and the manager of the division, David R. Boast, is an officer of UUNET. The
activities of the division are coordinated and directed by a Management
Committee comprised of two UUNET representatives and two Microsoft
representatives, one of whom is the Management Committee Chairperson. Three of
the four Management Committee members must approve any actions taken and
decisions made by the Management Committee. The Management Committee has
authority over certain key matters relating to the Microsoft dial-up network,
including certain personnel decisions, conduct of any third-party litigation,
operating budgets and certain technical specifications.
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The network-related agreement with Microsoft has an initial term ending in
March 2000, renewable by Microsoft for an additional five years. After
September 1996, Microsoft may terminate the agreement if UUNET breaches
certain material terms of the agreement and is unable to cure, thereby causing
a sustained operational failure of the dial-up access network. In addition,
Microsoft may terminate the agreement if, prior to March 2000, certain
competitors of Microsoft acquire majority ownership of UUNET. Microsoft has a
right of first refusal to purchase majority ownership of UUNET or
substantially all of UUNET's assets on the same terms as may be proposed in
any unsolicited offer made to UUNET. Microsoft has waived these rights with
respect to the Merger. In addition, Microsoft has the right to make an offer
to UUNET if UUNET intends to seek offers from multiple parties with respect to
any such transaction. The terms of the agreement with Microsoft restrict
UUNET's ability, prior to March 1997, to enter into similar agreements for the
deployment of other large-scale dial-up networks with, among others, on-line
services providers intending to deploy a domestic or international on-line
service. UUNET does not believe that the impact of those restrictions will
have a material effect on UUNET's business as UUNET plans to focus on the
domestic and international deployment, operation and expansion of the
Microsoft dial-up access network and UUNET's core business (the provision of
Internet access options, applications and consulting services).
PRIVATE LABEL NETWORKS AND OTHER RELATIONSHIPS
UUNET has entered into agreements with Digital Exchange Inc., Earthlink
Network, Inc., Global Village Communication, Inc. and The "Well" to provide
Internet access for these entities' networks. UUNET also has various
distribution, reseller and other arrangements with a number of on-line
services providers and applications developers, including Advantis,
CompuServe, FTP Software, Inc., NetManage, Netscape Communications
Corporation, Premenos and Spry. UUNET is seeking and negotiating additional
arrangements with other applications developers, providers of related services
and targeted industry groups. There can be no assurance that UUNET will be
able to enter into any such arrangements or that any such arrangements will be
successful.
CUSTOMERS
UUNET's customers are businesses and professionals in many lines of
business. UUNET estimates its customer base includes over 22,000 business and
professional accounts as of March 31, 1996, compared to over 4,000 accounts as
of March 31, 1995. In 1995, no customer accounted for more than one percent of
UUNET's Internet revenues, other than Microsoft. See "Microsoft Relationship."
The following is a list of certain UUNET customers in each of 12 selected
industry groups to which UUNET billed monthly service fees in excess of $1,000
for Internet access in March 1996.
Telecommunications Newspapers
AT&T Chicago Tribune Co.
Bell Atlantic Corporation Gannett Co., Inc.
SkyTel Communications Corp. Los Angeles Times
Southwestern Bell Corporation New York Times Co.
US West, Inc. Newhouse Newspaper Metro-Suburbia,
Inc.
On-line & Information Services
CompuServe Computer Systems & Services
Dow Jones & Co., Inc. Advantis
EarthLink Network, Inc. Digital Equipment Corp.
General Electric Information Services Electronic Data Systems Corporation
Reuters Holdings PLC IBM
Intel Corp.
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Financial Services Banking
American Express Co. Citibank
Chubb Group Citicorp
D.E. Shaw & Co. Credit Suisse
Morgan Stanley & Co. Incorporated Federal Reserve Bank of New York
Nomura Securities International, Inc. Swiss Bank Corporation
Computer Software Publishing
Adobe Systems, Inc. Addison-Wesley Publishing Company
Berkeley Software Design, Inc. Encyclopedia Britannica, Inc.
Chorus Systems Inc. Conde Nast Publications Inc.
Microsoft Wiley & Sons, Inc.
Trusted Information Systems, Inc. Time, Inc.
Manufacturing
Angus Chemical Co. Government
Cummins Engine Company, Inc. Federal Reserve Board
Deere & Co. Occupational Safety and Health
Lockheed Martin Corp. Administration
LTX Corp. Pacific States Marine Fisheries
Commission
Social Security Administration
Utilities United Nations
Boston Edison Co.
Electric Power Research Institute Other Services
Houston Lighting & Power Co. DHL Worldwide Express
Pacific Power & Light Company Federal Home Loan Mortgage
Suburban Cablevision Corporation
Kaiser Permanente
Pizza Hut Worldwide
NETWORK OPERATIONS AND TECHNICAL SUPPORT Student Loan Marketing Association
UUNET believes that effective network and technical support are important
criteria by which commercial users select Internet access providers and has
dedicated substantial resources to building a high quality support
infrastructure. As of March 31, 1996, UUNET had a network operations group in
Fairfax, Virginia consisting of 168 people, including 25 providing technical
support. UUNET's network operations personnel are responsible for continuously
monitoring traffic across UUNET's network 24 hours per day, seven days per
week in order to maintain the reliability of UUNET's network infrastructure.
UUNET's technical support personnel work to find solutions for customers
experiencing difficulties with Internet applications. These personnel
currently are available from 8:00 a.m. to 8:00 p.m., Eastern time, Monday
through Friday. At other times, UUNET's network operations personnel respond
to technical support requests and, if needed, can page on-call technical
support personnel.
UUNET plans to establish one or more additional network operations centers
to support the expansion of its network infrastructure, including one on the
west coast of the United States, and to expand its technical support
availability to 24 hours per day, seven days per week. UUNET is hiring and
training additional staff to provide improved customer support. UUNET's rapid
growth at times has strained the resources of its technical support
capability. For example, customers calling in had been unable to obtain
assistance within a commercially reasonable timeframe. Failure to provide
sufficient support could have a material adverse effect on UUNET's business,
financial condition and results of operations.
SALES AND MARKETING
As of March 31, 1996, UUNET employed 141 people in the U.S. in sales and
marketing. To date, UUNET has sold its Internet access and applications
products and services primarily through its direct telephone sales
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force. Call activity is generated in response to a variety of promotional
programs, including advertising in general business and specialty periodicals,
participation in industry shows, and public relations.
In January 1995, UUNET expanded its sales channels to coincide more closely
with UUNET's enhanced range of products and services and business customer
orientation by adding a Major Accounts sales group, a Web Services sales force
and a Channel Development group. Each of these groups focuses on a different
segment of customers.
The Major Accounts group focuses on selling products and services to larger
businesses with complex Internet needs. Major accounts generally require
installations at multiple sites, security and consulting services,
comprehensive responses to requests for proposals and on-site sales and
support calls. UUNET believes that major accounts generally will require
greater and more specialized attention than can be provided by a telephone
sales representative due to the variety and number of services demanded.
The Web Services sales force focuses primarily on selling Internet access
services in conjunction with UUNET's Web server hosting services and third
party Web site development services.
The Channel Development group focuses primarily on developing and
maintaining relationships with LAN integrators, vertical solution providers,
hardware and software suppliers and other Internet access providers. UUNET
maintains ongoing relationships with a number of industry associations,
hardware and software resellers and marketing partners. The Channel
Development group is also responsible for maintaining relationships with
certain of UUNET's key accounts.
UUNET has increased its marketing and advertising efforts significantly in
1996. UUNET has expanded the number and type of publications in which it will
place new advertisements and has initiated advertising on cable television.
UUNET's current sales and marketing efforts also include the enhancement and
expansion of its suite of value-added products and services to keep pace with
changing customer demand.
COMPETITION
The market for data communications services, including Internet access and
on-line services, is extremely competitive. There are no substantial barriers
to entry, and UUNET expects that competition will intensify in the future.
UUNET believes that its ability to compete successfully depends on a number of
factors, including market presence; the ability to execute a strategy of rapid
expansion; the capacity, reliability and security of its network
infrastructure; ease of access to and navigation of the Internet; the pricing
policies of its competitors and suppliers; the timing of the introduction of
new products and services by UUNET and its competitors; UUNET's ability to
support industry standards; and industry and general economic trends. UUNET's
success in this market will depend heavily upon its ability to provide high
quality Internet connectivity and value-added Internet services at competitive
prices.
UUNET's current and potential competitors headquartered in the United States
generally may be divided into the following three groups: (1)
telecommunications companies, such as AT&T, MCI, MFS, Sprint, WorldCom, BOCs
and @Home; (2) other Internet access providers, such as BBN, NETCOM, PSI, and
other national and regional providers; and (3) on-line services providers,
such as America Online, CompuServe, Intuit Inc., Microsoft, and Prodigy. Many
of these competitors have greater market presence, engineering and marketing
capabilities, and financial, technological and personnel resources than those
available to UUNET. As a result, they may be able to develop and expand their
communications and network infrastructures more quickly, adapt more swiftly to
new or emerging technologies and changes in customer requirements, take
advantage of acquisition and other opportunities more readily, and devote
greater resources to the marketing and sale of their services than can UUNET.
UUNET expects that all of the major on-line services providers will expand
their current services to compete fully in the Internet connectivity market.
In addition, UUNET believes that new competitors, including
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large computer hardware, software, media and other technology and
telecommunications companies, will enter the Internet connectivity market,
resulting in even greater competition for UUNET. Certain companies, including
America Online, AT&T, BBN and PSI, have obtained or expanded their Internet
access products and services as a result of acquisitions and strategic
investments. Such acquisitions may permit UUNET's competitors to devote
greater resources to the development and marketing of existing competitive
products and services. MFS and UUNET expect these acquisitions and strategic
investments to increase, thus creating significant new larger competitors to
MFS and UUNET. In addition, the ability of some of UUNET's competitors to
bundle other services and products with Internet connectivity services, such
as the Internet service offerings recently announced by AT&T and MCI, could
place UUNET at a competitive disadvantage.
As UUNET continues to expand its operations outside of the United States, it
will encounter competition from companies whose operating styles are
substantially different from those that it usually experiences. UUNET will be
forced to compete with and buy services from government owned or subsidized
telecommunications providers, some of which may enjoy an absolute monopoly on
telecommunications services essential to UUNET's business. There can be no
assurance that UUNET will be able to purchase such services at a reasonable
price or at all. For example, in the United Kingdom, UUNET PIPEX competes
directly with: (1) telecommunications companies, such as BT, Cable and
Wireless, Mercury and others; (2) other Internet access providers, such as
Demon and EUnet, (3) on-line services providers, such as CompuServe, America
Online/Bertelsmann, Microsoft and AT&T. In addition to the risks associated
with UUNET's previously described competitors, these foreign competitors may
possess a better understanding of their local markets and may have better
working relationships with local telecommunications companies. There can be no
assurance that UUNET can obtain similar levels of local knowledge and failure
to obtain that knowledge could place UUNET at a serious competitive
disadvantage.
As a result of increased competition in the industry, UUNET expects to
continue to encounter significant pricing pressure, which in turn could result
in significant reductions in the average selling price of UUNET's services.
For example, certain of UUNET's competitors which are telecommunications
companies, including AT&T and MCI, provide customers with low priced or free
Internet access services in connection with the purchase of telephone or other
communications services, significantly increasing price pressures on UUNET.
UUNET has in the past reduced prices on certain of its Internet access options
and may do so in the future. There can be no assurance that UUNET will be able
to offset the effects of any such price reductions through an increase in the
number of its customers, higher revenue from enhanced services, cost
reductions or otherwise. In addition, UUNET believes that the data
communications business, and in particular Internet access and on-line
services businesses, are likely to encounter consolidation in the near future,
which could result in increased price and other competition in the industry.
Increased price or other competition could result in erosion of UUNET's market
share and could have a material adverse effect on UUNET's business, financial
condition and results of operations. There can be no assurance that UUNET will
have the financial resources, technical expertise, marketing and support
capabilities or expansion and acquisition capabilities to continue to compete
successfully.
PROPRIETARY TECHNOLOGY
UUNET principally relies upon copyright, trade secret and contract law to
protect its proprietary technology. It may be possible for a third party to
copy or otherwise obtain and use UUNET's products or technology without
authorization, or to develop similar technology independently and there can be
no assurance that such laws are adequate to protect UUNET's proprietary
technology. In addition, UUNET's products may be licensed in foreign countries
and the laws of foreign countries treat the protection of proprietary rights
differently from, and may not protect UUNET's proprietary rights to the same
extent as do, laws in the United States.
GOVERNMENT REGULATION
UUNET is not currently subject to direct regulation by the FCC or any other
U.S. agency, other than regulation applicable to businesses generally. The FCC
recently requested comments on a petition filed by America's Carriers
Telecommunication Association which requests that the FCC regulate certain
voice
78
<PAGE>
transmission on the Internet as telecommunications services. Changes in the
regulatory environment relating to the telecommunications or Internet access
industry could have an adverse effect on UUNET's business. The Telecom Act
enacted federal telecommunications legislation may permit telecommunications
companies, BOCs or others to increase the scope or reduce the cost of their
Internet access services. UUNET cannot predict the effect that the Telecom Act
or any future legislation, regulation or regulatory changes may have on its
business.
The Telecom Act prohibits and imposes liability for using an interactive
computer service for transmitting certain types of information and content. In
addition, numerous states have adopted or are currently considering similar
types of legislation. The imposition upon Internet access providers or Web
hosting sites of liability for materials carried on or disseminated through
their systems could require UUNET to implement measures to reduce its exposure
to such liability, which may require the expenditure of substantial resources
or the discontinuation of certain product or service offerings. UUNET believes
that it is currently unsettled whether the Telecom Act prohibits and imposes
liability for any services provided by UUNET should the content or information
transmitted be subject to the statute.
The law relating to the liability of on-line services providers and Internet
access providers in relation to information carried, disseminated or hosted
also is being developed in the United Kingdom and other jurisdictions. The
scope of authority of various regulatory bodies in relation to on-line
services is at present uncertain. OFTEL in the United Kingdom has recently
published a consultative document setting out a number of issues for
discussion, including the roles of traditional telecommunications and
broadcasting regulators with respect to on-line services. The Securities
Investment Board is investigating the status of on-line services and the
transmission of investment information over networks controlled by access
providers. Such transmissions may make the access provider concerned liable
for any infringement of securities and other financial services legislation
and regulations. Decisions regarding regulation, enforcement, content
liability and the availability of Internet access in other countries may
significantly affect the ability to offer certain services worldwide and the
development and profitability of companies offering Internet and on-line
services in the future. For example, CompuServe recently removed certain
content from its services worldwide in reaction to law enforcement activities
in Germany, and it has been reported that an Internet access provider in
Germany has been advised by prosecutors that it may have liability for
disseminating neo-Nazi writings by providing access to the Internet where
these materials are available.
UUNET's current international expansion plans are dependent upon using U.S.-
developed technology in foreign countries. Export of technology from the
United States or import into a foreign country may be prohibited or may be
subject to duties or other fees of possibly punitive scale, delays from
customs brokers or government agencies, and regulatory or similar issues.
Export from the United States of encryption technology suitable for commercial
transactions is currently severely restricted and in some countries use of
such technology is illegal.
PROPERTY
UUNET's offices are located in Fairfax, Virginia, where as of March 31, 1996
UUNET leased approximately 68,800 square feet under a sublease that expires in
1999 and approximately 4,500 square feet under a sublease that expires in
2001. In April 1996, UUNET leased approximately 71,300 additional square feet
in Fairfax, Virginia under a lease that expires in 2,006. UUNET also leases
space (typically less than 500 square feet) in various geographic areas to
house the telecommunications equipment for each of its POPs.
EMPLOYEES
As of March 31, 1996, UUNET employed in the United States 351 persons,
including 141 in sales and marketing, 168 in network operations (including 25
in technical support) and 42 in general and administrative functions. None of
UUNET's employees is represented by a labor union, and UUNET considers its
employee relations to be good. See "--International Expansion Plan" for a
description of the employees of UUNET's international subsidiaries.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF UUNET
SELECTED FINANCIAL DATA
The selected consolidated financial data for each of the three years in the
period ended December 31, 1995, and as of December 31, 1994 and 1995, have
been derived from UUNET's audited consolidated financial statements. The
selected consolidated financial data for the years ended December 31, 1991 and
1992, and as of December 31, 1991, 1992 and 1993, have been derived from
audited financial statements of UUNET and UUNET PIPEX. The selected
consolidated financial data presented below for the three months ended March
31, 1995 and 1996, and as of March 31, 1996, have been derived from unaudited
consolidated financial statements of UUNET. In the opinion of UUNET's
management, the unaudited financial statements have been prepared on the same
basis as the audited consolidated financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
a fair presentation of the financial position and the results of operations
for these periods. Operating results for the three months ended March 31, 1996
are not necessarily indicative of the results that may be expected for any
future period. The selected consolidated financial data set forth below should
be read in conjunction with "UUNET MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and the UUNET Consolidated
Financial Statements and Notes thereto included elsewhere in this Joint Proxy
Statement-Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------- -----------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA(1):
Revenues:
Internet services..... $39,004 $ 8,815 $ 71,521 $16,860 $10,039 $ 7,054 $ 4,979
Software.............. 4,009 6,205 22,940 16,278 13,980 13,342 9,201
------- ------- -------- ------- ------- ------- -------
Total revenues...... 43,013 15,020 94,461 33,138 24,019 20,396 14,180
------- ------- -------- ------- ------- ------- -------
Costs and expenses:
Cost of revenues
Internet services... 25,062 4,490 46,393 10,262 6,452 3,556 2,618
Software............ 2,391 3,557 12,946 9,369 7,240 7,454 3,842
Network operations and
support.............. 5,265 2,315 13,127 6,764 3,850 1,658 1,850
Sales and marketing... 6,798 3,210 18,762 9,681 5,558 3,055 2,512
General and
administrative....... 3,126 1,839 12,709 5,288 2,248 3,071 1,532
Acquisition expense... -- -- 11,067 -- -- -- --
------- ------- -------- ------- ------- ------- -------
Total costs and
expenses........... 42,642 15,411 115,004 41,364 25,348 18,794 12,354
------- ------- -------- ------- ------- ------- -------
Income (loss) from
operations............. 371 (391) (20,543)(2) (8,226) (1,329) 1,602 1,826
Interest income......... 577 194 2,747 440 36 29 52
Interest expense........ (329) (83) (808) (76) (103) (198) (139)
Equity in net loss of
affiliates............. (386) -- (127) -- -- -- --
Loss on sale of
investment in related
party.................. -- -- -- -- (433) -- --
Other................... -- -- -- -- -- 20 --
------- ------- -------- ------- ------- ------- -------
Income (loss) before
income taxes........... 233 (280) (18,731)(2) (7,862) (1,829) 1,453 1,739
Benefit (provision) for
income taxes........... -- 17 474 (126) (197) (379) (441)
------- ------- -------- ------- ------- ------- -------
Net income (loss)....... $ 233 $ (263) $(18,257)(2) $(7,988) $(2,026) $ 1,074 $ 1,298
======= ======= ======== ======= ======= ======= =======
</TABLE>
(Footnotes appear on following page.)
80
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------- ---------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- --------- ------ ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Pro forma net income
(loss) per common and
equivalent share(3).... $ 0.01 $ (0.01) $(0.63)(2) $(0.35)
Shares used in computing
pro forma net income
(loss) per share
amounts(3)............. 33,436 25,774 28,987 22,946
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------------------
1996 1995 1994 1993 1992 1991
--------- -------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA(1):
Cash and cash
equivalents............ $ 45,413 $ 60,424 $10,493 $ 857 $ 280 $ 776
Working capital......... 17,789 38,335 4,270 (1,499) (584) (874)
Total assets............ 156,278 137,610 29,625 10,585 8,285 6,499
Notes payable, net of
current portion........ 18,045 13,686 1,196 634 774 696
Redeemable convertible
preferred stock........ -- -- 14,073 2,676 200 --
Total stockholders'
equity(4).............. 82,084 80,667 279 425 2,567 1,191
<CAPTION>
QUARTERS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------ ----------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- -------- ------- ------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(5)............... $ 4,319 $ 634 $(1,154) $(6,075) $ (120) $2,509 $2,376
</TABLE>
- --------
(1) UUNET acquired UUNET PIPEX in November 1995 in a transaction that was
accounted for as a pooling of interests and, as such, all financial
amounts contained in this table and the UUNET Consolidated Financial
Statements have been restated to include the financial results and data of
UUNET PIPEX for all periods presented. UUNET PIPEX previously had an April
30 fiscal year-end. In order to conform the fiscal year-end of UUNET PIPEX
to UUNET's calendar year-end, the statement of operations data for the
years ended December 31, 1991, 1992 and 1993 reflect the statement of
operations of UUNET PIPEX for the fiscal years ended April 30, 1992, 1993
and 1994, respectively. The consolidated statement of operations data for
the year ended December 31, 1993 includes the four month period ended
April 30, 1994 which is also included in the consolidated statement of
operations data for the year ended December 31, 1994. The consolidated
balance sheet data as of December 31, 1991, 1992 and 1993, includes the
balance sheet data of UUNET PIPEX as of April 30, 1992, 1993 and 1994,
respectively. See Note 1 of Notes to UUNET's Consolidated Financial
Statements for amounts included in more than one period.
(2) Reflects the incurrence of acquisition-related costs of approximately
$11.1 million during the fourth quarter of 1995 in connection with the
acquisition of UUNET PIPEX.
(3) See Note 1 of Notes to UUNET's Consolidated Financial Statements for an
explanation of the determination of the number of shares and share
equivalents used in computing pro forma per share amounts.
(4) UUNET was an S corporation for federal and state income tax purposes
through September 1992. UUNET paid cash dividends to its stockholders in
1991 and 1992 sufficient for its stockholders to pay income taxes on
UUNET's taxable income. UUNET, on a consolidated basis, has not declared
any dividends since 1994. Dividends declared and paid by UUNET on a
consolidated basis were $33,000 ($0.01 per share) in 1991, $587,000 ($0.08
per share) in 1992, and $129,000 ($0.01 per share) in 1994.
(5) Represents earnings (loss) before depreciation and amortization, interest
and income tax (expense) benefit and other non-operating expenses. UUNET
has included information concerning EBITDA because it understands that
such information is used by certain investors as one measure of an
issuer's operating performance. EBITDA is not determined in accordance
with generally accepted accounting principles ("GAAP"), is not indicative
of cash used by operating activities and should not be considered in
isolation or as a substitute for measures of performance determined in
accordance with GAAP. For the year ended December 31, 1995, EBITDA
excludes acquisition-related costs of approximately $11.1 million incurred
in connection with the acquisition of UUNET PIPEX.
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<PAGE>
UUNET MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
UUNET is a leading worldwide provider of a comprehensive range of Internet
access options, applications, and consulting services to businesses,
professionals and on-line services providers. UUNET provides both dedicated
and dial-up Internet access, and other applications and services which include
Web server hosting and integration services, client software and security
products, training, and network integration and consulting services. Internet
services revenues are primarily derived from recurring monthly connectivity
fees, installation and startup charges, and sales of related equipment,
applications and services. In addition, a substantial portion of Internet
services revenues are derived from the development, operation and maintenance
of the high speed dial-up network for Microsoft. Software revenues consist
primarily of the sale of Internet-related packaged third party software.
UUNET has made significant investments in developing and expanding its
network infrastructure which, prior to an equity financing in October 1993,
were primarily funded by cash flow from operations. Equity financings in 1993,
1994 and 1995 allowed UUNET to accelerate the expansion of its network
infrastructure and internal operations over the ten quarters ended March 31,
1996. During this period, UUNET hired a significant number of senior managers,
greatly increased its sales force, significantly expanded its product and
services portfolio, and substantially upgraded its network infrastructure. The
substantial costs incurred in connection with these activities contributed to
UUNET's operating losses in 1993, 1994 and 1995.
UUNET's consolidated operating results have fluctuated significantly in the
past and are expected to fluctuate significantly in the future as a result of
a variety of factors, some of which are beyond UUNET's control. As of March
31, 1996, UUNET had an accumulated deficit of approximately $27.3 million.
UUNET expects to increase significantly its expenses for international network
expansion, personnel, new product development and marketing, and undersea and
European terrestrial fiber optic cable capacity, and acquisitions of capital
equipment, in coordination with MFS as a subsdiary of MFS. In addition, UUNET
incurred substantial costs in the quarter ended December 31, 1995 in
connection with the acquisition of UUNET PIPEX.
RESULTS OF OPERATIONS
On November 15, 1995, UUNET acquired UUNET PIPEX in a stock transaction
accounted for as a pooling of interests (see Note 1 of Notes to UUNET
Consolidated Financial Statements). UUNET PIPEX is the largest Internet access
provider in the United Kingdom. As a result of the UUNET PIPEX acquisition,
the accompanying consolidated financial statements and related financial data
have been restated to include the financial results and data of UUNET PIPEX
for all periods presented.
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<PAGE>
As an aid to understanding UUNET's consolidated operating results, the
following table sets forth certain items from the Consolidated Statements of
Operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
--------------- ------------------
1996 1995 1995 1994 1993
------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Internet services.................... 91% 59% 76 % 51 % 42 %
Software............................. 9 41 24 49 58
------ ------ --- --- ---
Total revenues..................... 100 100 100 100 100
------ ------ --- --- ---
Costs and expenses:
Cost of revenues..................... 64 54 63 59 57
Network operations and support....... 12 16 14 21 16
Sales and marketing.................. 16 21 20 29 23
General and administrative........... 7 12 13 16 10
Acquisition expense.................. -- -- 12 -- --
------ ------ --- --- ---
Total costs and expenses........... 99 103 122 125 106
------ ------ --- --- ---
Income (loss) from operations.......... 1 (3) (22) (25) (6)
Interest income........................ 1 1 3 1 --
Interest expense....................... -- -- (1) -- --
Loss on sale of investment in related
party................................. -- -- -- -- (2)
Equity in net loss of affiliates....... (1) -- -- -- --
------ ------ --- --- ---
Income (loss) before income taxes...... 1 (2) (20) (24) (8)
Benefit for income taxes............... -- -- 1 -- --
------ ------ --- --- ---
Net income (loss)...................... 1% (2)% (19)% (24)% (8)%
====== ====== === === ===
</TABLE>
FISCAL YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
Revenues
UUNET derives substantially all of its revenues from two main activities:
Internet services and the sale of Internet-related third party software.
Internet services revenues result from providing a comprehensive range of
Internet access options, applications and services to businesses,
professionals and on-line services providers. A substantial portion of
Internet services revenues are derived from the development, operation and
maintenance of the high speed dial-up network for Microsoft. Total revenues
grew 38% from $24.0 million in 1993 to $33.1 million in 1994, and 185% to
$94.5 million in 1995. The major components of this increase are discussed
below.
Internet services revenues grew 68% from $10.0 million in 1993 to $16.9
million in 1994, and 324% to $71.5 million in 1995, and represented 42%, 51%
and 76%, respectively, of total revenues. This growth was primarily a result
of increases in the number of dedicated high speed connections sold by UUNET
during those periods as well as upgrades to higher speed connections, and in
1995, the build-out of the dial-up network for Microsoft. The number of high
speed connections sold by UUNET increased from 216 in 1993 to 734 in 1994, and
to 2,292 in 1995. UUNET (excluding UUNET PIPEX) sold 133, 547 and 1,789 of
these connections in 1993, 1994 and 1995, respectively. Upgrades to higher
speed connections sold by UUNET increased from nine in 1993 to 53 in 1994, and
to 369 in 1995. UUNET (excluding UUNET PIPEX) sold 44 and 345 upgrades in 1994
and 1995, respectively. Revenues from dial-up connections also increased from
1993 through 1995, but at a much lower rate, and were partially offset by the
anticipated decrease in revenues from UUNET's older UUCP news and mail
service. The dollar increase in high speed and dial-up revenues resulted
primarily from an increase in marketing efforts and the number of sales and
marketing personnel, as well as the rapid increase in the use of the Internet
in general. Revenues from Microsoft totaled approximately $19.3 million in
1995, contributing
83
<PAGE>
significantly to the $54.7 million increase in Internet services revenues from
1994 to 1995, and represented 20.4% of total revenues during 1995; there were
no revenues from Microsoft in 1993 or 1994.
Software revenues, generated by UUNET PIPEX, grew 16% from $14.0 million in
1993 to $16.3 million in 1994, and 41% to $22.9 million in 1995, and
represented 58%, 49% and 24%, respectively, of total revenues. The growth of
software revenues was due primarily to the increased demand for TCP/IP and
Network File System (NFS) products in general, and to the significant increase
in the number of sales and marketing personnel in particular, especially from
1994 to 1995.
The effect of price reductions due to competitive factors has not had a
material impact on revenue growth or profit margins during fiscal years 1993,
1994 and 1995.
Cost of Revenues
Total cost of revenues increased 43% from $13.7 million in 1993 to $19.6
million in 1994, and 202% to $59.3 million in 1995, representing 57%, 59% and
63%, respectively, of total revenues. The major components of this increase
are discussed below.
Cost of Internet services revenues consists primarily of leased network
backbone circuit costs, local access costs and, to a lesser extent,
depreciation of network-related equipment and the cost of equipment and
applications sold to customers. Cost of Internet services revenues increased
59% from $6.5 million in 1993 to $10.3 million in 1994, and 352% to $46.4
million in 1995, and as a percentage of Internet services revenues were 64%,
61% and 65% in 1993, 1994 and 1995, respectively. The cost of Internet
services revenues as a percentage of Internet services revenues decreased
between 1993 and 1994, primarily due to increased network utilization during
1994, partially offset by a $400,000 inventory write-off during 1994. The
increase in such percentages from 1994 to 1995 was due primarily to the lower
margin revenues associated with the build-out of the dial-up network for
Microsoft and, to a lesser extent, the upgrade and expansion in the second
half of 1995 of UUNET's network infrastructure and UUNET PIPEX's network for
its dial-up product.
Cost of software revenues increased 29% from $7.2 million in 1993 to $9.4
million in 1994, and 38% to $12.9 million in 1995, and as a percentage of
software revenues were 52%, 58% and 56% in 1993, 1994 and 1995, respectively.
The cost of software revenues as a percentage of software revenues has
fluctuated from 1993 through 1995, primarily due to changes in the mix of
software products sold and to fluctuations in the U.S. dollar to pound
sterling exchange rate.
Network Operations and Support
Network operations and support costs consist primarily of the expenses of
operating the network infrastructure, including monitoring network traffic and
quality, and costs of providing technical support to customers. Network
operations and support costs rose 76% from $3.9 million in 1993 to $6.8
million in 1994, and 94% to $13.1 million in 1995. These costs increased as a
percentage of total revenues from 16% in 1993 to 21% in 1994, and decreased to
14% in 1995. Approximately $1.3 million of the increase from 1993 to 1994, and
$4.8 million of the increase from 1994 to 1995, were due to the hiring of
additional personnel. UUNET hired additional personnel in this area primarily
to support its expanding customer base and expand its network infrastructure
and, for UUNET, to deploy the dial-up network for Microsoft. The remainder of
the dollar increase in both periods was due primarily to higher facilities-
related costs. The increase in network operations and support costs as a
percentage of total revenues from 1993 to 1994 was due primarily to increased
hiring of personnel in 1994, whereas the percentage decrease from 1994 to 1995
was due primarily to total revenues increasing more quickly than network
operations and support costs.
Sales and Marketing
Sales and marketing costs consist primarily of salaries and expenses of
sales and marketing personnel, advertising and other promotional activities,
procurement and installation of local access circuits and customer equipment,
and product development and enhancement. Sales and marketing costs rose 74%
from $5.6 million in 1993 to $9.7 million in 1994, and 94% to $18.8 million in
1995. These costs increased as a percentage of
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<PAGE>
total revenues from 23% in 1993 to 29% in 1994, and decreased to 20% in 1995.
Approximately $2.4 million of the increase from 1993 to 1994, and $6.1 million
of the increase from 1994 to 1995, were due to the hiring of additional
personnel, with the remainder of the increase in both years due primarily to
expanded advertising and promotional activities. The increase in sales and
marketing costs as a percentage of total revenues from 1993 to 1994 was
primarily due to increased hiring of personnel in 1994, while the percentage
decrease from 1994 to 1995 was due primarily to total revenues increasing more
quickly than sales and marketing costs as a result of UUNET's expanding
customer base and the revenues from Microsoft.
General and Administrative
General and administrative costs consist primarily of expenses associated
with UUNET's management, accounting, finance and administrative functions.
General and administrative costs increased 135% from $2.2 million in 1993 to
$5.3 million in 1994, and 140% to $12.7 million in 1995. These costs increased
as a percentage of revenues from 10% in 1993 to 16% in 1994, and decreased to
13% in 1995. The increase in general and administrative expenses from 1993 to
1994 was due primarily to the hiring of additional management, finance,
accounting and administrative personnel to support UUNET's expanding customer
base, and in the fourth quarter of 1994, expenses of $330,000 related to
UUNET's move into a new facility and $160,000 related to negotiating
relationships with Microsoft and other parties. The $7.4 million increase in
expenses from 1994 to 1995 was due primarily to costs associated with the
consolidation of facilities in the United Kingdom, increasing reserves for
possible doubtful accounts, the write-down of certain fixed assets in the
United Kingdom, and the hiring of additional finance and administrative
personnel to support UUNET's growth. The increase in general and
administrative costs as a percentage of total revenues from 1993 to 1994 was
due primarily to increased hiring of personnel, and UUNET's move and
negotiating costs in 1994 referred to above, while the percentage decrease
from 1994 to 1995 was due primarily to total revenues increasing more quickly
than general and administrative costs as a result of UUNET's expanding
customer base and the revenues from Microsoft.
Acquisition Expense
On November 15, 1995, UUNET acquired UUNET PIPEX in a stock transaction
accounted for as a pooling of interests and UUNET incurred acquisition-related
costs of $11.1 million. These costs were expensed in the fourth quarter of
1995 and consisted primarily of investment banking and other professional
fees, which totaled $7.0 million. The remaining costs of $4.1 million
consisted primarily of direct costs necessary to complete the transaction,
including taxes and printing and mailing costs.
Interest Income and Expense
Neither interest income nor interest expense was material in 1993 and 1994.
In 1995, UUNET earned $2.7 million in interest income as a result of investing
excess funds from equity financings, in particular UUNET's initial public
offering in May 1995. Interest expense of $0.8 million in 1995 was due
primarily to borrowings under equipment loan arrangements and capital leases
to assist in financing UUNET's network infrastructure expansion.
Loss on Sale of Investment in Related Party
UUNET realized a loss of $433,000 in 1993 on the disposition of an
investment in a related party. See Note 7 of Notes to UUNET Consolidated
Financial Statements.
Provision for Income Taxes
UUNET records income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The
adoption of SFAS 109 by UUNET on January 1, 1993 had no effect on UUNET's
consolidated financial position or results of operations for the year ended
December 31, 1993. The effective income tax rates were 11%, 2% and (3%) during
1993, 1994 and 1995, respectively. These rates were substantially below the
statutory U.S. federal tax rate of 34%, primarily due to deferring
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<PAGE>
recognition of benefits for net operating loss carryforwards as realization of
such is not assured. As of December 31, 1995, UUNET had U.S. federal net
operating loss carryforwards of approximately $12.2 million. These
carryforwards expire in the years 2008 through 2010. The amount of these
carryforwards that can be used in any given year may be limited in the event
of certain changes in the ownership of UUNET. Management believes that neither
the prior ownership changes nor the change in ownership of UUNET that may
result from the Merger will significantly limit its ability to use these net
operating loss carryforwards. UUNET PIPEX also had foreign net operating loss
carryforwards of approximately $2.5 million as of December 31, 1995. See Note
10 of Notes to UUNET Consolidated Financial Statements.
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
Revenues
Total revenues grew 186% from $15.0 million in the first quarter of 1995 to
$43.0 million in the first quarter of 1996. The major components of this net
increase are discussed below.
Internet services revenues grew 342% from $8.8 million in the first quarter
of 1995 to $39.0 million in the first quarter of 1996, and represented 59% and
91%, respectively, of total revenues. This growth was primarily a result of
increases in the number of dedicated high speed connections sold by UUNET
during those periods and upgrades by customers to higher speed connections,
increased sales of dial-up connections and the build-out of the dial-up
network for Microsoft. The number of high speed connections sold increased
from 444 in the first quarter of 1995 to 985 in the first quarter of 1996.
UUNET (excluding UUNET PIPEX) sold 330 and 805 of these connections in the
first quarter of 1995 and 1996, respectively. Upgrades to higher speed
connections increased from 37 in the first quarter of 1995 to 181 in the first
quarter of 1996. UUNET (excluding UUNET PIPEX) sold 30 and 167 upgrades in the
first quarter of 1995 and 1996, respectively. Revenues from dial-up
connections increased significantly from quarter-to-quarter. The dollar
increase in high speed and dial-up revenues resulted primarily from an
increase in marketing efforts and the number of sales and marketing personnel,
as well as the rapid increase in the use of the Internet in general. Revenues
from Microsoft increased from $0.2 million in the first quarter of 1995 to
$15.9 million in the first quarter of 1996. The build-out of the domestic
dial-up network commenced in the first quarter of 1995 and the international
deployment began in the fourth quarter of 1995. The accelerated build-out of
these networks at Microsoft's request resulted in revenues from Microsoft
increasing substantially and representing 36.9% of total revenues during the
first quarter of 1996.
Software revenues, generated by UUNET PIPEX, decreased 35% from $6.2 million
in the first quarter of 1995 to $4.0 million in the first quarter of 1996, and
represented 41% and 9%, respectively, of total revenues. The decrease in
software revenues was due primarily to increased competition in the United
Kingdom.
Except for the effect on software revenues as described above, the effect of
price reductions due to competitive factors has not had a material impact on
revenue growth or profit margins during the first quarters of 1995 and 1996.
Cost of Revenues
Total cost of revenues increased 241% from $8.0 million in the first quarter
of 1995 to $27.5 million in the first quarter of 1996, representing 54% and
64%, respectively, of total revenues. The major components of this net
increase are discussed below.
Cost of Internet services revenues consists primarily of leased network
backbone circuit costs, local access costs and, to a lesser extent,
depreciation of network-related equipment and the cost of equipment and
applications sold to customers. Cost of Internet services revenues increased
458% from $4.5 million in the first quarter of 1995 to $25.1 million in the
first quarter of 1996, and as a percentage of Internet services revenues were
51% and 64%, respectively. The cost of Internet services revenues as a
percentage of Internet services revenues increased primarily due to the lower
margin revenues associated with the build-out of the dial-up network for
Microsoft.
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Cost of software revenues decreased 33% from $3.6 million in the first
quarter of 1995 to $2.4 million in the first quarter of 1996, and as a
percentage of software revenues were 57% and 60%, respectively. The cost of
software revenues as a percentage of software revenues has increased primarily
due to increased competition, as previously discussed.
Network Operations and Support
Network operations and support costs rose 127% from $2.3 million in the
first quarter of 1995 to $5.3 million in the first quarter of 1996. These
costs decreased as a percentage of total revenues from 16% in the first
quarter of 1995 to 12% in the first quarter of 1996. Approximately $1.7
million of the increase was due to the hiring of additional personnel. UUNET
hired additional personnel in this area primarily to support its expanding
customer base and to expand its network infrastructure, including the domestic
and international network for Microsoft. The remainder of the dollar increase
was due primarily to higher facilities and related costs. The decrease in
network operations and support costs as a percentage of total revenues was due
primarily to total revenues increasing more quickly than network operations
and support costs.
Sales and Marketing
Sales and marketing costs rose 112% from $3.2 million in the first quarter
of 1995 to $6.8 million in the first quarter of 1996. These costs decreased as
a percentage of total revenues from 21% in the first quarter of 1995 to 16% in
the first quarter of 1996. Approximately $1.7 million of the increase was due
to increased advertising and promotional costs directly associated with
UUNET's decision to implement a major advertising campaign beginning in the
first quarter of 1996. The remainder of the increase was primarily due to the
hiring of additional personnel. The percentage decrease was primarily due to
total revenues increasing more quickly than sales and marketing costs as a
result of UUNET's expanding customer base and the revenues from Microsoft.
General and Administrative
General and administrative costs increased 70% from $1.8 million in the
first quarter of 1995 to $3.1 million in the first quarter of 1996. These
costs decreased as a percentage of revenues from 12% in the first quarter of
1995 to 7% in the first quarter of 1996. The increase in general and
administrative expenses was due primarily to the hiring of additional
personnel to support UUNET's expanding customer base and increases in other
general corporate costs. The decrease in general and administrative costs as a
percentage of total revenues was primarily due to total revenues increasing
more quickly than general and administrative costs as a result of UUNET's
expanding customer base and the revenues from Microsoft.
Interest Income and Expense
Interest income increased from $0.2 million in the first quarter of 1995 to
$0.6 million in the first quarter of 1996, while interest expense increased in
the respective periods from $0.1 million to $0.3 million. The increase in
interest income resulted from investing excess funds from equity financings,
in particular UUNET's initial public offering in May 1995, while interest
expense increased due primarily to borrowings under the Microsoft loan
facility and capital leases to assist in financing UUNET's network
infrastructure expansion.
Equity In Net Loss Of Affiliates
The equity in net loss of affiliates is due primarily to UUNET's acquisition
of a 40% interest in the outstanding capital stock of EUnet Germany in the
first quarter of 1996. EUnet Germany is a provider of Internet access options,
applications and consulting services in Germany.
QUARTERLY RESULTS
The following table sets forth quarterly consolidated financial data for
each of the nine fiscal quarters in the period ended March 31, 1996 including
such amounts expressed as a percentage of total revenues. All amounts
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previously reported by UUNET have been restated to include the results of
UUNET PIPEX. UUNET acquired UUNET PIPEX on November 15, 1995 and accounted for
the acquisition as a pooling of interests. The quarterly information below is
unaudited, but has been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, reflects all
adjustments necessary to present this information fairly when considered in
conjunction with UUNET's audited consolidated financial statements and the
notes thereto. Consolidated operating results for any quarter are not
necessarily indicative of results for any future periods.
<TABLE>
<CAPTION>
1994 1995 1996
------------------------- -------------------------------------------- ----------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues:
Internet
services....... $3,074 $ 3,651 $ 4,354 $ 5,781 $ 8,815 $13,655 $20,037 $ 29,014 $39,004
Software........ 3,963 3,298 4,501 4,516 6,205 6,350 5,592 4,793 4,009
------ ------- ------- ------- ------- ------- ------- -------- -------
Total revenues.. 7,037 6,949 8,855 10,297 15,020 20,005 25,629 33,807 43,013
------ ------- ------- ------- ------- ------- ------- -------- -------
Costs and
expenses:
Cost of
revenues....... 4,029 4,052 5,576 5,974 8,047 11,652 17,000 22,640 27,453
Network
operations and
support........ 1,237 1,587 1,866 2,074 2,315 3,384 3,634 3,794 5,265
Sales and
marketing...... 1,701 2,125 2,818 3,037 3,210 4,126 5,284 6,142 6,798
General and
administrative.. 982 1,205 1,224 1,877 1,839 3,111 5,258 2,501 3,126
Acquisition
expense........ -- -- -- -- -- -- -- 11,067 --
------ ------- ------- ------- ------- ------- ------- -------- -------
Total costs and
expenses....... 7,949 8,969 11,484 12,962 15,411 22,273 31,176 46,144 42,642
------ ------- ------- ------- ------- ------- ------- -------- -------
Income (loss)
from
operations...... (912) (2,020) (2,629) (2,665) (391) (2,268) (5,547) (12,337)(1) 371
Interest income.. 38 108 124 170 194 433 1,193 927 577
Interest
expense......... (18) (14) (17) (27) (83) (141) (202) (382) (329)
Equity in net
loss of
affiliates...... -- -- -- -- -- -- -- (127) (386)
------ ------- ------- ------- ------- ------- ------- -------- -------
Income (loss)
before income
taxes........... (892) (1,926) (2,522) (2,522) (280) (1,976) (4,556) (11,919)(1) 233
Tax benefit
(provision)..... -- (31) (47) (48) 17 122 282 53 --
------ ------- ------- ------- ------- ------- ------- -------- -------
Net income
(loss).......... $ (892) $(1,957) $(2,569) $(2,570) $ (263) $(1,854) $(4,274) $(11,866)(1) $ 233
====== ======= ======= ======= ======= ======= ======= ======== =======
</TABLE>
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<TABLE>
<CAPTION>
1994 1995 1996
----------------------- --------------------------------------- ---------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of
Revenues:
Revenues:
Internet services.... 44% 53% 49% 56% 59% 68% 78% 86% 91%
Software............. 56 47 51 44 41 32 22 14 9
--- --- --- --- --- --- --- --- ---
Total revenues....... 100 100 100 100 100 100 100 100 100
--- --- --- --- --- --- --- --- ---
Costs and expenses:
Cost of revenues..... 57 58 63 58 54 58 66 67 64
Network operations
and support......... 18 23 21 20 16 17 14 11 12
Sales and marketing.. 24 31 32 30 21 21 21 18 16
General and
administrative...... 14 17 14 18 12 15 21 8 7
Acquisition
expenses............ -- -- -- -- -- -- -- 33 --
--- --- --- --- --- --- --- --- ---
Total costs and
expenses............ 113 129 130 126 103 111 122 137 99
--- --- --- --- --- --- --- --- ---
Income (loss) from
operations........... (13) (29) (30) (26) (3) (11) (22) (37)(1) 1
Interest income....... -- 1 2 2 2 2 5 3 1
Interest expense...... -- -- -- -- (1) (1) (1) (1) --
Equity in net loss of
affiliates........... -- -- -- -- -- -- -- -- (1)
--- --- --- --- --- --- --- --- ---
Income (loss) before
income taxes......... (13) (28) (28) (24) (2) (10) (18) (35)(1) 1
Tax benefit
(provision).......... -- -- (1) (1) -- 1 1 -- --
--- --- --- --- --- --- --- --- ---
Net income (loss)..... (13)% (28)% (29)% (25)% (2)% (9)% (17)% (35)%(1) 1%
=== === === === === === === === ===
</TABLE>
- --------
(1) Reflects the incurrence of acquisition-related costs of approximately
$11.1 million in connection with the acquisition of UUNET PIPEX.
As an aid to understanding the effect of the UUNET PIPEX acquisition on
UUNET's consolidated financial results, selected fiscal year data is presented
below, and should be read in conjunction with UUNET's Consolidated Financial
Statements included elsewhere in this Joint Proxy Statement--Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- -----------------
1995 1994 1995 1994
--------- --------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues:
UUNET (parent company)................ $ 23,981 $ 4,117 $ 57,375 $12,414
UUNET PIPEX .......................... 9,826 6,180 37,086 20,724
--------- -------- -------- -------
Consolidated revenues............... $ 33,807 $ 10,297 $ 94,461 $33,138
========= ======== ======== =======
Net income (loss):
UUNET (parent company)................ $ 1,219 $ (2,289) $ 469 $(6,949)
UUNET PIPEX........................... (2,018) (281) (7,659) (1,039)
Acquisition expense................... (11,067) -- (11,067) --
--------- -------- -------- -------
Consolidated net loss............... $ (11,866) $ (2,570) $(18,257) $(7,988)
========= ======== ======== =======
</TABLE>
UUNET received net proceeds of approximately $107 million from equity
financings in 1993, 1994 and 1995, allowing UUNET to accelerate the expansion
of its network infrastructure and internal operations over the ten quarters
ended March 31, 1996. During this period, UUNET hired a significant number of
senior managers, greatly increased its sales force, significantly expanded its
product and services portfolio, and upgraded its network infrastructure. These
substantial expenses were incurred in anticipation of significant future
growth, and contributed to UUNET's 1993, 1994 and 1995 consolidated losses. In
addition, UUNET incurred acquisition-related costs of
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$11.1 million during the fourth quarter of 1995 in connection with the UUNET
PIPEX acquisition, which is accounted for as a pooling of interests. Prior to
October 1993, the expansion of UUNET's network infrastructure and internal
operations was funded primarily by cash flow from operations.
In view of the significant growth of UUNET's consolidated operations,
management believes that period-to-period comparisons of consolidated
financial results should not be relied upon as an indication of future
performance and that UUNET may experience significant future period-to-period
fluctuations in operating results.
LIQUIDITY AND CAPITAL RESOURCES
UUNET historically has satisfied its cash requirements principally through a
combination of sales of equity securities, borrowings from banks and other
third parties, and cash flow from operations. In the second quarter of 1995,
UUNET completed its initial public offering, raising net proceeds of $67.7
million, and raised an additional $12.5 million from the exercise of warrants
by Microsoft. UUNET PIPEX raised net proceeds of $8.0 million during 1994 in
connection with its stock flotation in the United Kingdom. These funds have
been and will be used to fund the expansion of UUNET's network infrastructure
and internal operations, including purchases of capital equipment and the
hiring of additional personnel. As of March 31, 1996, Microsoft had agreed to
lend UUNET up to $26.0 million to finance the capital equipment necessary to
build the dial-up network that is the primary Internet dial-up network and
infrastructure for The Microsoft Network. The interest rate on the loan from
Microsoft is equal to the greater of the Applicable Federal Rate ("AFR") in
effect on the date of the Microsoft Agreement (7.74%) or the AFR in effect at
the time of the advance (5.34% as of March 31, 1996). Borrowings available
under this facility totaled approximately $3.2 million as of March 31, 1996.
Subsequent to March 31, 1996, the loan agreement was amended to increase the
borrowings available under the facility by $22.2 million to $48.2 million and
to limit advances to eligible purchases made on or before the earlier of the
Effective Date or February 28, 1997.
UUNET generated positive cash flow from operating activities of $1.5 million
in 1993, negative cash flow from operating activities of $1.2 million in 1994
and positive cash flow from operating activities of $4.4 million in 1995.
UUNET generated positive cash flow from operating activities of $8.2 million
during the quarter ended March 31, 1996. Cash flow from operations can vary
significantly from period to period, depending upon the timing of operating
cash receipts and payments, especially accounts receivable, accounts payable
and accrued expenses. In addition, purchases of fixed assets increased from
$3.1 million in 1993 to $9.4 million in 1994, and to $53.7 million in 1995,
primarily as a result of purchases of equipment to support the expansion of
UUNET's network infrastructure, and in 1995, as UUNET commenced deployment of
the dial-up network for Microsoft. Purchases of fixed assets totaled $25.3
million in the quarter ended March 31, 1996 to support the continued expansion
of UUNET's domestic and international network infrastructure.
As of March 31, 1996, UUNET had commitments to certain vendors totaling
approximately $7.5 million to purchase network related equipment, $0.7 million
for other capital expenditures, and $0.9 million for advertising and
promotional activities. UUNET has guaranteed monthly usage levels to its
primary communications vendors. The commitments require monthly usage
(exclusive of discounts) through January 2009, which total approximately
$130.9 million. UUNET also has various agreements to lease and sublease office
space, and as of March 31, 1996, minimum lease payments of approximately $23.7
million through April 2006. Of these commitments, which total $163.7 million,
payments of $38.4 million are due in the remainder of 1996, $33.9 million are
due in 1997 and $91.4 million are due thereafter. The anticipated source of
funds for such commitments are current working capital, cash flow from
operations, loan advances from Microsoft and advances from MFS subsequent to
the closing of the Merger.
FORWARD LOOKING STATEMENTS
The following statements are based upon management's current expectations.
These statements are forward looking and actual results may differ materially.
These statements should be read in conjunction with, and are qualified by, the
other portion of Management's Discussion and Analysis of Financial Condition
and Results of Operations in this Joint Proxy Statement-Prospectus, UUNET's
Report on Form 10-Q for the three months ended March 31, 1996, and UUNET's
entire Annual Report on Form 10-K/A for the year ended December 31, 1995,
including the sections therein entitled "RISK FACTORS."
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In anticipation of continued future growth, management intends to accelerate
the major international expansion it began in 1995, by obtaining significant
undersea and European terrestrial fiber optic cable capacity. The extent and
timing of obtaining fiber optic cable capacity will depend upon various
factors, many of which are external to UUNET, including, but not limited to,
the availability and cost of such capacity; the ability of UUNET to enter into
long-term leases, various alliances with carriers and others, or a combination
of these options; and the ability of UUNET to obtain other financing for such
capacity. Management also expects to continue to make significant investments
in its domestic and international network infrastructure and internal
operations over at least the next several years, and intends in 1996 to
substantially increase advertising and promotional activities as compared to
1995 (as it did in the first quarter of 1996); hire additional management,
sales, marketing and other key personnel; and expand its operations
geographically, in large part by further acquisitions and other commercial
arrangements.
Software revenues, generated by UUNET PIPEX, decreased 35% from $6.2 million
in the first quarter of 1995 to $4.0 million in the first quarter of 1996, and
represented 41% and 9%, respectively, of total revenues. UUNET expects that
software revenues will continue to decline as a percentage of total revenues,
and that the dollar amount of software revenues may further decline in future
periods.
As previously stated, except for the effect on software revenues, the effect
of price reductions due to competitive factors has not had a material impact
on revenue growth or profit margins during the first quarter of 1996 and the
year ended December 31, 1995. However, competitive factors could have a
material impact on future revenue growth and profit margins.
UUNET's consolidated quarterly operating results have fluctuated
significantly in the past and are expected to continue to fluctuate
significantly from period to period depending upon factors such as the
acquisition of assets and businesses both domestically and internationally,
the development of strategic alliances worldwide, the expansion of UUNET's
network infrastructure in terms of both scale and timing, the cost and timing
of advertising and marketing efforts, the timing and installation of
significant orders and the pricing and mix of services and products sold by
UUNET. Other factors which may cause quarterly fluctuations in operating
results include customer terminations of service, new product introductions by
UUNET and its competitors, market acceptance of new and enhanced versions of
UUNET's products and services, changes in pricing policies by its competitors
and UUNET's ability to obtain sufficient supplies of sole or limited source
components. Although UUNET achieved profitability on a consolidated basis for
the quarter ended March 31, 1996, there can be no assurance that UUNET will be
able to sustain profitability on a consolidated basis in the future. See "RISK
FACTORS."
UUNET believes that its cash and cash equivalents and available borrowings
will be sufficient to meet its anticipated working capital requirements
through 1996. However, UUNET will require additional financing to continue
with its plan to accelerate international expansion, make strategic
acquisitions of other Internet service providers or complementary businesses,
acquire technologies or develop new products or otherwise respond to
unanticipated competitive pressures. Management believes that UUNET will be
able to obtain additional financing through increases in existing credit
facilities, new credit facilities and leasing arrangements, strategic
alliances or joint ventures. UUNET may also consider other sources of
financing. There can be no assurance that additional financing will be
available to UUNET when needed or on terms acceptable to UUNET. If adequate
funds are not available, UUNET has the flexibility to delay or modify its
expansion plans described above. See "RISK FACTORS."
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BUSINESS OF MFS
MFS provides facilities-based telecommunications systems and services to
business and government end users. MFS believes business and government users
have distinct telecommunications service requirements, including maximum
reliability, consistent high quality, substantial capacity for high-speed data
transmission, responsive customer service and continuous attention to service
enhancement and new service development. MFS believes it has significant
advantages over its competitors as a result of MFS': (i) focus on business and
government end users; (ii) expertise in developing and operating highly
reliable, advanced digital fiber optic networks which offer substantial
transmission capacity; (iii) emphasis on providing comprehensive and
responsive customer service; (iv) International Network Platform that serves
customers with multiple offices in key international business centers; (v)
network development plan which helps assure an efficient evolution from a
voice-oriented circuit switched network to a packet switched network based on
Internet standards; (vi) plan to develop new services, including voice
service, to be provided over a network based on Internet standards; and (vii)
ability to bundle local, long distance and Internet-related services provided
over an end-to-end network controlled by MFS.
MFS is organized as a holding company and operates through its subsidiaries
in two business segments: (i) telecommunications services and (ii) network
systems integration. Where permitted by local law, MFS provides
telecommunications services domestically and internationally in the form of:
(i) dedicated special access and private line circuits, local switched service
and high speed data communications to large business customers; (ii) single
source integrated local and long distance, high speed data communications
services and facilities management to medium and small businesses; and (iii)
local access to long distance companies and local access, ATM-based backbone
services and interconnection services via Network Access Points ("NAPs") to
Internet service providers.
MFS provides telecommunications services by utilizing its international
network platform, which consists of MFS owned transmission and switching
facilities and network capacity leased from other carriers primarily in the
United States and Western Europe. The MFS owned portion of the international
network platform consists of metropolitan area networks of fiber optic cables,
integrated local and long distance switches, advanced electronics, ATM
switching equipment, transmission equipment and associated wiring and
equipment. In addition, MFS has ownership interests in several international
submarine cables. The metropolitan area networks are generally linked to each
other with leased high capacity fiber optic lines. MFS provides international
service through several means, including leasing submarine cable capacity from
international carriers as well as taking ownership interests and obtaining
indefeasible rights of use capacity on other submarine cables. On May 7, 1996,
MFS announced that it intends to replace its leased lines by building or
acquiring its own U.S., international and transoceanic fiber optic networks,
to be deployed over a four year period. MFS is now deploying its own fiber
optic link between Washington, D.C. and Boston.
MFS has moved quickly to capitalize on the anticipated benefits of the
Telecom Act. MFS has contacted 21 LECs to initiate the process of implementing
the "co-carrier" provisions of the Telecom Act as quickly as possible and has
established a co-carrier task force consisting of approximately 100 personnel
dedicated to facilitate the negotiation and implementation of co-carrier
arrangements with the LECs. On May 22, 1996, MFS announced that it and
Ameritech Corp. ("Ameritech") had entered into a comprehensive co-carrier
agreement which involves the networks of the respective companies in the
entire Ameritech marketing region, including Illinois, Indiana, Michigan, Ohio
and Wisconsin. Included in the agreement with Ameritech are provisions
relating to: interconnection at any technically feasible point within
Ameritech's network; interim number portability; access to poles, ducts,
conduits and rights-of-way controlled by Ameritech; exchange of all local
traffic at a fully reciprocal per minute rate; receipt by MFS of terminating
access charges for long distance calls made to its customers; and
nondiscriminatory access to 911 and emergency 911 services, directory
assistance services, operator call completion services and white pages
directory listings for MFS' customers.
The fiber optic cable utilized in MFS' networks typically contain from 12 to
144 optical fiber strands, each of which is capable of providing multiple
telecommunications channels or "circuits." Depending on transmission
electronics, a single pair of glass fibers on MFS' networks currently can
transmit 32,256 or more simultaneous voice conversations, whereas a typical
pair of copper wires generally can carry a maximum of 24
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simultaneous voice conversations. Although local exchange carriers (the
"LECs") and foreign telecommunications carriers have historically used copper
wire in their networks, they currently are deploying fiber optic cable to
supplant or upgrade portions of their copper-based networks, particularly in
areas served by MFS. MFS expects that continuing developments in
telecommunications equipment will increase the transmission capacity of each
optical fiber, thereby providing even greater capacity at relatively low
incremental cost.
MFS' subsidiary, MFS Global Network Services, Inc. ("Global Network
Services") manages the operation and development of MFS' networks. MFS Global
Network Services contracts with another MFS subsidiary, MFS Network
Technologies, Inc. ("MFS Network Technologies") which engineers and manages
the construction of MFS' fiber optic networks. As each portion of a network is
completed, MFS Global Network Services manages the operation of the network.
Over time, MFS' network has evolved from "islands" of advanced fiber optic
networks within individual metropolitan areas, to an integrated international
network platform consisting of fiber optic cables either owned or leased by
MFS.
MFS also plays a major role in making the Internet available to users
internationally through sales of dedicated circuits for local access and ATM-
based backbone service to Internet service providers. MFS is also one of
several companies that manage the operation of NAPs, through which significant
amounts of traffic on the Internet pass. MFS developed and manages NAPs that
are known as MAE East in Washington, D.C., MAE West in San Jose, California
and MAE Chicago in Chicago, Illinois.
Initially created to design and build MFS' networks in a high quality and
cost-effective manner, MFS Network Technologies provides network systems
integration for MFS and third parties which desire to deploy sophisticated
networks, including intelligent transportation systems, voice and data
networks, interactive distance learning networks, security systems and
combined cable television-telephone networks.
Additional information concerning MFS is included in the MFS Reports
incorporated by reference in this Joint Proxy Statement-Prospectus. See
"AVAILABLE INFORMATION" and "INCORPORATION OF DOCUMENTS BY REFERENCE."
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GLOSSARY
ATM (asynchronous transfer mode)--An information transfer standard that is
one of a general class of packet technologies that relay traffic by way of an
address contained within the first five bytes of a standard fifty-three byte
long packet or cell. The ATM format can be used by many different information
systems, including LANs, to deliver traffic at varying rates, permitting a mix
of data, voice and video.
Backbone--A centralized high-speed network that interconnects smaller,
independent networks.
Bandwidth--The number of bits of information which can move through a
communications medium in a given amount of time.
CAP (competitive access provider)--A company that provides its customers
with an alternative to the LEC for local transport of private line and special
access telecommunications services.
Central offices--The switching centers or central switching facilities of
the LECs.
Co-carrier status--A regulatory scheme under which the incumbent LEC is
required to integrate new, competing providers of local exchange service, such
as the Company, into the systems of traffic exchange, inter-carrier
compensation, and other inter-carrier relationships that already exist among
LECs in most jurisdictions.
Collocation--The ability of a CAP such as MFS to connect its network to the
LECs central offices. Physical collocation occurs when a CAP places its
network connection equipment inside the LEC's central offices. Virtual
collocation is an alternative to physical collocation pursuant to which the
LEC permits a CAP to connect its network to the LEC's central offices on
comparable terms, even though the CAP's network connection equipment is not
physically located inside the central offices.
DS-1--A data communications circuit capable of transmitting data at 1.5 Mbps
(sometimes called T-1).
DS-3--A data communications circuit capable of transmitting data at 45 Mbps
(sometimes called T-3).
Dedicated--Telecommunications lines dedicated or reserved for use by
particular customers.
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ
a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. The precise digital numbers minimize
distortion (such as graininess or snow in the case of video transmission, or
static or other background distortion in the case of audio transmission).
E-3--A data communications circuit capable of transmitting data at 34 Mbps
(typically used outside North America).
Ethernet--A local area network technology used for connecting computers,
printers, workstations, terminals, etc., within the same building. Ethernet
operates over twisted wire or coaxial cable at speeds up to 10 megabits per
second. Ethernet is the most popular LAN technology.
FCC--Federal Communications Commission.
FDDI (Fiber Distributed Data Interface)--Based on fiber optics, FDDI is a
100 megabit per second local area network technology used to connect
computers, printers, and workstations at very high speeds. FDDI is also used
as backbone technology to interconnect other LANs.
Fiber mile--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
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Firewall--A system placed between networks that filters data passing through
it and removes unauthorized traffic, thereby enhancing the security of the
network.
Frame relay--An information transfer standard for relaying traffic based on
an address contained in the six byte header of a variable length packet that
is up to 2,106 bytes long. Frame relay has less overhead than ATM but may be
difficult to implement at speeds greater than 45 Mbps.
Graphical user interface--A means of communicating with a computer by
manipulating icons, menus and windows rather than using text commands.
Home page--An entry point for a collection of information presented through
the World Wide Web.
Interconnection Decisions--Rulings by the FCC announced in September 1992
and August 1993, which require the BOCs and most other large LECs to provide
interconnection in LEC central offices to any CAP, long distance carrier or
end user seeking such interconnection for the provision of interstate special
access and switched access transport services.
Internet--A global collection of interconnected computer networks which use
TCP/IP, a common communications protocol.
ISDN--Integrated Services Digital Network. An information transfer standard
for transmitting digital voice and data over telephone lines at speeds up to
128 Kbps.
Kbps--Kilobits per second. A transmission rate. One kilobit equals 1,024
bits of information.
LANs (local area networks)--The interconnection of computers for the purpose
of sharing files, programs and various devices such as printers and high-speed
modems. LANs may include dedicated computers or file servers that provide a
centralized source of shared files and programs.
Local exchange--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
LECs (local exchange carrier)--A company providing local telephone services.
Long distance carriers (interexchange carriers)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities.
Mbps--Megabits per second. A transmission rate. One megabit equals 1,024
kilobits.
Modem--A device for transmitting digital information over an analog
telephone line.
Network systems integration--Involves the creation of turnkey
telecommunications networks and systems including: (i) route and site
selection, (ii) rights of way and legal authorizations and/or acquisition;
(iii) design and engineering of the system, including technology and vendor
assessment and selection, determining fiber optic circuit capacity, and
establishing reliability/flexibility standards; and (iv) project and
construction management, including contract negotiations, purchasing and
logistics, installation as well as testing and construction management.
Number portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
On-line services--Commercial information services that offer a computer user
access to a specified slate of information, entertainment and communications
menus on what appears to be a single system.
95
<PAGE>
POPs (points of presence)--With respect to voice communications, locations
where a long distance carrier has installed transmission equipment in a
service area that serves as, or relays calls to, a network switching center of
that long distance carrier, and with respect to a data communications network,
geographic areas within which the communications network allows local access.
PPP--Point-to-Point--Protocol. An information transfer standard for
transmitting packets over data connections between two points.
PUC (public utility commission)--A state regulatory body, established in
most states, which regulates utilities, including telephone companies
providing intrastate services.
Private line--A dedicated telecommunications connection between end user
locations.
Public switched network--That portion of a LEC's network available to all
users generally on a shared basis (i.e., not dedicated to a particular user).
Traffic along the public switched network is generally switched at the LEC's
central offices.
Reciprocal compensation--The same compensation of a new competitive local
exchange carrier for termination of a local call by the BOC on its network, as
the new competitor pays the BOC for termination of local calls on the BOC
network.
Resale--The provision by a provider of telecommunications services to other
providers or carriers on a wholesale basis for use by such carrier to provide
services to its own end users.
Route mile--The number of miles of the telecommunications path in which
fiber optic cables are installed.
Router--A system placed between networks that relays data to those networks
based upon a destination address contained in the data packets being routed.
SLIP--Serial Line Internet Protocol. An information transfer standard for
transmitting Internet Protocol packets over asynchronous data connections
between two points.
Special Access Services--The lease of private dedicated telecommunications
lines or circuits along the network of a LEC or a CAP which lines run to or
from the long distance carrier POP.
Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched access transport services--Transportation of switched traffic along
dedicated lines between the LEC central offices and long distance carrier
POPs.
Switched traffic--Telecommunications traffic along the public switched
network. This traffic is generally switched at the LEC's central offices.
TCP/IP--Transmission Control Protocol/Internet Protocol. A suite of network
protocols that allow computers with different architectures and operating
system software to communicate with other computers on the Internet.
T-1--A data communications circuit capable of transmitting data at 1.5 Mbps
(sometimes called DS-1).
T-3--A data communications circuit capable of transmitting data at 45 Mbps
(sometimes called DS-3).
Token Ring--A local area network technology used to interconnect personal
computers, file servers, printers, and other devices. Token Ring LANs
typically operate at either 4 megabits per second or 16 megabits per second.
96
<PAGE>
Unbundled Access--Access by competitive telecommunications carriers to
unbundled elements of a telecommunications service provider's network
facilities, equipment, feature, function and capabilities, at any technically
feasible point within the network.
Unix--A computer operating system frequently found on workstations and PCs
and noted for its portability and communications functionality.
UUCP--Unix to Unix Copy Protocol. A transmission protocol usually found on
Unix systems that is commonly used to transfer electronic mail and news.
World Wide Web or Web--A collection of computer systems supporting a
communications protocol that permits multi-media presentation of information
over the Internet.
97
<PAGE>
COMPARATIVE PER SHARE PRICES
MFS
The MFS Common Stock trades on Nasdaq under the symbol "MFST." The following
table sets forth the high and low sale prices of the MFS Common Stock as
reported by Nasdaq for each of the quarters in the two-year period ended
December 31, 1995 and for the first and second quarters of 1996, which prices
give effect a 2-for-1 stock split which was payable on April 26, 1996.
<TABLE>
<CAPTION>
1994 HIGH LOW
---- ------- -------
<S> <C> <C>
First Quarter.............................................. $20.625 $14.000
Second Quarter............................................. 17.000 10.250
Third Quarter.............................................. 18.375 12.250
Fourth Quarter............................................. 20.750 16.250
<CAPTION>
1995
----
<S> <C> <C>
First Quarter.............................................. $19.500 $15.375
Second Quarter............................................. 18.625 14.375
Third Quarter.............................................. 24.500 15.875
Fourth Quarter............................................. 26.875 19.125
<CAPTION>
1996
----
<S> <C> <C>
First Quarter.............................................. $34.000 $28.875
Second Quarter............................................. 38.375 31.250
On April 29, 1996, the last sales price of the MFS Common Stock on Nasdaq
was $34.625. The public announcement of the Merger Agreement occurred prior to
the opening of trading on April 30, 1996.
UUNET
Since May 25, 1995, the UUNET Common Stock trades on Nasdaq under the symbol
"UUNT." The following table sets forth the high and low sale prices of the
UUNET Common Stock as reported by Nasdaq for each of the quarters in the
period ended December 31, 1995 and for the first and second quarters of 1996.
<CAPTION>
1995 HIGH LOW
---- ------- -------
<S> <C> <C>
Second Quarter............................................. $28.500 $21.750
Third Quarter.............................................. 51.750 27.250
Fourth Quarter............................................. 98.750 38.750
<CAPTION>
1996
----
<S> <C> <C>
First Quarter.............................................. $62.500 $25.000
Second Quarter............................................. 67.500 25.500
</TABLE>
On April 29, 1996, the last sales price of the UUNET Common Stock on Nasdaq
was $48.250. The public announcement of the Merger Agreement occurred prior to
the opening of trading on April 30, 1996.
EQUIVALENT PER SHARE DATA
The following tables set forth certain data concerning the historical book
value per share, cash dividends declared per share and income (loss) per share
from continuing operations for MFS and UUNET, respectively, on a pro forma
basis after giving effect to the Merger and on a pro forma basis after giving
effect to the exercise of the Option. The pro forma combined data are
presented for comparative purposes only and are not necessarily indicative of
what the actual financial position and results of operations would have been
as of and for the periods ended December 31, 1995 and March 31, 1996 had the
Merger or exercise of the Option been consummated nor
98
<PAGE>
does such data purport to represent results for future periods. The
information should be read in conjunction with the unaudited Pro Forma
Consolidated Condensed Financial Statements of MFS contained elsewhere in this
Joint Proxy Statement-Prospectus, the historical financial statements of MFS
incorporated herein by reference and the historical financial statements of
UUNET contained elsewhere herein. The unaudited pro forma equivalent per share
data shows for each share of MFS Common Stock and UUNET Common Stock before
the Merger and the exercise of the Option, its equivalent position after
giving effect to the Merger and the exercise of the Option. UUNET stockholders
will receive 1.777776 shares of MFS Common Stock for each share of UUNET
Common Stock outstanding .
HISTORICAL
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
----------------------------------------
MFS UUNET MFS UUNET
--------- ------------------ ---------
<S> <C> <C> <C> <C>
Book value per share................. $ 6.01 $ 2.55 $ 6.67 $ 2.52
Cash dividends per share............. -- -- -- --
Income (loss) per share from
continuing operations............... (0.75) 0.01 (2.21) (0.63)
</TABLE>
MFS--PRO FORMA
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------------- ------------------
MERGER OPTION MERGER OPTION
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Book value per share................ $ 15.62 $ 12.33 $ 16.13 $ 12.88
Cash dividends per share............ -- -- -- --
Income (loss) per share from
continuing operations.............. (1.09) (0.97) (3.92) (3.33)
</TABLE>
UUNET--PRO FORMA EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1996 DECEMBER 31, 1995
-------------------- ------------------
MERGER OPTION MERGER OPTION
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Book value per share................ $ 27.77 $ 21.91 $ 28.67 $ 22.90
Cash dividends per share............ -- -- -- --
Income (loss) per share from contin-
uing operations.................... (1.94) (1.72) (6.97) (5.92)
</TABLE>
99
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--THE MERGER
The following unaudited pro forma consolidated condensed financial
statements give effect to the merger of UUNET with Sub pursuant to the Merger
Agreement. The pro forma consolidated condensed balance sheet assumes that the
Merger occurred on March 31, 1996. The pro forma consolidated condensed
statements of operations assume that the Merger occurred as of January 1,
1995. The pro forma consolidated condensed financial statements are not
necessarily indicative of the results that actually would have been attained
if the Merger had been in effect on the dates indicated or which may be
attained in the future. Such statements should be read in conjunction with the
MFS and UUNET historical consolidated financial statements and notes thereto
incorporated by reference or included herein.
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................. $ 186,316 $ 43,013 $ (1,322)(4) $ 228,007
Costs and expenses:
Operating expenses.... 174,173 35,568 (1,322)(4) 208,419
Depreciation and
amortization......... 44,609 3,948 105,907 (1) 154,464
General and
administrative
expenses............. 34,892 3,126 -- 38,018
----------- ----------- ---------- -----------
253,674 42,642 104,585 400,901
----------- ----------- ---------- -----------
Income (loss) from
operations............. (67,358) 371 (105,907) (172,894)
Other income (expense):
Interest income....... 5,644 577 -- 6,221
Interest expense...... (23,626) (329) -- (23,955)
Other................. (784) (386) -- (1,170)
----------- ----------- ---------- -----------
Total other income
(expense).......... (18,766) (138) -- (18,904)
----------- ----------- ---------- -----------
Income (loss) before
income taxes........... (86,124) 233 $ (105,907) (191,798)
Income tax expense...... (100) -- -- (100)
----------- ----------- ---------- -----------
Net income (loss)....... (86,224) 233 (105,907) (191,898)
Dividends on preferred
stock.................. (7,072) -- -- (7,072)
----------- ----------- ---------- -----------
Net income (loss)
applicable to common
stockholders........... $ (93,296) $ 233 $ (105,907) $ (198,970)
=========== =========== ========== ===========
Weighted average number
of shares outstanding.. 125,017,000 57,248,000 (6) 182,265,000
=========== ========== ===========
Pro forma net loss per
share applicable to
common stockholders.... $ (0.75) $ (1.09)
=========== ===========
</TABLE>
See accompanying notes to pro forma consolidated condensed financial
statements.
100
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................. $ 583,194 $ 94,461 $ (5,845)(4) $ 671,810
Costs and expenses:
Operating expenses.... 562,300 82,906 (5,845)(4) 639,361
Depreciation and
amortization......... 142,496 8,322 423,628 (1) 574,446
General and
administrative
expenses............. 117,703 12,709 -- 130,412
Other................. -- 11,067 -- 11,067
----------- ---------- ---------- -----------
822,499 115,004 417,783 1,355,286
----------- ---------- ---------- -----------
Loss from operations.... (239,305) (20,543) (423,628) (683,476)
Other income (expense):
Interest income....... 13,188 2,747 -- 15,935
Interest expense...... (38,606) (808) -- (39,414)
Other................. (2,575) (127) -- (2,702)
----------- ---------- ---------- -----------
Total other income
(expense).......... (27,993) 1,812 -- (26,181)
----------- ---------- ---------- -----------
Loss before income
taxes.................. (267,298) (18,731) (423,628) (709,657)
Income tax (expense)
benefit................ (600) 474 (474)(5) (600)
----------- ---------- ---------- -----------
Net loss................ (267,898) (18,257) (424,102) (710,257)
Dividends on preferred
stock.................. (15,064) -- -- (15,064)
----------- ---------- ---------- -----------
Net loss applicable to
common stockholders.... $ (282,962) $ (18,257) $ (424,102) $ (725,321)
=========== ========== ========== ===========
Weighted average number
of shares outstanding
(after stock split).... 127,786,000 57,248,000 (6) 185,034,000
=========== ========== ===========
Net loss per share
applicable to common
stockholders........... $ (2.21) $ (3.92)
=========== ===========
</TABLE>
See accompanying notes to pro forma consolidated condensed financial
statements.
101
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996
<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 92,588 $ 45,413 -- $ 138,001
Marketable
securities........... 368,266 -- -- 368,266
Accounts receivable
and other assets..... 260,860 28,525 -- 289,385
---------- ---------- ---------- ----------
Total current
assets............. 721,714 73,938 -- 795,652
Networks and equipment,
at cost................ 1,466,254 93,261 -- 1,559,515
Less accumulated
depreciation and
amortization......... (245,321) (17,384) -- (262,705)
---------- ---------- ---------- ----------
Networks and
equipment, net..... 1,220,933 75,877 -- 1,296,810
Goodwill, net........... 279,970 166 $1,898,309 (1) 2,178,445
Other assets, net....... 124,594 6,297 135,500 (1) 266,391
---------- ---------- ---------- ----------
Total assets........ $2,347,211 $ 156,278 $2,033,809 $4,537,298
========== ========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 168,235 $ 17,824 -- 186,059
Other current
liabilities.......... 99,421 38,325 14,400 (2) 152,146
---------- ---------- ---------- ----------
Total current
liabilities........ 267,656 56,149 14,400 338,205
Long-term obligations,
less current portion... 1,286,354 18,045 -- 1,304,399
Other liabilities and
minority interest...... 38,619 -- -- 38,619
Stockholders' equity:
Preferred stock, $.01
par value.
Series A, 8%
cumulative
convertible........ 1 -- -- 1
Series B, 7 3/4%
cumulative
convertible........ 150 -- -- 150
Common stock.......... 1,255 32 (32)(3)
573 (6) 1,828
Additional paid-in
capital................ 1,482,442 109,328 (109,328)(3)
2,100,920 (6) 3,583,362
Other................... (1,956) 44 (44)(3) (1,956)
Accumulated deficit..... (727,310) (27,320) 27,320 (3) (727,310)
---------- ---------- ---------- ----------
Total stockholders'
equity................. 754,582 82,084 2,019,409 2,856,075
---------- ---------- ---------- ----------
Total liabilities and
stockholders' equity... $2,347,211 $ 156,278 $2,033,809 $4,537,298
========== ========== ========== ==========
</TABLE>
See accompanying notes to pro forma consolidated condensed financial
statements.
102
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1: PRO FORMA STATEMENTS
The pro forma information as of, and for, the three months ended March 31,
1996 is based on unaudited financial statements after giving effect to the
preliminary allocation of the purchase price and the adjustments described in
Note 2. The pro forma information for the year ended December 31, 1995 is
based on historical financial statements of the MFS and UUNET after giving
effect to the adjustments described in Note 2.
The unaudited pro forma consolidated condensed financial statements may not
be indicative of the results that actually would have been achieved if the
acquisition had occurred on the dates assumed and do not project MFS'
financial position or results of operations at any future date or period then
ended.
NOTE 2: PRO FORMA ADJUSTMENTS
(1) Reflects the excess of the purchase price over the net book value (which
approximates fair value) of the net tangible assets acquired which was
recorded as goodwill, a customer contract and customer list. The pro forma
adjustment to depreciation and amortization represents the amortization of
the goodwill and other intangibles and was calculated using the
straightline method over a five year life for goodwill and three to four
year lives for the other intangibles.
(2) Reflects liabilities incurred, such as compensation costs and legal,
accounting and consulting fees, related to the Merger.
(3) Reflects the elimination of the equity accounts of UUNET.
(4) Reflects the elimination of intercompany revenues and expenses.
(5) Reflects adjustment of federal income tax expense for the effects of the
Merger.
(6) Reflects the effect of the issuance of MFS Common Stock and options to
purchase MFS Common Stock as consideration for the UUNET Common Stock and
options to purchase UUNET Common Stock, respectively, in connection with
the Merger. The MFS Common Stock was valued at $34.69 per share for
purposes of calculating the Merger consideration.
103
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--EXERCISE OF OPTION
The following unaudited pro forma consolidated condensed financial
statements give effect to the exercise of the Option to purchase 19,300,317
shares of UUNET Common Stock (representing approximately 59.5% of the
outstanding shares of UUNET Common Stock outstanding at the UUNET Record Date)
by MFS pursuant to the Stock Option Agreement. The pro forma consolidated
condensed balance sheet assumes that the exercise of the Option occurred on
March 31, 1996. The pro forma consolidated condensed statements of operations
assume that the exercise of the Option occurred as of January 1, 1995. The pro
forma consolidated condensed financial statements are not necessarily
indicative of the results that actually would have been attained if the
exercise of the Option had been in effect on the dates indicated or which may
be attained in the future. Such statements should be read in conjunction with
the MFS and UUNET historical consolidated financial statements and notes
thereto either included or incorporated herein by reference.
104
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................. $ 186,316 $ 43,013 $ (1,322)(4) $ 228,007
Costs and expenses:
Operating expenses.... 174,173 35,568 (1,322)(4) 208,419
Depreciation and
amortization......... 44,609 3,948 62,348 (1) 110,905
General and
administrative
expenses............. 34,892 3,126 -- 38,018
----------- ----------- ---------- -----------
253,674 42,642 61,026 357,342
----------- ----------- ---------- -----------
Income (loss) from
operations............. (67,358) 371 (62,348) (129,335)
Other income (expense):
Interest income....... 5,644 577 -- 6,221
Interest expense...... (23,626) (329) -- (23,955)
Other................. (784) (386) (89)(7) (1,259)
----------- ----------- ---------- -----------
Total other income
(expense).......... (18,766) (138) (89) (18,993)
----------- ----------- ---------- -----------
Income (loss) before
income taxes........... (86,124) 233 (62,437) (148,328)
Income tax expense...... (100) -- -- (100)
----------- ----------- ---------- -----------
Net income (loss)....... (86,224) 233 (62,437) (148,428)
Dividends on preferred
stock.................. (7,072) -- -- (7,072)
----------- ----------- ---------- -----------
Net income (loss)
applicable to common
stockholders........... $ (93,296) $ 233 $ (62,437) $ (155,500)
=========== =========== ========== ===========
Weighted average number
of shares outstanding.. 125,017,000 -- 35,494,000 160,511,000
=========== =========== ========== ===========
Pro forma net loss per
share applicable to
common stockholders.... $ (0.75) $ (0.97)
=========== ===========
</TABLE>
See accompanying notes to pro forma consolidated condensed financial
statements.
105
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue................. $ 583,194 $ 94,461 $ (5,845)(4) $ 671,810
Costs and expenses:
Operating expenses.... 562,300 82,906 (5,845)(4) 639,361
Depreciation and
amortization......... 142,496 8,322 249,393 (1) 400,211
General and
administrative
expenses............. 117,703 12,709 -- 130,412
Other................. -- 11,067 -- 11,067
----------- ---------- ---------- -----------
822,499 115,004 243,548 1,181,051
----------- ---------- ---------- -----------
Loss from operations.... (239,305) (20,543) (249,393) (509,241)
Other income (expense):
Interest income....... 13,188 2,747 -- 15,935
Interest expense...... (38,606) (808) -- (39,414)
Other................. (2,575) (127) 6,938 (7) 4,236
----------- ---------- ---------- -----------
Total other income
(expense).......... (27,993) 1,812 6,938 (19,243)
----------- ---------- ---------- -----------
Loss before income
taxes.................. (267,298) (18,731) (242,455) (528,484)
Income tax (expense)
benefit................ (600) 474 (474)(5) (600)
----------- ---------- ---------- -----------
Net loss................ (267,898) (18,257) (242,929) (529,084)
Dividends on preferred
stock.................. (15,064) -- -- (15,064)
----------- ---------- ---------- -----------
Net loss applicable to
common stockholders.... $ (282,962) $ (18,257) $ (242,929) $ (544,148)
=========== ========== ========== ===========
Weighted average number
of shares outstanding
(after stock split).... 127,786,000 35,494,000 163,280,000
=========== ========== ===========
Net loss per share
applicable to common
stockholders........... $ (2.21) $ (3.33)
=========== ===========
</TABLE>
See accompanying notes to pro forma consolidated condensed financial
statements.
106
<PAGE>
MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1996
<TABLE>
<CAPTION>
MFS UUNET
COMMUNICATIONS TECHNOLOGIES, PRO FORMA
COMPANY, INC. INC. ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- ----------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 92,588 $ 45,413 $ -- $ 138,001
Marketable
securities........... 368,266 -- -- 368,266
Accounts receivable
and other assets..... 260,860 28,525 -- 289,385
---------- -------- ---------- ----------
Total current
assets............. 721,714 73,938 -- 795,652
Networks and equipment,
at cost................ 1,466,254 93,261 -- 1,559,515
Less accumulated
depreciation and
amortization......... (245,321) (17,384) -- (262,705)
---------- -------- ---------- ----------
Networks and
equipment, net..... 1,220,933 75,877 -- 1,296,810
Goodwill, net........... 279,970 166 1,110,669 (1) 1,390,805
Other assets, net....... 124,594 6,297 84,010 (1) 214,901
---------- -------- ---------- ----------
Total assets........ $2,347,211 $156,278 $1,194,679 $3,698,168
========== ======== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 168,235 $ 17,824 $ -- $ 186,059
Other current
liabilities.......... 99,421 38,325 14,400 (2) 152,146
---------- -------- ---------- ----------
Total current
liabilities........ 267,656 56,149 14,400 338,205
Long-term obligations,
less current portion... 1,286,354 18,045 -- 1,304,399
Other liabilities and
minority interest...... 38,619 -- 31,192 (7) 69,811
Stockholders' equity:
Preferred stock, $.01
par value.
Series A, 8%
cumulative
convertible........ 1 -- -- 1
Series B, 7 3/4%
cumulative
convertible........ 150 -- -- 150
Common stock.......... 1,255 32 (32)(3)
355 (6) 1,610
Additional paid-in
capital................ 1,482,442 109,328 (109,328)(3)
1,230,816 (6) 2,713,258
Other................... (1,956) 44 (44)(3) (1,956)
Accumulated deficit..... (727,310) (27,320) 27,320 (3) (727,310)
---------- -------- ---------- ----------
Total stockholders'
equity............... 754,582 82,084 1,149,087 1,985,753
---------- -------- ---------- ----------
Total liabilities and
stockholders'
equity............... $2,347,211 $156,278 $1,194,679 $3,698,168
========== ======== ========== ==========
</TABLE>
See accompanying notes to pro forma consolidated condensed financial
statements.
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MFS COMMUNICATIONS COMPANY, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1: PRO FORMA STATEMENTS
The pro forma information as of, and for the three months ended March 31,
1996 is based on unaudited financial statements after giving effect to the
preliminary allocation of the purchase price and the adjustments described in
Note 2. The pro forma information for the year ended December 31, 1995 is
based on historical financial statements of MFS and UUNET after giving effect
to the adjustments described in Note 2.
The unaudited pro forma consolidated condensed financial statements may not
be indicative of the results that actually would have been achieved if the
Option had been exercised on the dates assumed and do not project MFS'
financial position or results of operations at any future date or period then
ended.
NOTE 2: PRO FORMA ADJUSTMENTS
(1) Reflects the excess of the purchase price over the net book value (which
approximates fair value) of the net tangible assets acquired which was
recorded as goodwill, a customer contract and customer list. The pro
forma adjustment to depreciation and amortization represents the
amortization of the goodwill and other intangibles and was calculated
using the straightline method over a five year life for goodwill and
three to four year lives for the other intangibles.
(2) Reflects liabilities incurred, such as compensation costs and legal,
accounting and consulting fees, related to the exercise of the Option.
(3) Reflects the elimination of the equity accounts of UUNET.
(4) Reflects the elimination of intercompany revenues and expenses.
(5) Reflects adjustment of federal income tax expense for the effects of the
exercise of the Option.
(6) Reflects the effect of the issuance of MFS' Common Stock to exercise the
Option. The MFS Common Stock was valued at $34.69 per share for purposes
of calculating the consideration paid to exercise the Option.
(7) Reflects the effect of minority interest for the 38% of UUNET Common Stock
assumed held by stockholders other than MFS.
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DESCRIPTION OF MFS CAPITAL STOCK
The summary of the terms of the stock of MFS set forth below does not
purport to be complete and is subject to and qualified in its entirety by
reference to the MFS Amended & Restated Certificate and the MFS By-laws.
GENERAL
The aggregate number of shares of capital stock of all classes which MFS has
authority to issue is 425,000,000, of which 400,000,000 shares are MFS Common
Stock, $.01 par value, and 25,000,000 shares are preferred stock, $.01 par
value (the "MFS Preferred Stock"). The issued and outstanding shares of MFS
Common Stock and MFS Preferred Stock, are duly authorized, validly issued,
fully paid and nonassessable.
The additional shares of authorized stock available for issuance by MFS
might be issued at such times and under such circumstances as to have a
dilutive effect on earnings per share and on the equity ownership of the
holders of MFS Common Stock. The ability of the MFS Board of Directors to
issue additional shares of stock could enhance the MFS Board of Directors'
ability to negotiate on behalf of the stockholders in a takeover situation and
also could be used by the MFS Board of Directors to make a change in control
more difficult, thereby denying stockholders the potential to sell their
shares at a premium and entrenching current management.
COMMON STOCK
Subject to the senior rights of Preferred Stock which may from time to time
be outstanding, holders of MFS Common Stock are entitled to receive such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon dissolution and liquidation, holders of MFS Common
Stock are entitled to a ratable share of the net assets of MFS remaining after
payment to the holders of the MFS Preferred Stock of the full preferential
amounts to which they are entitled. All outstanding shares of MFS Common Stock
are fully paid and nonassessable.
The holders of MFS Common Stock are entitled to one vote per share for the
election of Directors and on all other matters submitted to a vote of
stockholders. Holders of MFS Common Stock are not entitled to cumulative
voting for the election of Directors. They are not entitled to preemptive
rights.
The transfer agent and registrar for the MFS Common Stock is Continental
Stock Transfer & Trust Company.
As of the date of MFS Record Date, there are 126,664,076 shares of MFS
Common Stock outstanding after giving effect to a 2-for-1 stock split effected
in the form of a stock dividend which was payable on April 26, 1996. The MFS
Common Stock is traded on Nasdaq under the symbol "MFST."
PREFERRED STOCK
The MFS Preferred Stock has priority over the MFS Common Stock with respect
to dividends and to other distributions, including the distribution of assets
upon liquidation. The MFS Board of Directors is authorized to fix and
determine the terms, limitations and relative rights and preferences of the
MFS Preferred Stock, to establish series of MFS Preferred Stock and to fix and
determine the variations as among series. The MFS Board of Directors without
stockholder approval could issue MFS Preferred Stock with voting and
conversion rights which could adversely affect the voting power of the holders
of MFS Common Stock. Outstanding MFS Preferred consists of 94,992 shares of
Series A Preferred and 15,000,000 shares of Series B Preferred.
The liquidation preference of each share of Series A Preferred is an amount
equal to the greater of (i) the sum of (a) $3,350 and (b) all accrued and
unpaid dividends thereon to the date of liquidation, dissolution or
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winding up and (ii) the value of the fraction of a share of MFS Common Stock
into which the Series A Preferred is convertible on the date of such
liquidation, dissolution or winding up. Dividends on the Series A Preferred
and the Depositary Shares representing such Series A Preferred are cumulative
from the date of original issue and are payable quarterly in arrears at the
rate of $268.00 per annum per share of Series A Preferred (equivalent to $2.68
per annum per Depositary Share). The Depositary Shares representing such
Series A Preferred may be redeemed for cash at the option of MFS, in whole or
in part, at a call price of the sum of (i) $34.170 on and after the Initial
Redemption Date through August 30, 1998, $34.003 on and after August 31, 1998
through November 29, 1998, $33.835 on and after November 30, 1998 through
February 27, 1999, $33.668 on and after February 28, 1999 through April 29,
1999, and $33.50 on and after April 30, 1999, until May 31, 1999, plus (ii)
all accrued and unpaid dividends thereon to the date fixed for redemption. The
Series A Preferred and the Depositary Shares representing such Series A
Preferred are mandatorily convertible into an aggregate of 18,998,400 shares
of MFS Common Stock.
Each share of Series A Preferred is entitled to 10 votes per share with
respect to the election of directors of MFS and each other matter coming
before any meeting of MFS stockholders. The holders of the Series A Preferred
and the holders of MFS Common Stock will vote together as a single class,
unless otherwise provided by law or the Restated Certificate of MFS. The
approval of more than two-thirds of the votes entitled to be cast by the
holders of issued and outstanding shares of Series A Preferred is required to
amend the Restated Certificate of MFS or to materially, adversely changes the
rights, preferences or privileges of the Series A Preferred. The holders of
the outstanding shares of Series A Preferred shall also have the right, voting
together with the holders of any other outstanding shares of Voting Preferred
Stock (as hereinafter defined) as a separate voting group, to elect two
members of the Board of Directors of MFS at any time six or more quarterly
dividends on any shares of Voting Preferred Stock shall be in arrears and
unpaid, in whole or in part, whether or not declared and whether or not any
funds shall be or have been legally available for payment thereof. For this
purpose, "Voting Preferred Stock" shall mean the shares of Series A Preferred
and each other series of Preferred Stock which shall have substantially
similar voting rights (including voting as one voting group with other shares
of Voting Preferred Stock) with respect to the election of directors upon
substantially similar arrearages of dividends. In such event, the number of
Directors of MFS shall be increased by two, and, unless a regular meeting of
the stockholders of MFS is to be held within 60 days thereof for the purpose
of electing Directors, within 30 days thereafter, MFS shall call a special
meeting of the holders of the outstanding shares of Voting Preferred Stock for
the purpose of electing such Directors. If such special meeting shall not have
been so called by MFS, or such regular meeting shall not be so held, a special
meeting may be called for such purpose at the expense of MFS by the holders of
not less than 10% of the outstanding shares of any series of Voting Preferred
Stock; and notice of any such special meeting shall be given by the person or
persons calling the same to the holders of the outstanding shares of the
Voting Preferred Stock. At any such special meeting the holders of the
outstanding shares of Voting Preferred Stock (voting separately as a class
with each share having one vote) shall elect two members of the Board of
Directors of MFS. If a regular meeting of the stockholders of MFS for the
purpose of electing Directors is to be held within 60 days after the time the
holders of the outstanding shares of Voting Preferred Stock become so entitled
to elect two Directors, then at such regular meeting, the holders of the
outstanding shares of Voting Preferred Stock (voting separately as a class
with each share having one vote) shall elect two members of the Board of
Directors. The right of the holders of the Voting Preferred stock (voting
separately as a class) to elect two members of the Board of Directors of MFS
shall continue until such time as no dividends on any outstanding shares of
Voting Preferred Stock are in arrears and unpaid, in whole or in part, at
which time (i) the voting power of the holders of the outstanding shares of
Voting Preferred Stock so to elect two Directors shall cease, but always
subject to the vesting of such voting power upon the occurrence of each and
every like arrearage of dividends, and (ii) the term of office of each member
of the Board of Directors who was elected pursuant to this provision shall
automatically expire.
The Series B Preferred is convertible into shares of MFS Common Stock at any
time after the first anniversary of the date of issuance (September 30, 1996)
at a conversion price of $21.563. Each share of Series B Preferred is
convertible into 0.0463768 shares of MFS Common Stock, or an aggregate of
695,652 shares of MFS Common Stock. Dividends on the Series B Preferred accrue
at the rate of 7 3/4% per annum and are
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payable in cash. Dividends will be paid only when, as and if declared by the
Board. The liquidation preference on each share of Series B Preferred is
$1.00, plus all accrued and unpaid dividends thereon to the date of
liquidation, dissolution or winding up. The Series B Preferred cannot be
redeemed by MFS prior to September 30, 2001. Each share of Series B Preferred
is entitled to 10 votes per share with respect to any and all matters
presented to the MFS stockholders for their action and holders of MFS Common
Stock as a single class unless otherwise required by law or the proposed
action amends, alters or repeals the preferences, special rights or other
powers of the Series B Preferred. The shares of Series B Preferred, however,
are held subject to an irrevocable proxy that has been granted to the
Secretary and Assistant Secretary of MFS to vote all shares of Series B
Preferred on all matters, other than the election of directors and matters as
to which the holders of Series B Preferred vote as a separate class, in
proportion to the holders of MFS Common Stock. The Series B Preferred is non-
transferable for a period of six years from its issuance date, with limited
exceptions, and is redeemable at the option of MFS at the end of such six-year
period. Accordingly, the Series B Preferred has no realizable resale value
until the earlier of its conversion into MFS Common Stock at the option of the
holder or the expiration of the six-year transfer restriction.
MFS has also authorized 75,000 shares to be issued as Series C Junior
Participating Preferred Stock (the "Series C Preferred"). A description of the
terms of the Series C Preferred is set forth below under "--Preferred Stock
Purchase Rights."
PREFERRED STOCK PURCHASE RIGHTS
In September 1995, MFS adopted the MFS Rights Plan and in connection
therewith entered into the MFS Rights Agreement. To implement the MFS Rights
Plan, the MFS Board of Directors authorized the issuance of one MFS Right for
each share of MFS Common Stock outstanding as of October 2, 1995 and issued
thereafter until the Distribution Date (as defined in the MFS Rights
Agreement). Each MFS Right entitles the holder to purchase from MFS one one-
thousandth of a share of Series C Preferred at an initial purchase price of
$300, subject to adjustment. The MFS Rights expire on September 30, 2005,
unless extended or earlier redeemed by MFS.
The MFS Rights separate from the MFS Common Stock and a Distribution Date
occurs upon the earlier of 10 days following public disclosure that certain
persons or groups of persons have become a beneficial owner of 15% or more of
the outstanding MFS Common Stock (an "Acquiring Person") or 10 business days
following the commencement of a tender offer or exchange offer that would
result in certain persons or groups becoming an Acquiring Person. Upon the
occurrence of a Distribution Date, each holder of a MFS Right has the right to
receive, upon exercise of the right, MFS Common Stock having a value equal to
two times the exercise price of the MFS Right, except that all MFS Rights held
by an Acquiring Person become null and void.
In the event that a person becomes an Acquiring Person and MFS is acquired
in a merger or other business combination in which MFS is not the surviving
corporation or more than 50% of the assets or earning power of MFS' assets are
sold or transferred, each holder, except for Acquiring Persons, of a MFS Right
has the right to receive, upon exercise, common stock of the acquiring company
which has a value equal to two times the exercise price of the MFS Right.
The Series C Preferred will be nonredeemable, and subordinate to all other
series of MFS Preferred Stock. The liquidation preference of each share of
Series C Preferred is an amount equal to (a) 1,000 times the aggregate amount
to be distributed per share to holders of MFS Common Stock and (b) after the
payments set forth in (a), a ratable and proportionate share with the holders
of MFS Common Stock of the remaining assets to be distributed. Each share of
Series C Preferred will be entitled to receive, when, as and if declared, a
quarterly dividend at the rate equal to 1,000 times the aggregate per share
amount of all cash dividends and 1,000 the aggregate per share amount of all
non-cash dividends or other distributions (payable in kind) (other than a
dividends payable in of MFS equity securities). Each share of Series C
Preferred will have 1,000 votes, subject to adjustment, voting together with
the MFS Common Stock and not as a separate class. If MFS enters into any
consolidation, merger, combination or other transaction in which the shares of
MFS Common Stock are
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exchanged, each share of Series C Preferred will be entitled to receive 1,000
times the amount received per share of MFS Common Stock. The rights of the
Series C Preferred as to dividends, voting rights and liquidation are
protected by antidilution provisions.
MFS may redeem the MFS rights in whole, but not in part, at any time until
ten days following the date on which there has been public disclosure that, or
facts indicating that, a person has become an Acquiring Person at a price (the
"Redemption Right") of $.01 per MFS Right (or such other consideration deemed
appropriate by the MFS Board of Directors) by resolution of the MFS Board of
Directors, subject to certain exceptions. The redemption of the MFS Rights may
be made effective at such time on such basis with such conditions as the MFS
Board of Directors in its sole discretion may establish. The MFS Rights
terminate immediately upon the action of the MFS Board of Directors ordering
redemption of the MFS Rights and thereafter the holders of MFS Rights will
only be able to receive the Redemption Price.
Other than provisions relating to the principal economic terms of the MFS
Rights, the MFS Rights Agreement may be amended by resolution of MFS' Board of
Directors, subject to certain exceptions, prior to the Distribution Date.
After the Distribution Date, the MFS Rights Agreement may be amended by
resolution of the MFS' Board of Directors, subject to certain exceptions, in
order to cure any ambiguity, to make changes which do not adversely affect the
interests of holders of MFS Rights (excluding the interests of any Acquiring
Person or its affiliates or associates), or to shorten or lengthen any time
period under the MFS Rights Agreement; provided, however, that no amendment to
adjust the time period governing redemption may be made at such time as the
MFS Rights are no redeemable.
The MFS Rights have certain anti-takeover effects. The MFS Rights will cause
substantial dilution to a person or group that attempts to acquire, or merge
with, MFS without conditioning the offer on the MFS Rights being rendered
inapplicable.
COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of material differences between the rights of
holders of UUNET Common Stock and the rights of holders of MFS Common Stock.
Each of UUNET and MFS is organized under the laws of the State of Delaware.
Any material differences in the rights of their respective stockholders would
arise from various provisions of the Certificate of Incorporation and By-laws
of each of UUNET and MFS. Among the differences between the rights of the
holders of MFS Common Stock and UUNET Common Stock are the following:
. CAPITAL STOCK. The total number of authorized shares of capital stock of
MFS is 425,000,000 shares, consisting of 400,000,000 shares of MFS Common
Stock and 25,000,000 shares of MFS Preferred Stock, while the total number of
authorized shares of capital stock of UUNET is 175,500,000 shares, consisting
of 175,000,000 shares of UUNET Common Stock and 500,000 shares of UUNET
Preferred Stock.
. CERTIFICATE OF INCORPORATION. The Restated Certificate of Incorporation of
MFS may be amended by majority vote of the board of directors or the
stockholders, while the Certificate of Incorporation of UUNET requires the
affirmative vote of the holders of at least 66 2/3% of the voting power of all
of the then outstanding capital stock of UUNET to amend the Certificate of
Incorporation regarding election of directors, special meetings of
stockholders, liability of directors, and indemnification.
. SPECIAL MEETINGS OF STOCKHOLDERS. The Restated Certificate of
Incorporation of MFS provides that special meetings of the stockholders may be
called only by the MFS Board of Directors or the Chairman of the MFS Board of
Directors, while the By-laws of UUNET provide that the UUNET Board of
Directors, the Chairman of the UUNET Board of Directors, the President or the
Chief Executive Officer, unless otherwise required by law, may call such
meeting.
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. ANNUAL MEETINGS OF STOCKHOLDERS. The By-laws of MFS provide that to
propose business to be transacted at an annual meeting, a stockholder's timely
notice must be received by MFS not less than 60 days nor more than 90 days
prior to the anniversary of the immediately preceding annual meeting of
stockholders, while the By-laws of UUNET deem such notice timely if received
by UUNET not less than 120 calendar days in advance of the date that UUNET's
proxy statement was released to stockholders in connection with the previous
year's annual meeting of stockholders.
. REMOVAL OF DIRECTORS. The By-laws of UUNET provide that directors may be
removed only for cause and only by the affirmative vote of the holders of at
least a majority of the voting power of all of the then outstanding shares of
capital stock of UUNET entitled to vote generally in the election of directors
voting together as a single class and vacancies from such action may be filled
only by the affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present or by unanimous
written consent of the stockholders, while the By-laws of MFS are silent
although under Delaware law, members of a classified board of directors (which
MFS has), can only be removed for cause.
. NOMINATION OF DIRECTORS. The By-laws of MFS provide that a stockholder's
notice in connection with the nomination of directors is timely if received by
MFS (a) in the case of an annual meeting, not less than 60 days nor more than
90 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders, and (b) in the case of a special meeting of
stockholders called for the purpose of electing directors, not later than the
close of business on the 10th day following the day on which notice of the
date of the special meeting was mailed or public disclosure of the date of the
special meeting was made, whichever first occurs, while the By-laws of UUNET
provide that such notice is timely if received by UUNET not less than 21 days
nor more than 60 days prior to any meeting of stockholders called for the
election of directors, but if less than 21 days' notice of the meeting is
given to stockholders, a stockholder's notice shall be considered timely if
received by UUNET at the close of business on the 7th day following the day on
which the notice of meeting was mailed.
. AMENDING BY-LAWS. The Restated Certificate of Incorporation of MFS
provides that the By-laws of MFS may be amended or repealed by majority vote
of the MFS Board of Directors or by the affirmative vote of 66 2/3% of the
outstanding stock of MFS entitled to vote thereon, while the By-laws of UUNET
provide that the affirmative vote of the holders of at least 66 2/3% of the
voting power of all of the then outstanding shares of the capital stock of
UUNET entitled to vote generally in the election of directors is required to
amend or repeal By-laws of UUNET that relate to special meetings of
stockholders, number and term of office of directors, vacancies and newly
created directorships, removal of directors, indemnification of directors and
officers, and requirements for amendments.
. VOTING RIGHTS. Neither the Certificate of Incorporation nor the By-laws of
either MFS or UUNET contain any other provisions designed to delay or impede a
change of control or supermajority voting provisions. See "DESCRIPTION OF MFS
CAPITAL STOCK--Preferred Stock Purchase Rights" for a description of the MFS
Rights Plan, adopted by MFS in September 1995, which may have certain anti-
takeover effects.
MANAGEMENT OF UUNET
DIRECTORS
The following sets forth information as to the persons who are expected to
serve as directors of UUNET following the Merger:
James Q. Crowe, 47, has been the senior executive officer of MFS since its
inception. He has served as Chairman of the Board of MFS since 1988, Chief
Executive Officer since November 1991 and was President (January 1988-June
1989 and April 1990-January 1992). Mr. Crowe has also served as President and
Vice President of Kiewit Industrial Co., which is engaged in large industrial
construction projects, such as independent power projects, cogeneration
facilities, and, until 1988, telecommunications projects. Prior to joining
Peter Kiewit Sons', Inc. ("PKS") in 1986, Mr. Crowe was employed by Morrison-
Knudsen Corporation, a major
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construction and engineering company based in Boise, Idaho, where he held the
position of Group Vice President with responsibility for the electric power
market. Mr. Crowe is a Director of PKS, Kiewit Diversified Group Inc. ("KDG"),
a wholly owned subsidiary of PKS, RCN Corporation, a wholly owned subsidiary
of KDG ("RCN"), and CalEnergy Company, Inc. ("CEC"), a geothermal energy
producer, which is partially owned by KDG. In addition, since October 1993,
Mr. Crowe has been a Director of C-TEC Corporation ("C-TEC"), a company
controlled by RCN that, until MFS acquired these operations from C-TEC on May
8, 1995, owned a competitive access provider providing business services in
Westchester County, New York. Mr. Crowe is presently a member of the executive
committee of the MFS Board of Directors (the "Executive Committee").
R. Douglas Bradbury, 44, has been the Chief Financial Officer of MFS since
January 1992 and Executive Vice President since August 1995. Previously, Mr.
Bradbury was Senior Vice President of MFS from September 1992 to August 1995,
and prior to that, he was Senior Vice President--Corporate Affairs for MFS
Telecom. Before joining MFS in 1988, he was Executive Vice President and Chief
Operating Officer at American Pioneer Telephone, Inc., a regional long
distance carrier based in Orlando, Florida, and a Vice President of
Manufacturers Hanover Trust Company in New York City and Milan, Italy.
Kirby G. Pickle, 39, has been an Executive Vice President of MFS and
President and Chief Executive Officer of the MFS Intelenet Companies since
August 1995; previously, he was President and Chief Executive Officer of MFS
Intelenet from November 1992. From September 1992 to August 1995 he was a
Senior Vice President of MFS. Previously, he was Senior Vice President of
Sales and Marketing of MFS Telecom, and had general management
responsibilities over MFS Telecom's Northern Division, comprising six
metropolitan area networks. Prior to joining MFS Telecom in January 1991, he
was Vice President of Marketing/Business Development for Sprint Corporation,
and has held other sales, customer service and marketing positions with Sprint
Corporation, MCI Communications Corporation and AT&T.
Terrence J. Ferguson, 53, has been responsible for the legal affairs of MFS
since its inception. He was elected Senior Vice President in September 1992,
General Counsel in January 1992 and Secretary in November 1991. Before joining
MFS in October 1992, Mr. Ferguson was employed as an attorney by PKS. From
September 1976 to December 1981, Mr. Ferguson was an associate and then
partner in the law firm Kutak Rock.
Richard L. Adams, Jr., 39, founded the business of UUNET in 1987, has been a
director of UUNET since its inception in May 1990, and has served as the Chief
Technical Officer of UUNET since June 1994. In addition, Mr. Adams served as
President and Chief Executive Officer of UUNET from inception to June 1994.
Mr. Adams has been active in data communications and networking since 1980 and
designed standard networking protocols, including SLIP (Serial Line Internet
Protocol) and the "t" protocol for running UUCP over TCP/IP connections. Mr.
Adams is a founder of the Commercial Internet Exchange Association. Mr. Adams
received his B.S. and M.S. degrees in Computer Science from, and performed
postgraduate research in Mechanical Computer Aided Design at, Purdue
University.
John W. Sidgmore, 45, has served as President, Chief Executive Officer and a
director of UUNET since June 1994. In 1989, he became President and Chief
Executive Officer of Intelicom Solutions Corporation (currently CSC
Intelicom), a telecommunications software company. In 1991, the company was
sold to Computer Sciences Corporation, and he remained President and Chief
Executive Officer until June 1994. From 1975 to 1989, Mr. Sidgmore was
employed by GEIS, where he was Vice President and General Manager of GEIS
North America from 1985 to 1989. Mr. Sidgmore is a director of Saville Systems
PLC, a provider of billing software for the telecommunications industry. Mr.
Sidgmore received his B.A. in Economics from State University of New York.
See "MFS REELECTION OF CLASS I DIRECTORS PROPOSAL--Information as to
Nominees for Elections as Class I Directors" and "--Executive Compensation"
for additional information with respect to Messrs. Crowe and Bradbury. See "--
Officers," "--Employment Arrangements" and "THE MERGER--Interests of Certain
Persons in the Merger" for additional information with respect to Messrs.
Adams and Sidgmore.
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OFFICERS
Set forth below are the names, ages and titles of certain of the persons who
are expected to serve as executive officers of UUNET following the Merger:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John W. Sidgmore ....... 45 President and Chief Executive Officer
Richard L. Adams, Jr. .. 39 Chief Technical Officer
David R. Boast ......... 45 Vice President, Microsoft Network Division
Kevin R. Boyne ......... 41 Vice President, Network Operations
David F. Foster ........ 49 Vice President, Business Development
Clinton F. Heiden....... 28 Vice President, Sales
Heidi B. Heiden ........ 57 Senior Vice President, Network Operations and
Technology
Jeffrey G. Hilber ...... 42 Vice President and Chief Financial Officer
Martina W. Knee ........ 42 Vice President, General Counsel and Secretary
Diana E. Lawrence ...... 44 Vice President, Human Resources
James T. McManus ....... 38 Vice President, Systems Engineering
Michael D. O'Dell ...... 42 Vice President and Chief Scientist
Jeffrey S. Osborn ...... 37 Vice President, Network Sales and Marketing
Eric L. Scace .......... 43 Vice President, International Development
Joseph Squarzini, Jr. .. 56 Senior Vice President, Global Technology Integration
Alan B. Taffel ......... 40 Vice President, Sales and Marketing
</TABLE>
Mr. Sidgmore has served as President, Chief Executive Officer and a director
of UUNET since June 1994. In 1989, he became President and Chief Executive
Officer of Intelicom Solutions Corporation (currently CSC Intelicom), a
telecommunications software company. In 1991, the company was sold to Computer
Sciences Corporation, and he remained President and Chief Executive Officer
until June 1994. From 1975 to 1989, Mr. Sidgmore was employed by GEIS, where
he was Vice President and General Manager of GEIS North America from 1985 to
1989. Mr. Sidgmore is a director of Saville Systems PLC, a provider of billing
software for the telecommunications industry. Mr. Sidgmore received his B.A.
in Economics from State University of New York.
Mr. Adams founded the business of UUNET in 1987, has been a director of
UUNET since its inception in May 1990, and has served as the Chief Technical
Officer of UUNET since June 1994. In addition, Mr. Adams served as President
and Chief Executive Officer of UUNET from inception to June 1994. Mr. Adams
has been active in data communications and networking since 1980 and designed
standard networking protocols, including SLIP (Serial Line Internet Protocol)
and the "t" protocol for running UUCP over TCP/IP connections. Mr. Adams is a
founder of the Commercial Internet Exchange Association. Mr. Adams received
his B.S. and M.S. degrees in Computer Science from, and performed postgraduate
research in Mechanical Computer Aided Design at, Purdue University.
Mr. Boast has served as Vice President, Microsoft Network Division of UUNET
since December 1994, after serving as Director, Product Assurance from June
1994 to December 1994. From August 1981 to October 1993, he served in a
variety of positions at Legent Corporation, most recently as Corporate Vice
President, Client Services.
Mr. Boyne has served as Vice President, Network Operations of UUNET since
December 1995, after joining UUNET in March 1995, as Manager, Engineering and
serving in various engineering and operations capacities until December 1995.
From 1976 to February 1995, Mr. Boyne served in a variety of positions at GEIS
and General Electric Technical Services Co., another subsidiary of General
Electric Co., most recently serving as Manager, ECS (electronic commerce
services) Connectivity at GEIS. Mr. Boyne received his B.S. in Mathematics and
his M.S. in Computer and Information Science from The Ohio State University.
Mr. Foster has served as Vice President, Business Development of UUNET since
November 1994. He was a principal of David Foster Associates, a consulting
firm, from January 1992 to November 1994 and was Vice
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<PAGE>
President of Marketing for Soft-Switch, Inc. from March 1990 to January 1992.
Mr. Foster received his B.A. in Mathematics from the University of Georgia.
Mr. Clinton Heiden has served as Vice President, Sales of UUNET since June
1996, after serving as Director of Sales from June 1994 to June 1996. Prior to
joining UUNET, he was Vice President of Sales of InterCon Systems ("InterCon")
from March to June 1994, having served as Intercon's Director of Sales from
December 1992 to March 1994 and Sales Manager from December 1990 to December
1992. Mr. Heiden received his B.A. in Computer Information Systems from James
Madison University.
Mr. Heidi Heiden has served as Senior Vice President, Network Operations and
Technology, since September 1995. Prior to joining UUNET, he was Senior
Operating Officer at Salomon Inc. from December 1990 to August 1995 and was
Senior Vice President of the Wollongong Group from July 1986 to November 1990.
He served in the United States Army from July 1963 to January 1984 where he
led diverse technology development programs including prototype user equipment
for the Global Positioning System. Mr. Heiden created and ran the DDN (Defense
Data Network), the largest data system at that time, which formed the basis of
what is now the Internet. Mr. Heiden received a B.S. from the United States
Military Academy, West Point, New York.
Mr. Hilber has served as Chief Financial Officer of UUNET since September
1993 and as a Vice President since January 1996. Prior to joining UUNET, Mr.
Hilber was Corporate Controller of Telebit Corporation from November 1991 to
August 1993. Prior to his association with Telebit, he held various positions
with Qume Corporation, including Corporate Controller, from September 1988 to
November 1991. From 1978 to 1988, he served in various positions with Arthur
Andersen LLP (then Arthur Andersen & Co.), most recently as Senior Audit
Manager. Mr. Hilber received his B.B.A. in Accounting from the University of
Wisconsin-Milwaukee and has held licenses as a certified public accountant in
the States of California and Wisconsin.
Ms. Knee has served as Vice President, General Counsel and Secretary of
UUNET since December 1995. From January 1990 through November 1995, she was a
shareholder of a partner of Heller Ehrman White & McAuliffe, having become
associated with the firm in 1983. Ms. Knee received her B.A. in Psychology
from the University of California, Berkeley and her J.D. from the Boalt Hall
School of Law, University of California, Berkeley.
Ms. Lawrence has served as Vice President, Human Resources of UUNET since
November 1994, after serving as Director, Human Resources from September to
November 1994. Prior to joining UUNET, she held various human resources
management positions with GEIS from January 1984 to September 1994. Ms.
Lawrence received her B.A. in English from Siena College.
Mr. McManus has served as Vice President, Systems Engineering of UUNET since
January 1996. Prior to joining UUNET, he was Vice President, Systems
Engineering at Salomon Inc. from June 1993 until December 1995. Mr. McManus
served as Vice President, Strategic Projects from May 1991 until 1993 and
Manager, Network Planning from October 1989 to May 1991, each at Salomon Inc.
He received his B.A. in Engineering and M.B.A. from Manhattan College.
Mr. O'Dell has served as Vice President and Chief Scientist of UUNET since
January 1996 and as Vice President, Research and Development from March 1993
through December 1995. Prior to joining UUNET, he was a Member of the
Technical Staff at Bell Communications Research (Bellcore) from April 1990 to
March 1993. Mr. O'Dell received his B.S. and M.S. degrees in Computer Science
from the University of Oklahoma.
Mr. Osborn has served as Vice President, Network Sales and Marketing since
January 1996 and as Vice President, Sales of UUNET from November 1994 to
January 1996, and as Director of Sales and Marketing from November 1993 to
November 1994. Prior to joining UUNET, he was Vice President of Sales at
InterCon from May 1992 to November 1993 and was President of Wilder Systems
("Wilder"), a startup software publishing company, from September 1991 to May
1992. Before joining Wilder, Mr. Osborn was Director of Sales for
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<PAGE>
Cayman Systems from August 1988 to September 1991. Mr. Osborn received his
B.A. in Economics from Trinity College.
Mr. Scace has served as Vice President, International Development since July
1995 and as Manager, International Development from April 1995 to July 1995.
Prior to joining UUNET, he was President of Klaros Corp., an independent
consulting firm, from September 1994 to April 1995. From June 1993 until
September 1994, Mr. Scace served as Regional Sales Manager of Alcatel Data
Networks, a joint venture of Sprint Corporation and Alcatel N.V. ("Alcatel
Data Networks"). He was the Regional Sales Manager for Sprint International
from prior to 1990 until June 1993. Mr. Scace received his B.S. in Atmospheric
Sciences from Cornell University.
Mr. Squarzini has served as Senior Vice President, Global Technology
Integration since September 1995 and as Vice President, Network Operations of
UUNET from September 1993 to September 1995. Prior to joining UUNET, he served
as Vice President, Technology Operations of GEIS from 1983 to September 1993
where he was general manager of GEIS' international and teleprocessing
organization. From 1979 to 1983, Mr. Squarzini was General Manager, Telecoms
and Information Processing at General Electric Co., where he supervised the
planning and operation of the then largest private voice network. From 1976 to
1979, he was Director of Systems Engineering at Satellite Business Systems, a
partnership of IBM, COMSAT and Aetna. Mr. Squarzini received his B.S. in
Electrical Engineering from Manhattan College in New York.
Mr. Taffel has served as Vice President, Sales and Marketing of UUNET since
January 1996 and as Vice President, Marketing since September 1994. Prior to
joining UUNET, he served as Vice President, Marketing of Alcatel Data Networks
from June 1993 to August 1994. Mr. Taffel served as Vice President, Market
Development for Sprint International from July 1988 to June 1993. He is the
past President of the Frame Relay Forum. Mr. Taffel received his B.S. in
Information and Computer Sciences from the University of California, Irvine.
Mr. Heidi Heiden is Mr. Clinton Heiden's father.
EMPLOYMENT ARRANGEMENTS
In May 1994, UUNET entered into an employment agreement with Mr. Sidgmore.
Pursuant to the terms of the agreement, Mr. Sidgmore's base salary is $220,000
per year, plus a bonus targeted at $130,000 per year. Mr. Sidgmore received a
$200,000 signing bonus in 1994, a $150,000 bonus in July 1995 for the period
July 1, 1994 through June 30, 1995, and a bonus of $82,500 in February 1996
for the period July 1 through December 31, 1995. If UUNET terminates Mr.
Sidgmore's employment without cause, he will receive severance payments
totaling $300,000. UUNET granted to Mr. Sidgmore options to purchase at $0.16
per share 1,244,100 shares of UUNET Common Stock pursuant to the employment
agreement. UUNET has a right to repurchase 888,642 of such shares at the
exercise price if Mr. Sidgmore's employment by UUNET terminates, which right
lapses ratably over 60 months beginning on July 31, 1994. In the event of a
change in control of UUNET or an involuntary termination other than for cause
of Mr. Sidgmore's employment by UUNET, UUNET's right of repurchase lapses with
respect to 50 percent of any of the 888,642 shares subject to a right of
repurchase at the time. See "THE MERGER--Interests of Certain Persons in the
Merger."
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<PAGE>
SECURITY OWNERSHIP OF MFS
PRIOR TO THE MERGER
The following table sets forth as of June 21 certain information with
respect to the beneficial ownership of MFS Common Stock and Series B Preferred
by (i) each person known by MFS to own beneficially 5% or more of the
outstanding shares of MFS Common Stock and Series B Preferred, (ii) each
director of MFS, (iii) MFS' Chief Executive Officer and each of the four
remaining most highly compensated executive officers (collectively, the
"Executive Group") and (iv) all executive officers and directors of MFS as a
group. No person listed in the following table is the beneficial owner of any
shares of Series A Preferred.
<TABLE>
<CAPTION>
AMOUNT AND
AMOUNT AND NATURE OF
NATURE OF OWNERSHIP-
NAME AND ADDRESS OF OWNERSHIP- CONVERTIBLE
BENEFICIAL OWNER OF CLASS COMMON STOCK PERCENT PREFERRED STOCK PERCENT
- ------------------------- ------------ ------- --------------- -------
<S> <C> <C> <C> <C>
James Q. Crowe (1) ................ 1,464,846 1.1% 87,389 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
R. Douglas Bradbury (2) ........... 278,609 * 3,537 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Howard Gimbel (3) ................. 219,918 * -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
William L. Grewcock (4) ........... 4,056,672 3.2 758,554 5.1%
1000 Kiewit Plaza
Omaha, Nebraska 68131
Royce J. Holland (5) .............. 566,089 * 11,499 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Richard R. Jaros (6) .............. 355,760 * 67,522 *
1000 Kiewit Plaza
Omaha, Nebraska 68131
Robert E. Julian .................. 1,119,820 * 222,809 1.5%
1000 Kiewit Plaza
Omaha, Nebraska 68131
David C. McCourt (7) .............. 21,808 * 977 *
105 Carnegie Center
Princeton, New Jersey 08540
Ronald W. Roskens ................. 9,784 * -- *
617 North 90 Street
Omaha, Nebraska 68144
Walter Scott, Jr. (8) ............. 9,458,548 7.5% 1,778,669 11.8%
1000 Kiewit Plaza
Omaha, Nebraska 68131
Kenneth E. Stinson ................ 140,606 * 23,725 *
1000 Kiewit Plaza
Omaha, Nebraska 68131
Michael B. Yanney (9) ............. 10,146 * -- *
1004 Farnam Street, Suite 400
Omaha, Nebraska 68102
</TABLE>
118
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
AMOUNT AND NATURE OF
NATURE OF OWNERSHIP-
NAME AND ADDRESS OF OWNERSHIP- CONVERTIBLE
BENEFICIAL OWNER OF CLASS COMMON STOCK PERCENT PREFERRED STOCK PERCENT
- ------------------------- ------------ ------- --------------- -------
<S> <C> <C> <C> <C>
Ronald R. Beaumont (10)............ 129,000 * -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Kirby G. Pickle (11)............... 205,722 * -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
All directors and
executive officers as a
group (27 persons) (12)........... 19,631,136 15.8% 2,953,704 19.6%
</TABLE>
- --------
* Less than 1% of the outstanding shares.
(1) Includes 997,220 shares of MFS Common Stock which may be acquired within
60 days of June 21, 1996 through the exercise of stock options, and 166
shares of MFS Common Stock held in trusts for the benefit of Mr. Crowe's
child and stepchildren.
(2) Includes 259,210 shares of MFS Common Stock which may be acquired within
60 days of June 21, 1996 through the exercise of stock options.
(3) Includes 60,000 shares of MFS Common Stock which may be acquired within
60 days of June 21, 1996 through the exercise of stock options.
(4) Includes 34,826 shares of MFS Common Stock and 13,030 shares of Series B
Preferred held in the Bill and Berniece Grewcock Foundation and 208,957
shares of MFS Common Stock and 78,180 shares of Series B Preferred held
in the Grewcock Family Limited Partnership.
(5) Includes 504,366 shares of MFS Common Stock which may be acquired within
60 days of June 21, 1996 through the exercise of stock options.
(6) Includes 5,483 shares of MFS Common Stock and 1,303 shares of Series B
Preferred held in trusts for the benefit of Mr. Jaros' children.
(7) Includes 5,000 shares of MFS Common Stock held by Mr. McCourt's wife.
(8) Includes 34,772 shares of MFS Common Stock and 12,991.2 shares of Series
B Preferred held in the Suzanne Scott Irrevocable Trust.
(9) Includes 704 shares of MFS Common Stock held by Mr. Yanney's wife and
2,000 shares of MFS Common Stock held by America First Companies, L.L.C.,
60% of which is indirectly owned by Mr. Yanney and his wife.
(10) Includes 129,000 shares of MFS Common Stock which may be acquired within
60 days of June 21, 1996 through the exercise of stock options.
(11) Includes 205,722 shares of MFS Common Stock which may be acquired within
60 days of June 21, 1996 through the exercise of stock options.
(12) Includes 3,199,859 shares of MFS Common Stock which may be acquired
within 60 days of June 21, 1996 through the exercise of stock options.
AFTER THE MERGER
The following table sets forth certain information as of the MFS Record Date
with respect to the anticipated beneficial ownership of MFS Common Stock and
Series B Preferred, after giving effect to the issuance of shares of MFS
Common Stock in the Merger, by (i) each person known by MFS to own
beneficially 5% or more of the outstanding shares of MFS Common Stock and
Series B Preferred, (ii) each director of MFS, (iii) MFS' Chief Executive
Officer and each of the four remaining most highly compensated executive
officers (collectively, the "Executive Group") and (iv) all executive officers
and directors of MFS as a group. No person listed in the following table is
the beneficial owner of any shares of Series A Preferred.
119
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
AMOUNT AND NATURE OF
NATURE OF OWNERSHIP-
NAME AND ADDRESS OF OWNERSHIP- CONVERTIBLE
BENEFICIAL OWNER OF CLASS COMMON STOCK PERCENT PREFERRED STOCK PERCENT
------------------------- ------------ ------- --------------- -------
<S> <C> <C> <C> <C>
Richard L. Adams, Jr. (1) ......... -- *
3060 Williams Drive
Fairfax, Virginia 22031
James Q. Crowe (2) ................ 87,389 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
R. Douglas Bradbury (3) ........... 3,537 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Howard Gimbel (4) ................. -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
William L. Grewcock (5) ........... 758,554 5.1%
1000 Kiewit Plaza
Omaha, Nebraska 68131
Royce J. Holland (6) .............. 11,499 *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Richard R. Jaros (7) .............. 67,522 *
1000 Kiewit Plaza
Omaha, Nebraska 68131
Robert E. Julian .................. 222,809 1.8%
1000 Kiewit Plaza
Omaha, Nebraska 68131
David C. McCourt (8) .............. 977 *
105 Carnegie Center
Princeton, New Jersey 08540
Ronald W. Roskens ................. -- *
617 North 90 Street
Omaha, Nebraska 68144
Walter Scott, Jr. (9) ............. 1,772,173 11.8%
1000 Kiewit Plaza
Omaha, Nebraska 68131
John W. Sidgmore (1) .............. -- *
3060 Williams Drive
Fairfax, Virginia 22031
Kenneth E. Stinson ................ 23,725 *
1000 Kiewit Plaza
Omaha, Nebraska 68131
Michael B. Yanney (10) ............ -- *
1004 Farnam Street, Suite 400
Omaha, Nebraska 68102
</TABLE>
120
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
AMOUNT AND NATURE OF
NATURE OF OWNERSHIP-
NAME AND ADDRESS OF OWNERSHIP- CONVERTIBLE
BENEFICIAL OWNER OF CLASS COMMON STOCK PERCENT PREFERRED STOCK PERCENT
------------------------- ------------ ------- --------------- -------
<S> <C> <C> <C> <C>
Ronald R. Beaumont (11)........... -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Kirby G. Pickle (12).............. -- *
11808 Miracle Hills Drive
Omaha, Nebraska 68154
All directors and executive
officers as a group (30 persons)
(13)............................. 2,947,208 19.6%
</TABLE>
- --------
* Less than 1% of the outstanding shares of MFS Common Stock.
(1) Such person will become a director of MFS upon consummation of the
Merger. see "THE MERGER-Interests of Certain Persons in the Merger,"
"MANAGEMENT OF UUNET--Officers" and "--Employment Arrangements" for
additional information concerning such person's biographical information
and terms of employment.
(2) Includes shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options, and 83
shares of MFS Common Stock held in trusts for the benefit of Mr. Crowe's
child and stepchildren.
(3) Includes shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(4) Includes shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(5) Includes 34,826 shares of MFS Common Stock and 13,030 shares of Series B
Preferred held in the Bill and Berniece Grewcock Foundation and 208,957
shares of MFS Common Stock and 78,180 shares of Series B Preferred held
in the Grewcock Family Limited Partnership.
(6) Includes shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(7) Includes 5,483 shares of MFS Common Stock and 1,303 shares of Series B
Preferred held in trusts for the benefit of Mr. Jaros' children.
(8) Includes 5,000 shares of MFS Common Stock held by Mr. McCourt's wife.
(9) Includes 34,772 shares of MFS Common Stock and 12,991.2 shares of Series
B Preferred held in the Suzanne Scott Irrevocable Trust.
(10) Includes 704 shares of MFS Common Stock held by Mr. Yanney's wife and
2,000 shares of MFS Common Stock held by America First Companies, L.L.C.,
60% of which is indirectly owned by Mr. Yanney and his wife.
(11) Includes shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(12) Includes shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
(13) Includes shares of MFS Common Stock which may be acquired within 60
days of the MFS Record Date through the exercise of stock options.
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<PAGE>
SECURITY OWNERSHIP OF UUNET
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding the beneficial
ownership of the UUNET Common Stock as of June 21, 1996 by (i) each of UUNET's
directors, its Chief Executive Officer and each of the other four most highly
compensated executive officers of UUNET as of December 31, 1995 (ii) all
directors and executive officers of UUNET as a group and (iii) each person who
is known by UUNET to own beneficially more than five percent of the UUNET
Common Stock. The information included in this table is based upon information
provided to UUNET in writing by the stockholders named therein.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
----------------------
NUMBER (1) PERCENT (2)
---------- -----------
<S> <C> <C>
Richard L. Adams, Jr. (3)................................ 4,376,501 13.48%
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Microsoft Corporation.................................... 4,164,000 12.83
1 Microsoft Way
Redmond, WA 98052
Menlo Ventures IV, L.P. (4).............................. 3,229,698 9.94
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
New Enterprise Associates V,
Limited Partnership(5).................................. 3,229,698 9.94
1119 St. Paul Street
Baltimore, MD 21202
Accel IV L.P. (6)........................................ 3,210,320 9.88
One Palmer Square
Princeton, NJ 08542
Peter J. Barris(7)....................................... 3,229,698 9.94
John W. Jarve(8)......................................... 3,229,698 9.94
Arthur C. Patterson(9)................................... 3,210,320 9.88
John W. Sidgmore(10)..................................... 1,146,118 3.53
Joseph Squarzini, Jr.(11)................................ 252,841 *
Jeffrey G. Hilber(12).................................... 240,321 *
Alan B. Taffel(13)....................................... 92,696 *
Les B. Strauss(14)....................................... 92,432 *
Daniel C. Lynch(15)...................................... 91,000 *
Daniel Rosen(16)......................................... 16,600 *
All directors and executive
officers as a group
(22 persons)(17)........................................ 17,036,826 52.48%
</TABLE>
- --------
* Less than one percent of the outstanding shares of UUNET Common Stock.
(1) Except pursuant to applicable community property laws or as indicated in
the footnotes to this table, to UUNET's knowledge, each stockholder
identified in the table possesses sole voting and investment power with
respect to all shares of UUNET Common Stock shown as beneficially owned
by such stockholder.
(2) Applicable percentage of ownership for each stockholder is based on
32,462,956 shares of UUNET Common Stock outstanding as of June 21, 1996
together with applicable options for such stockholders. Beneficial
ownership is determined in accordance with the rules of the Commission,
and includes voting and investment power with respect to the shares.
Shares of UUNET Common Stock subject to options are deemed outstanding
for computing the percentage of ownership of the person holding such
options, but are not deemed outstanding for computing the percentage
ownership of any other person.
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<PAGE>
(3) Includes 1,497 shares issuable upon the exercise of options which will
vest on December 31, 2002.
(4) Includes 2,563,031 shares held by Menlo Ventures IV, L.P. ("Menlo IV")
and 666,667 shares held by Menlo Evergreen V, L.P. ("Menlo V"). John W.
Jarve, a director of UUNET, is a general partner of the general partner
of each of these partnerships, shares voting and dispositive power with
respect to the shares held by each such entity, and disclaims beneficial
ownership of such shares in which he has no pecuniary interest. See Note
8.
(5) Peter J. Barris, a director of UUNET, is a partner of the general partner
of New Enterprise Associates V, Limited Partnership ("NEA V"), shares
voting and dispositive powers with respect to the shares held by NEA V,
and disclaims beneficial ownership of such shares in which he has no
pecuniary interest. See Note 7.
(6) Includes 2,958,403 shares held by Accel Investors IV L.P. ("Accel IV"),
119,499 shares held by Accel Investors '93 L.P. ("Accel Investors"),
71,054 shares held by Ellmore C. Patterson Partners ("ECP Partners") and
61,364 shares held by Accel Keiretsu L.P. ("Keiretsu"). Arthur C.
Patterson, a director of UUNET, is a general partner of the general
partner of each of these partnerships, shares voting and dispositive
power with respect to the shares held by each such entity, and disclaims
beneficial ownership of such shares in which he has no pecuniary
interest. See Note 9.
(7) All shares are held by NEA V. Mr. Barris is a partner of the general
partner of NEA V and disclaims ownership of such shares in which he has
no pecuniary interest. See Note 5.
(8) Includes 2,563,031 shares held by Menlo IV and 666,667 shares held by
Menlo V. Mr. Jarve is a general partner of the general partner of these
partnerships and disclaims ownership of such shares in which he has no
pecuniary interest. See Note 4.
(9) Includes 2,958,403 shares held by Accel IV, 119,499 shares held by Accel
Investors, 71,054 shares held by ECP Partners and 61,364 shares held by
Keiretsu. Mr. Patterson is a general partner of the general partner of
each of these partnerships and disclaims ownership of such shares in
which he has no pecuniary interest. See Note 6.
(10) Includes as of 60 days after June 21, 1996, 435,204 shares subject to a
right of repurchase by UUNET which expires as to 14,811 of such shares
ratably on a monthly basis through June 30, 1999, and 45,188 shares held
in a trust of which Mr. Sidgmore is the trustor and the sole trustee.
Also includes 5,500 shares issuable upon exercise of options, all of
which are vested, and 3,975 shares issuable upon exercise of options
which will vest on December 31, 2002.
(11) Includes as of 60 days after June 21, 1996, 119,792 shares subject to a
right of repurchase by UUNET which expires ratably on a monthly basis
through September 13, 1998, 3,375 shares issuable upon exercise of
options, all of which are vested; 12,500 shares issuable upon exercise of
options of which, as of 60 days after June 21, 1996, 7,501 shares are
subject to a right of repurchase by UUNET which expires ratably on a
monthly basis through July 20, 1999; and 1,446 shares issuable upon
exercise of options which will vest on December 31, 2002.
(12) Includes as of 60 days after June 21, 1996, 119,792 shares subject to a
right of repurchase by UUNET which expire ratably on a monthly basis
through September 1, 1998, 3,375 shares issuable upon exercise of
options, all of which are vested, and 1,446 shares issuable upon exercise
of options which will vest on December 31, 2002.
(13) Includes as of 60 days after June 21, 1996, 61,667 shares subject to a
right of repurchase by UUNET which expires ratably on a monthly basis
through September 26, 1999, 3,250 shares issuable upon exercise of
options, all of which are vested, and 1,446 shares issuable upon exercise
of options which will vest on December 31, 2002.
(14) Includes 38,960 shares issuable upon exercise of options, 30,628 of which
will be vested within 60 days of June 21, 1996.
(15) Includes 56,500 shares issuable upon exercise of options, 34,158 of which
will be vested within 60 days of June 21, 1996.
(16) Includes 15,000 shares issuable upon exercise of options, of which, as of
60 days after June 21, 1996, 8,750 shares are subject to a right of
repurchase by UUNET which expires ratably on a quarterly basis through
June 30, 1998.
(17) Includes 9,669,716 shares held by entities affiliated with certain
directors as described in Notes 7 through 9 and 991,376 shares issuable
pursuant to the exercise of outstanding options.
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<PAGE>
MFS REELECTION OF CLASS I DIRECTORS PROPOSAL
The MFS Board of Directors currently consists of twelve directors, divided
into three classes, designated Class I, Class II and Class III. Each class
currently consists of four Directors. All of the Class I directors are
standing for reelection. At the MFS Annual Meeting such Class I Directors will
be elected to hold office for a three-year term until the 1999 annual meeting,
or until their successors have been elected and qualified. If any nominee
shall, prior to the MFS Annual Meeting, become unavailable for election as a
Director, the persons named in the accompanying form of proxy will vote for
such nominee, if any in their discretion as may be recommended by the MFS
Board of Directors, or the MFS Board of Directors may reduce the number of
Directors to eliminate the vacancy.
INFORMATION AS TO NOMINEES FOR ELECTION AS CLASS I DIRECTORS
The respective ages, positions with MFS, business experience, directorships
in other companies and MFS Board of Directors committee memberships of the
nominees for election are set forth below.
James Q. Crowe, 45, has been the senior executive officer of MFS since its
inception. He has served as Chairman of the Board of MFS since 1988, Chief
Executive Officer since November 1991 and was President (January 1988-June
1989 and April 1990-January 1992). Mr. Crowe has also served as President and
Vice President of Kiewit Industrial Co., which is engaged in large industrial
construction projects, such as independent power projects, cogeneration
facilities, and, until 1988, telecommunications projects. Prior to joining
Peter Kiewit Sons', Inc. ("PKS") in 1986, Mr. Crowe was employed by Morrison-
Knudsen Corporation, a major construction and engineering company based in
Boise, Idaho, where he held the position of Group Vice President with
responsibility for the electric power market. Mr. Crowe is a Director of PKS,
Kiewit Diversified Group Inc. ("KDG"), a wholly owned subsidiary of PKS, RCN
Corporation, a wholly owned subsidiary of KDG ("RCN"), and CEC, a geothermal
energy producer, which is partially owned by KDG. In addition, since October
1993, Mr. Crowe has been a Director of C-TEC Corporation ("C-TEC"), a company
controlled by RCN that, until MFS acquired these operations from C-TEC on May
8, 1995, owned a competitive access provider providing business services in
Westchester County, New York. Mr. Crowe is presently a member of the executive
committee of the MFS Board of Directors (the "Executive Committee").
Royce J. Holland, 46, has been a Director and the President and Chief
Operating Officer of MFS since January 1992. He has been the Chairman of MFS
Intelenet, Inc. ("MFS Intelenet") since November 1992. He was the President
and Chief Executive Officer of MFS Telecom, Inc. ("MFS Telecom") between April
1990 and November 1992. He was previously the President (June 1989-April 1990)
and Vice President (February 1988-May 1989) of MFS. Before joining MFS, Mr.
Holland held various management positions with Energy Factors, Inc., an
independent power company based in San Diego, California and Morrison-Knudsen
Corporation. Mr. Holland is a Director of KDG. Mr. Holland is presently a
member of the Executive Committee.
R. Douglas Bradbury, 44, has been the Chief Financial Officer of MFS since
January 1992 and Executive Vice President since August 1995. Previously, Mr.
Bradbury was Senior Vice President of MFS from September 1992 to August 1995,
and prior to that, he was Senior Vice President--Corporate Affairs for MFS
Telecom. Before joining MFS in 1988, he was Executive Vice President and Chief
Operating Officer at American Pioneer Telephone, Inc., a regional long
distance carrier based in Orlando, Florida, and a Vice President of
Manufacturers Hanover Trust Company in New York City and Milan, Italy.
William L. Grewcock, 69, has been the Vice Chairman of PKS and a member of
the Board of Directors of PKS for more than the last five years.
THE MFS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE NOMINEES
NAMED ABOVE.
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BOARD OF DIRECTORS' MEETINGS
The Board met seven times during 1995, the Audit Committee met four times
and the Compensation Committee met six times. Each of the MFS' Directors
attended at least 75% of (1) the number of meetings of the Board and (2) the
total number of meetings held by all committees of the Board on which he
served.
EXECUTIVE COMMITTEE
The Executive Committee exercises, to the maximum extent permitted by law,
all powers of the Board between board meetings, except those functions
assigned to specific committees.
AUDIT COMMITTEE
The Audit Committee reviews the services provided by MFS' independent
auditors, consults with the independent auditors and reviews the need for
internal auditing procedures and the adequacy of internal controls.
COMPENSATION COMMITTEE
The Compensation Committee determines the compensation of the Chief
Executive Officer and reviews the compensation and stock option awards of all
other executives.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Gimbel has a consulting agreement with a subsidiary of MFS pursuant to
which he performs real estate and building access services in return for a
monthly fee of $5,000, an automobile allowance, health insurance coverage and
reimbursement of expenses. This consulting agreement can be terminated by
either party upon thirty days' notice. Messrs. Jaros, McCourt, Roskens and
Yanney have not been employees of MFS or otherwise participated in activities
constituting compensation committee interlocks or insider participation
requiring disclosure under this caption.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
Under the securities laws of the United States, MFS' Directors, its
executive officers, and any persons holding more than ten percent of the MFS
Capital Stock are required to report their initial ownership of the MFS
Capital Stock and any subsequent changes in that ownership to the Securities
and Exchange Commission. Specific due dates for these reports have been
established and MFS is required to disclose in this proxy statement any
failure to file by these dates during 1995. All of these filing requirements
were satisfied. In making these disclosures, MFS has relied solely on written
representations of its Directors and executive officers and copies of the
reports that they have filed with the Securities and Exchange Commission.
COMPENSATION COMMITTEE REPORT
The Compensation Committee (the "Committee") is responsible for determining
the cash and equity compensation of James Q. Crowe, Chairman of the Board and
Chief Executive Officer. The Committee reviews and approves the cash
compensation of certain of MFS' other senior executives based upon the
recommendations of Mr. Crowe.
MFS believes that the compensation levels of its executive officers, who
provide leadership and strategic direction, should consist of: (i) fair base
salaries, (ii) significant cash bonus opportunities based on achievement of
objectives established by MFS and (iii) ownership of MFS Common Stock and
stock options to join management's interests with stockholders' interests,
targeted to provide opportunities that are comparable to other similarly
situated telecommunications and high growth technology companies.
MFS considers the following factors (ranked in order of importance) when
determining compensation of executive officers: (i) MFS' performance measured
by attainment of specific objectives, (ii) the individual
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performance of each executive officer, (iii) MFS' stock price performance,
(iv) comparative industry compensation levels and (v) historical cash and
compensation levels. The comparable industry compensation data is based in
part on public telecommunications companies that are included in the NASDAQ
Telecommunications Stock Index, which was chosen as the peer group for the
Stockholder Return Performance Graph and on the other publicly traded
telecommunications and high growth technology companies with comparable market
capitalization. In the future, the Committee also intends to review MFS'
performance against the Standard & Poor's 500 Index.
Determination of the Chief Executive Officer's Compensation
For fiscal 1995, the MFS performance objectives were:
Continue to expand MFS' existing metropolitan area networks and develop new
networks in other metropolitan areas throughout the United States. Accelerate
the development of new networks internationally, primarily in Western Europe.
Attract and retain experienced personnel to enable MFS to meet its tactical
and strategic goals. Continue the acquisition of sufficient capital at an
acceptable cost in order to fund the MFS' business development plan.
Significantly increase MFS' revenues from its telecommunications segment while
ensuring that the cost of such service remained competitive. Continue to shape
and influence regulatory legislation on a state by state and national level to
enhance the MFS competitive posture.
These goals were met in fiscal 1995. Fiber miles increased 85%, the number
of buildings connected increased 108% and circuits in service increased 73%.
As of March 1996, MFS provides services on its networks, or through the resale
of services, or has network operations under development in 50 major
metropolitan areas in the United States and Europe. In 1995, MFS expanded its
network infrastructure into Western Europe (Frankfurt, Paris and Stockholm) to
serve existing large business customers and to take advantage of the new
competitive environment there. MFS also played an instrumental role in getting
more than half the states to pass legislation and continued to influence
federal legislation leading up to eventual passage of The Telecommunications
Act of 1996.
During 1995, revenues from the telecommunications segment grew from $228.7
million to $498.2 million while costs associated with the provision of service
was within budget. At year-end 1995, MFS had 3,525 full-time employees
compared to 2,971 at year-end 1994. In the second quarter, MFS received
approximately $320 million in gross proceeds from the sale of mandatorily
convertible preferred stock, referred to as DECS, with a 22% conversion
premium to the issue price.
Based on the achievement of these goals and for aggressively pursuing the
implementation of MFS' expansion plan, Mr. Crowe received a 10% increase in
base salary in fiscal 1995 and a cash bonus paid in December of 1995 of
$700,000 for his performance in fiscal 1995.
Equity Compensation
The Committee approves all awards made under the MFS 1992 Stock Plan and the
MFS 1993 Stock Plan. Periodically the Committee approves grants to existing
employees and also approves awards to new employees as an incentive to join
MFS.
The Compensation Committee:
Howard Gimbel
Richard R. Jaros
David C. McCourt
Ronald W. Roskens
Michael B. Yanney-Chairman
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table shows compensation paid to,
deferred or accrued for the benefit of, Mr. Crowe and each of the four other
most highly compensated executive officers (the "Executive Group") for all
services rendered to MFS during the fiscal years ended December 31, 1995, 1994
and 1993:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
----------------- ----------------------
NAME AND PRINCIPAL OTHER ANNUAL SECURITIES UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARDS-OPTIONS (#) COMPENSATION (5)
- ------------------ ---- -------- -------- ------------ ---------------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
James Q. Crowe.......... 1995 $416,688 $700,000 $ -- -- $176,414
Chief Executive Officer 1994 373,146 500,000 -- --
1993 324,115 250,000 -- --
Royce J. Holland........ 1995 290,259 350,000 -- -- 96,631
Chief Operating Officer 1994 257,039 200,000 -- --
1993 216,538 150,000 -- --
Ronald R. Beaumont...... 1995 246,075 150,000 -- -- 15,061
Senior Vice President 1994 211,523 107,000 7,138(1)
1993 198,269 95,000 387,521(2) --
Kirby G. Pickle......... 1995 246,556 150,000 -- -- 56,396
Senior Vice President 1994 211,523 107,000 67,267(3) --
1993 198,269 95,000 68,817(4) 10,000
R. Douglas Bradbury..... 1995 230,340 200,000 -- -- 62,085
Chief Financial Officer 1994 192,923 120,000 -- --
1993 158,659 100,000 -- --
</TABLE>
- --------
(1) Represents amounts received by Mr. Beaumont in connection with (i) the
reimbursement of moving expenses of $3,997 and (ii) the payment of taxes
on such moving expenses of $3,141.
(2) Represents amounts received by Mr. Beaumont in connection with (i) the
reimbursement of moving expenses of $101,216, (ii) the loss on the sale of
Mr. Beaumont's home of $107,000 and (iii) the reimbursement of the payment
of taxes on such amounts of $179,305.
(3) Represents amounts received by Mr. Pickle in connection with (i) the
payment of a cost of living adjustment of $42,000, (ii) the reimbursement
of moving expenses of $14,976 and (iii) the reimbursement of the payment
of taxes on such amounts of $10,291.
(4) Represents amounts received by Mr. Pickle in connection with (i) the
payment of a cost of living adjustment of $49,000, (ii) the reimbursement
of moving expenses of $54,583 and (iii) the reimbursement of the payment
of taxes on such amounts of $65,234.
(5) The amounts in this column represent (i) amounts of salary and bonus
forgone by members of the Executive Group pursuant to the ShareWorks Match
Plan (see "Approval of the 1995 Deferred Stock Purchase Plan Proposal"),
(ii) MFS matching contributions to the ShareWorks Match Plan on behalf of
members of the Executive Group, and (iii) year-end contributions to the
accounts of the members of the Executive Group pursuant to the ShareWorks
grant plan. These amounts are held in accounts for members of the
Executive Group as shares or units of MFS Common Stock. These amounts
represent the year-end value of such accounts based on the last reported
sale price of the MFS Common Stock on December 31, 1995.
No member of the Executive Group received any restricted stock awards, stock
options, stock appreciation rights ("SARs") or long-term incentive performance
("LTIP") payouts for the fiscal year ended December 31, 1995.
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AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END($)(1)
------------------------- -------------------------
SHARES
ACQUIRED ON VALUE REALIZED
NAME EXERCISE(#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James Q. Crowe.......... -- -- 997,220 664,810 $20,542,732 $13,695,086
Royce J. Holland........ -- -- 504,366 336,242 10,389,940 6,926,585
R. Douglas Bradbury..... -- -- 259,210 172,802 5,339,726 3,559,721
Ronald R. Beaumont...... -- -- 179,000 136,000 3,687,400 2,801,600
Kirby G. Pickle......... -- -- 204,722 143,146 4,135,473 2,826,108
</TABLE>
- --------
(1) On December 31, 1995 as adjusted for the MFS 2-for-1 stock split effected
April 16, 1996, the last reported sale price for the MFS Common Stock as
reported by Nasdaq was $26.625 per share.
DIRECTORS' COMPENSATION
Directors of MFS who are employees or consultants of MFS and its affiliates
receive no directors' fees. Non-employee directors are paid an annual
directors' fee of $40,000, which is paid in MFS Common Stock on the date of
the annual meeting of stockholders based upon the average fair market value of
the MFS Common Stock during the 10 trading days prior to such date, plus
$1,000 per Board of Directors meeting and $1,000 per meetings of committees of
the Board of Directors. Committee Chairmen receive an annual retainer of
$2,500 per year. In addition, all Directors are reimbursed for their
reasonable travel expenses incurred in attending these meetings.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. McCourt is a director and president of, and owns, directly or
indirectly, approximately 17.5% of the voting stock of Metropolitan Fiber
Systems/McCourt, Inc. ("MFS/McCourt"). In 1995, the amount owed by MFS/McCourt
to MFS Telecom, Inc., either in the form of preferential payments or shares of
preferred stock held by MFS Telecom, Inc. or indebtedness by MFS Telecom,
Inc., increased to $51.1 million from $44.9 million in 1994. On May 5, 1995,
MFS purchased Northeast Networks, Inc. a competitive access provider providing
service to Westchester County, New York from C-TEC, of which Mr. McCourt is
the Chairman and Chief Executive Officer, for a purchase price of $7.3
million. An affiliate of MFS, Metropolitan Fiber Systems of New Jersey, Inc.
has a 66 2/3% interest in MFS/C-TEC, a New Jersey limited partnership. The
remaining 33 1/3% interest is held by an affiliate of C-TEC. As of December
31, 1995, MFS had an outstanding cash advance to MFS/C-TEC of $289,545.
Mr. Andrew Lipman, Senior Vice President of MFS, is a partner in the law
firm of Swidler & Berlin Chartered, of Washington, D.C. The firm provides
legal services to MFS and was paid fees of approximately $2.9 million, $2.9
million and $6.1 million in 1993, 1994 and 1995, respectively. Mr. Lipman has
an arrangement with MFS under which he is expected to devote a substantial
portion of his time to legal/regulatory matters of MFS.
The PKS Executive Compensation Committee established a bonus pool to be
distributed among the senior management team of MFS and KDG in recognition of
their extraordinary achievements in creating value for PKS stockholders over a
significant period ending with the distribution of MFS Common Stock to certain
PKS stockholders on September 30, 1995. Mr. James Q. Crowe was paid $12
million, Mr. Royce J. Holland was paid $2 million and Mr. R. Douglas Bradbury
was paid $1 million from this bonus pool.
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PERFORMANCE GRAPH
The following performance graph shall not be deemed to be incorporated by
reference by reason of any general statement incorporating by reference this
Joint Proxy Statement-Prospectus into any filing under the Securities Act of
1933, as amended or the Securities Exchange Act of 1934, except to the extent
that MFS specifically incorporates such information by reference, and shall
not otherwise be deemed filed under such acts.
The following graph compares the cumulative annual return of MFS Common
Stock during the fiscal year ended December 31, 1995, with the cumulative
total stockholder return of (1) the Nasdaq Stock Market (U.S.) Index, (2) the
Nasdaq Telecommunications Stock Index and (3) the Standard & Poor's 500 Stock
Index.
COMPARISON OF CUMULATIVE ANNUAL RETURN AMONG
MFS COMMUNICATIONS COMPANY, INC., THE NASDAQ STOCK MARKET (US) INDEX,
THE NASDAQ TELECOMMUNICATIONS STOCK INDEX
AND THE STANDARD & POOR'S 500 STOCK INDEX
[GRAPH APPEARS HERE]
MFS' initial public offering was declared effective on May 19, 1993 and,
therefore, data is included for only a portion of that year.
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MFS AMENDMENT TO AMENDED AND RESTATED 1993 STOCK PLAN PROPOSAL
Effective August 31, 1993, the MFS Board adopted the MFS Communications
Company, Inc. 1993 Stock Plan and on July 24, 1995 the Executive Committee
adopted an amendment and restatement of the 1993 Stock Plan, which was
subsequently approved by the stockholders (the "MFS 1993 Stock Plan"). On
September 19, 1995, December 15, 1995 and February 21, 1996 the Executive
Committee adopted further amendments to and restated the MFS 1993 Stock Plan,
subject to stockholder approval (the MFS 1993 Stock Plan, as amended and
restated, being referred to herein as the "Amended Plan"). The Amended Plan is
being submitted to stockholders in view of, among other things, the proposed
increase in the number of shares of MFS Common Stock authorized for issuance
(see the section below entitled "Shares Available for Grant") and MFS' desire
that Outperformance Options (as modified in the Amended Plan) continue to
qualify as "performance based compensation" for purposes of Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code") (See "--Summary of
the MFS 1993 Stock Plan--Outperformance Options"). If the Amended Plan is not
approved by the stockholders, the MFS 1993 Stock Plan as in effect immediately
prior to such amendments and restatement shall remain in full force and
effect. Awards granted prior to the effective date of the Amended Plan will
remain outstanding subject to the terms and conditions of the MFS 1993 Stock
Plan.
The following summary of the MFS 1993 Stock Plan and the Amended Plan is
qualified in its entirety by reference to the text of the Amended Plan, a copy
of which has been filed with the Securities and Exchange Commission.
SUMMARY OF THE MFS 1993 STOCK PLAN
Purpose and Eligibility
The primary purpose of the MFS 1993 Stock Plan is to enable employees,
directors who are not also employees ("Non-Employee Directors") and outside
consultants to share in the growth and prosperity of MFS by encouraging stock
ownership by such persons and to attract and retain skilled personnel and
consultants. The MFS 1993 Stock Plan contemplates the issuance of incentive
stock options within the meaning of Section 422 of the Code, as well as non-
statutory stock options, Outperformance Options, restricted stock, stock
appreciation rights, cash and other stock-related awards ("Awards"). The MFS
1993 Stock Plan also provides that the shares of MFS Common Stock authorized
for issuance under the MFS 1993 Stock Plan will be available to satisfy MFS'
obligations to deliver shares of MFS Common Stock under other compensation and
benefit plans heretofore or hereafter established by MFS, including but not
limited to the 1996 Bonus Plan, the Deferred Stock Plan and the Qualified
Stock Plan (each as defined in the Amended Plan). All employees and outside
consultants of MFS and any of its subsidiaries ("Participants") are eligible
for discretionary Awards under the MFS 1993 Stock Plan. In addition, Non-
Employee Directors receive automatic grants of MFS Common Stock pursuant to a
formula set forth in the Plan. The approximate number of persons eligible to
participate is 3,600. As of the date of this Joint Proxy Statement-Prospectus,
of the 20,000,000 shares of MFS Common Stock initially authorized for issuance
under the MFS 1993 Stock Plan, approximately 9,500,000 shares remain available
for issuance under the MFS 1993 Stock Plan and approximately 10,500,000 shares
remain subject to outstanding Awards under the MFS 1993 Stock Plan.
Administration
The MFS 1993 Stock Plan is administered by the Compensation Committee.
Except for the automatic formula Awards to Non-Employee Directors, the
Compensation Committee, in its sole discretion, has the authority, among other
things, to determine the terms of all Awards granted under the MFS 1993 Stock
Plan, including any purchase or exercise price for an Award; to determine the
employees and outside consultants to whom, and the time or times at which,
Awards will be granted, exercised and become forfeitable; to determine the
number of shares covered by an Award; to interpret the MFS 1993 Stock Plan;
and to make all other determinations deemed advisable for the administration
of the MFS 1993 Stock Plan.
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Options
The Compensation Committee may from time to time grant incentive stock
options ("Incentive Options") and non-statutory options ("Non-Statutory
Options") (collectively "Options") to any Participant. The terms of Options
granted under the MFS 1993 Stock Plan will be set out in Option agreements
between MFS and Participants which will contain such provisions as the
Compensation Committee from time to time deems appropriate, including the
exercise price and expiration date of such Options. Option agreements will
specify whether or not an Option is an Incentive Option.
In no event will the exercise price of an Incentive Option be less than 100%
of the fair market value of the shares subject to the Option on the date of
grant. The term of Incentive Options cannot exceed ten years from the date of
grant and, generally, cannot extend beyond the optionee's employment with MFS.
The aggregate fair market value, determined as of the time the Incentive
Option is granted, of the MFS Common Stock which may become exercisable for
the first time by any employee during any calendar year cannot exceed
$100,000. No Incentive Option will be granted to an employee, who, at the time
of grant, owns stock representing more than 10% of the total combined voting
power of all classes of stock of MFS unless the exercise price of the
Incentive Option is at least 110% of the fair market value, at the time of
grant, of the MFS Common Stock subject to the Option, and the Option by its
terms is not exercisable more than five years from the date of grant.
The Compensation Committee may also grant new Options ("New Conditional
Options") to an optionee under the MFS 1993 Stock Plan who is also a holder of
one or more unexercised outstanding Options previously granted under the MFS
1993 Stock Plan or any other stock option plan of MFS on the condition that
such optionee shall surrender for cancellation one or more outstanding options
which represent the right to purchase a number of shares, in relation to the
number of shares to be covered by the New Conditional Option. The Compensation
Committee also may grant Options from time to time in substitution for similar
rights held by employees of other corporations who are about to become
employees of MFS or a subsidiary of MFS as a result of a merger or
consolidation of the employing corporation with MFS or its subsidiary or the
acquisition by MFS or its subsidiary of the assets or stock of the employing
corporation as a result of which it becomes a subsidiary of MFS.
Outperformance Options
The MFS 1993 Stock Plan provides that the Compensation Committee will be
authorized to grant Outperformance Options to any Participant. Outperformance
Options will have an initial exercise price equal to the per share fair market
value of MFS Common Stock on the date of grant, at which price an optionee may
purchase a designated number of shares of MFS Common Stock. Immediately prior
to the time of any exercise, the initial exercise price with respect to the
shares being exercised will adjust automatically (the "Adjusted Price"),
upward or downward, by a percentage equal to the annualized percentage
increase or decrease in the Standard & Poor's 500 Index (the "S&P") over the
period beginning on the date of grant and ending on the last day of the month
coincident with or immediately preceding the date of exercise (calculated
pursuant to the terms of the MFS 1993 Stock Plan) (the "S&P Period").
Outperformance Options will generally become exercisable ratably over the
three years following the date of grant; provided, that unless otherwise
determined by the Compensation Committee, such options will not be exercisable
(i) within the fifteen-day period preceding a Change in Control (as defined in
the MFS 1993 Stock Plan) and (ii) at any time unless (1) the fair market value
of a share of MFS Common Stock has increased from the time of grant until the
time of purported exercise, and (2) the annualized percentage increase in the
MFS Common Stock is greater than the annualized percentage increase in the S&P
as of the last day of the month coincident with or immediately preceding the
date of purported exercise (each calculated pursuant to the terms of the MFS
1993 Stock Plan). Depending on the extent to which such MFS Common Stock
"outperforms the S&P", the initial number of shares of MFS Common Stock
covered by the portion of the option being exercised shall be increased (the
"Adjusted Shares") by a pre- established factor (the "Factor"), which Factor
will in no event be greater than eight (8) (which maximum occurs only in the
event that the annualized percentage increase in MFS Common Stock exceeds the
annualized percentage increase in the S&P over a period (the "MFS Period") by
ten or more percentage points). The Factor
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will be determined on the date of exercise. The MFS Period will reflect a
period of time beginning on the date of grant and ending on the last day of
the month coincident with or immediately preceding the date of exercise. Each
Outperformance Option will contain a tandem right to a number of units
("Units") equal to the number of Adjusted Shares, which entitle the holder,
only in the event of a Change in Control and the cancellation of the tandem
Outperformance Option, to an amount of cash determined as described below. See
"Change in Control." The term of an Outperformance Option will be ten years or
less. Upon the exercise of all or any portion of any Outperformance Option,
the Compensation Committee will be entitled to, with respect to such exercised
option or applicable portion, either (i) cause MFS to deliver to the optionee
a number of shares of MFS Common Stock with a value equal to the fair market
value of a share of MFS Common Stock, less the Adjusted Price, multiplied by
the number of Adjusted Shares so exercised; (ii) cause MFS to deliver to the
optionee, upon receipt of the Adjusted Price, a number of shares of MFS Common
Stock equal to the Adjusted Shares so exercised; or (iii) provide any other
economically equivalent benefit to the optionee.
The total number of shares of MFS Common Stock subject to Outperformance
Options which may be granted to any one individual over the term of the
Amended Plan shall not exceed in the aggregate 1,000,000, provided, that such
number shall be determined prior to application of the Factor described above.
Outperformance Options will be subject to the same restrictions on
transferability applying to Options.
Outperformance Options are intended to constitute "performance based"
compensation to certain employees of MFS and its subsidiaries (within the
meaning of Section 162(m) of the Code). Section 162(m) of the Code denies a
deduction by an employer for certain compensation in excess of $1 million per
year paid by a publicly traded corporation to the chief executive officer and
the four most highly compensated executive officers other than the chief
executive officer. Certain compensation, including "performance based"
compensation, is excluded from this deduction limit. Among the requirements
for compensation to qualify for this exception is that the material terms
pursuant to which the compensation is to be paid, including the performance
goals, be disclosed to and approved by the stockholders prior to the payment.
Restricted Stock
The Compensation Committee from time to time may grant restricted stock
("Restricted Stock") to any Participant. Each Participant who is awarded
Restricted Stock will be required to enter into an agreement with MFS, in a
form specified by the Compensation Committee, agreeing to the terms and
conditions of the grant and such other matters consistent with the MFS 1993
Stock Plan as the Compensation Committee determines appropriate.
The Participant will have the entire beneficial ownership and all rights and
privileges of a stockholder with respect to the Restricted Stock awarded to
him, including the right to receive dividends and vote such Restricted Stock.
The Compensation Committee may provide any other terms and conditions with
regard to the Restricted Stock that it deems appropriate.
Stock Appreciation Rights
The Compensation Committee from time to time may grant stock appreciation
rights ("Stock Appreciation Rights") to any Participant. A Stock Appreciation
Right will be evidenced by an agreement between MFS and the Participant
containing such terms and conditions, consistent with the MFS 1993 Stock Plan,
as the Compensation Committee deems appropriate.
Upon exercise, a Stock Appreciation Right may be satisfied by MFS in cash or
shares of MFS Common Stock, as determined by the Compensation Committee. The
agreement may limit the maximum amount of appreciation taken into account
under a Stock Appreciation Right.
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A Stock Appreciation Right may be granted in conjunction with an Option,
Restricted Stock or any other award granted under the MFS 1993 Stock Plan. At
the discretion of the Compensation Committee, a Stock Appreciation Right may
be exercisable only to the extent that a related award is exercisable and only
upon surrender of a related award.
The Compensation Committee may provide any other terms or conditions with
regard to Stock Appreciation Rights that it deems appropriate.
Other Awards
The Compensation Committee may grant any other cash, stock or stock-related
awards to a Participant that the Compensation Committee deems appropriate,
including but not limited to, the bargain purchase of MFS Common Stock, and
stock bonuses.
Non-Employee Directors Formula Grant
The MFS 1993 Stock Plan provides that all Non-Employee Directors will
receive a grant of MFS Common Stock in lieu of the annual retainer fee
otherwise payable. Such grants will occur pursuant to the terms of the MFS
1993 Stock Plan and without any further action by the Board or the
Compensation Committee. On the date of each annual meeting of stockholders,
each Non-Employee Director will automatically be granted in lieu of the annual
retainer a number of shares of MFS Common Stock equal to the annual retainer
divided by the average fair market value of the MFS Common Stock during the 10
trading days prior to such date.
Payment upon Exercise
Payment in full for the number of shares of MFS Common Stock purchased under
any Award, must be made to MFS at the time of such exercise. Payment for such
shares must be made in cash, or with the consent of the Compensation
Committee, in shares of Qualifying Stock (as defined in the MFS 1993 Stock
Plan), or any combination thereof. No fees or commissions are applicable to
purchases of MFS Common Stock under the MFS 1993 Stock Plan.
Withholding
With respect to any payments made to Participants under the MFS 1993 Stock
Plan, MFS will have the right to withhold any taxes required by law to be
withheld because of such payments. The Compensation Committee, in its sole
discretion, may permit a Participant to satisfy tax withholding obligations,
in whole or in part, either (i) by having MFS withhold from the shares of MFS
Common Stock to be issued upon the exercise of an Option or Stock Appreciation
Right or upon the receipt of an Award, shares having a fair market value equal
to the withholding amount due, or (ii) by delivering to MFS already-owned
shares to satisfy the withholding amount.
Adjustment for Recapitalization, Merger, Etc.
If any change is made to the shares of MFS Common Stock by reason of any
merger, consolidation, reorganization, recapitalization, stock dividend,
split-up, combination of shares, exchange of shares, change in corporate
structure, or otherwise, appropriate adjustments will be made by the
Compensation Committee to the kind and maximum number of shares subject to the
MFS 1993 Stock Plan and the kind and number of shares and price per share of
stock subject to each outstanding Award.
Transferability of Amended Awards
No grant of Options, or any right or interest therein, is assignable or
transferable except by will or the laws of descent and distribution. During
the lifetime of an optionee, Options are exercisable only by the optionee or
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his legal representative. Similarly, Restricted Stock granted to Participants
may not be sold, transferred, pledged or otherwise encumbered during the
restricted period.
Termination or Amendment
The Board may terminate the MFS 1993 Plan at any time, provided that no such
action shall deprive Participants of their rights under outstanding Awards.
The Board may also amend the Plan from time to time as its deems desirable and
shall make any amendments which may be required so that Options intended to be
Incentive Options shall at all times continue to be Incentive Options for the
purposes of the Code; provided, however, (i) without the requisite approval of
the stockholders, the MFS 1993 Stock Plan may not be amended where such
stockholder approval is required in order for the MFS 1993 Stock Plan to
continue to comply with Rule 16b-3 under the Exchange Act, and (ii) in any
event, the provisions of the MFS 1993 Stock Plan regarding formula grants of
MFS Common Stock to Non-Employee Directors may not be amended more than once
every six months, other than to comport with changes in the Code, the Employee
Retirement Income Security Act of 1974 or the rules thereunder.
Change in Control
The MFS 1993 Stock Plan provides that upon the occurrence of a Change in
Control (as defined in the MFS 1993 Stock Plan) (i) all Options (other than
Outperformance Options) and freestanding Stock Appreciation Rights will become
immediately exercisable in full, (ii) all restrictions with respect to
Restricted Stock will lapse, (iii) all Outperformance Options that are
otherwise outstanding will be canceled effective as of the fifteenth day prior
to the Change in Control and the holders of such awards will be entitled to
receive, a number of tandem Units equal to the number of Adjusted Shares
applicable to the canceled Outperformance Option (such number of Adjusted
Shares determined subject to the terms and conditions of the MFS 1993 Stock
Plan), whether or not such Outperformance Option was vested. Each Unit will
entitle the holder to an amount equal to the difference between the Change in
Control Price (as defined in the MFS 1993 Plan) and the Adjusted Price
(determined as if the Outperformance Option had not been terminated and had
been exercised on the date of the Change in Control). Such amounts will be
payable in cash within twenty (20) days following the Change in Control, and
(iv) the Compensation Committee may, in its sole discretion, provide for
similar treatment with respect to any other awards granted under the 1993
Plan.
SUMMARY OF AMENDMENTS TO THE MFS 1993 STOCK PLAN
As described above, the total number of shares of MFS Common Stock
authorized for issuance under the MFS 1993 Stock Plan (including any Awards
payable in cash but denominated as shares of MFS Common Stock) is 20,000,000,
of which approximately 10,500,000 shares remain available for issuance under
the MFS 1993 Stock Plan, and of which approximately 9,500,000 shares are
subject to outstanding Awards. The Amended Plan provides that the total number
of shares of MFS Common Stock which may be issued pursuant to awards ("Amended
Awards") under the Amended Plan will not exceed, in the aggregate, 25,000,000,
including for this purpose the shares subject to outstanding Awards.
Administration
The Amended Plan requires that the committee administering the Plan be
composed of "disinterested persons" within the meaning of Rule 16b-3 of the
Exchange Act.
Outperformance Options
The Amended Plan allows for the grant of Outperformance Options at the
discretion of the Compensation Committee. Outperformance Options will be
granted with respect to a specific number of shares of Common Stock at an
initial exercise price (the "Initial Price"). The Initial Price per share with
respect to an Outperformance Option will be the same as the closing price of
one share of MFS Common Stock on the date immediately preceding the date of
grant. The Initial Price will be adjusted upward or downward as of the date of
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<PAGE>
exercise (the "Adjusted Price") by a percentage equal to the annualized
percentage increase or decrease in the S&P (the "Annualized Percentage S&P
Performance") over the period beginning on the date of grant and ending on the
trading day immediately preceding the date of exercise (the "Amended S&P
Period"); provided, that the Adjusted Price will never be less than the
Initial Price unless the closing price of the MFS Common Stock on the trading
day immediately preceding the date of exercise is no less than the Initial
Price. For purposes of determining the Annualized Percentage S&P Performance
with respect to any Amended S&P Period, the S&P as of the last day of the S&P
Period will be deemed to equal the average closing value of the S&P over the
ten-consecutive-trading day period ending on the last day of such Amended S&P
Period. The term of each Outperformance Option will be determined by the
Compensation Committee, not to exceed ten years from the date of grant.
Outperformance Options will become vested and exercisable in accordance with
terms and conditions established by the Compensation Committee. Unless
otherwise determined by the Compensation Committee, all Outperformance Options
will be canceled as of the fifteenth day prior to a Change in Control (as
defined in the Amended Plan). See "Change in Control." Upon the exercise of an
Outperformance Option, the Amended Plan provides for the distribution of (i) a
number of shares of MFS Common Stock with a fair market value equal to the
product of (A) the closing price of a share of MFS Common Stock on the trading
day immediately preceding the date of exercise minus the Adjusted Price,
multiplied by (B) a "Multiplier" (as defined below) plus (ii) cash in lieu of
fractional shares. The Multiplier will be determined on the date of exercise
based on the extent to which the annualized percentage change in fair market
value per share of MFS Common Stock (the "Annualized Percentage MFS Stock
Price Change") over the period beginning on the date of grant and ending on
the trading day immediately preceding the date of purported exercise (the
"Amended MFS Period") exceeds the annualized percentage change in the S&P (the
"Annualized Percentage S&P Change") over the corresponding Amended S&P Period.
The Multiplier will be a number between 2.5 and 8 depending upon the degree
that the Annualized Percentage MFS Common Stock Price Change exceeds the
Annualized Percentage S&P Change. In the alternative, upon the exercise of an
Outperformance Option, the Compensation Committee, in its discretion, may
require the optionee to pay, with respect to the portion of the Outperformance
Option being exercised, the Adjusted Price multiplied by the Multiplier in
return for a number of shares of MFS Common Stock equal to the product of the
number of shares relating to the portion of the Outperformance Option being
exercised multiplied by the Multiplier. Upon the exercise of an Outperformance
Option the Compensation Committee, in its discretion, may satisfy the exercise
of the Outperformance Option with any combination of MFS Common Stock, cash or
other economically equivalent benefit.
Each Outperformance Option will contain a tandem right to a number of units
("Units") equal to, as of any given date, the product of (i) the number of
shares relating to such Outperformance Option and (ii) the Multiplier that
would be applicable to such Outperformance Option if exercised on such given
date. Each Unit will entitle the holder to an amount of cash upon the
occurrence of a Change in Control as set forth above. See "Change in Control."
The Units will be canceled upon the exercise or cancellation of the
corresponding Outperformance Option (other than a cancellation in connection
with a Change in Control).
Transferability of Awards
The Amended Plan provides for limited transferability with respect to
Options other than Incentive Options (but including Outperformance Options).
Pursuant to the Amended Plan the Committee may, in its sole discretion, allow
for the transfer of Options (other than Incentive Options but including
Outperformance Options) to other persons or entities, subject to such
limitations as it may establish to ensure that transactions with respect to
such Options intended to be exempt from Section 16(b) of the Exchange Act
pursuant to Rule 16b-3 thereunder do not fail to maintain such exemption.
Change in Control
The Amended Plan provides that the accelerated vesting for Options, other
than Outperformance Options, and freestanding Stock Appreciation Rights and
the lapse of restrictions with respect to Restricted Stock upon a
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<PAGE>
Change in Control will only be implemented if an optionee's employment is
terminated within two years following the Change in Control without cause, as
determined by the Compensation Committee, or because of a Constructive
Involuntary Termination, as defined in the Plan.
Retirement Vesting
The Amended Plan provides for accelerated vesting of Outperformance Options
and freestanding Stock Appreciation Rights and the immediate lapse of all
restrictions with respect to Restricted Stock with respect to an optionee upon
retirement from MFS at (i) age 62, (ii) age 61 with one year of service, (iii)
age 60 with two years of service, (iv) age 59 with three years of service, (v)
age 58 with four years of service, (vi) age 57 with five years of service,
(vii) age 56 with six years of service, or (viii) age 55 with seven years of
service.
Non-Employee Directors Formula Grant
In addition to the payment of annual retainer fees to Non-Employee Directors
in the form of MFS Common Stock, the Amended Plan provides for the payment of
committee chair retainer fees, board meeting fees and committee meeting fees
in the form of MFS Common Stock in the same general manner as the payment of
annual retainer grant. The committee chair retainer grant will be made
annually on the date of each Annual Meeting. The board and committee meeting
grants will be made quarterly. All Non-Employee Director grants will be based
on the amount of fee otherwise due divided by the fair market value of a share
of MFS Common Stock at such time. In addition, the Amended Plan provides for a
one-time grant of 1,000 shares of MFS Common Stock to each Non-Employee
Director the Annual Meeting and subsequently, a one time grant of 1,000 shares
of MFS Common Stock to each new Non-Employee Director upon their first
election to the Board.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief discussion of the Federal income tax consequences
of transactions under the Amended Plan based on the Code, as in effect as of
the date hereof. The Amended Plan is not qualified under Section 401(a) of the
Code. This discussion is not intended to be exhaustive and does not describe
the state or local tax consequences.
Incentive Options. No taxable income is realized by the optionee upon the
grant or exercise of an Incentive Option. If MFS Common Stock is issued to an
optionee pursuant to the exercise of an Incentive Option, and if no
disqualifying disposition of such shares is made by such optionee within two
years after the date of grant or within one year after the transfer of such
shares to such optionee, then (1) upon sale of such shares, any amount
realized in excess of the exercise price will be taxed to such optionee as a
long-term capital gain and any loss sustained will be a long-term capital
loss, and (2) no deduction will be allowed to the optionee's employer for
Federal income tax purposes.
If the MFS Common Stock acquired upon the exercise of an Incentive Option is
disposed of prior to the expiration of either holding period described above,
generally (1) the optionee will realize ordinary income in the year of
disposition in an amount equal to the excess (if any) of the fair market value
of such shares at exercise (or, if less, the amount realized on the
disposition of such shares) over the exercise price paid for such shares, and
(2) the optionee's employer will be entitled to deduct such amount for Federal
income tax purposes if the amount represents an ordinary and necessary
business expense. Any further gain (or loss) realized by the optionee will be
taxed as short-term or long-term capital gain (or loss), as the case may be,
and will not result in any deduction by the employer.
Subject to certain exceptions for disability or death, if an Incentive
Option is exercised more than three months following the termination of
employment, the exercise of the Option will generally be taxed as the exercise
of a Non-Statutory Option.
Non-Statutory Options. Except as noted below, with respect to Non-Statutory
Options (including Outperformance Options), (1) no income is realized by the
optionee at the time the Option is granted;
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<PAGE>
(2) generally, at exercise, ordinary income is realized by the optionee in an
amount equal to the difference between the exercise price paid for the shares
and the fair market value of the shares, if unrestricted, on the date of
exercise, and the optionee's employer is generally entitled to a tax deduction
in the same amount subject to applicable tax withholding requirements;
provided, that with respect to any exercise of an Outperformance Option by any
person who is an "insider" within the meaning of Section 16(b) of the Exchange
Act, income will not be realized (and the employer will not be entitled to a
tax deduction) until six months have elapsed from the date of such exercise
(unless the insider makes an election under Section 83(b) of the Code); and
(3) at sale, appreciation (or depreciation) after the date as of which amounts
are includable in income is treated as either short-term or long-term capital
gain (or loss) depending on how long the shares have been held.
NEW PLAN BENEFITS
Inasmuch as Awards to all participants except those to Non-Employee
Directors under the Amended Plan will be granted at the sole discretion of the
Compensation Committee, such benefits under the Amended Plan are not
determinable. As set forth above, Non-Employee Directors will receive
automatic grants of Non-Statutory Options annually for the number of shares of
MFS Common Stock equal to the fair market value of the shares on the date of
grant divided by the Non-Employee Directors annual retainer fee, annual
committee chair retainer fee, Board meeting fees and committee meeting fees.
Non-Employee Directors currently receive an annual retainer of $40,000, which
is payable in shares of MFS Common Stock, Board meeting fees of $1,000, and
committee meeting fees of $1,000. Committee chairs receive an annual retainer
of $2,500. In addition, each Non-Employee Director will receive an automatic
one-time grant of 1,000 shares of MFS Common Stock at the Annual Meeting.
Compensation paid and other benefits granted in respect of the 1995 fiscal
year to the named executive officers are set forth in the Summary Compensation
Table
THE MFS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDED PLAN.
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MFS AMENDMENT OF 1995 DEFERRED STOCK PURCHASE PLAN (AMENDED AND RESTATED
AUGUST 28, 1995) PROPOSAL
On July 25, 1995 MFS adopted and the stockholders subsequently approved the
MFS Communications, Inc. 1995 Deferred Stock Purchase Plan (the "Match Plan")
to encourage ownership of the MFS Common Stock by employees of MFS. The Match
Plan is part of MFS "ShareWorks" program, which is comprised of the Match Plan
and the MFS Communications Company, Inc. Stock Bonus Plan. As of August 28,
1995, MFS amended and restated the Match Plan (the "Amended Match Plan") to
provide for accelerated vesting of MFS' contribution to a participant's
account under the Amended Match Plan upon such participant's early retirement
from MFS or its subsidiaries and to restrict the accelerated vesting of MFS'
contribution to a participant's account, due to occur upon a Change in Control
(as defined in the Amended Match Plan), to situations in which the
participant's employment with MFS is terminated following such Change in
Control. MFS is seeking stockholder approval of the Match Plan in order to
comply with the requirements of Rule 16b-3, promulgated pursuant to Section
16(b) of the Exchange Act. Solely with respect to participants in the Match
Plan who are subject to Section 16 of the Exchange Act, the provisions of the
Match Plan as amended and restated are subject to stockholder approval. In the
event that the stockholders of MFS do not approve the Amended Match Plan, the
provisions of the Match Plan prior to such amendment and restatement will
apply to such persons subject to Section 16.
SUMMARY OF THE MATCH PLAN
The following summary of the Match Plan is qualified in its entirety by the
terms of the Match Plan, a copy of which has been filed with the Commission.
Purpose and Eligibility
The purpose of the Match Plan is to encourage employee ownership of the MFS
Common Stock by providing a convenient mechanism for employees of MFS to
purchase MFS Common Stock with the added incentive of a MFS match.
All full-time employees of MFS and its subsidiaries will be eligible to
participate in ShareWorks. However, employees of MFS and its subsidiaries
hired prior to September 1, 1995, all of whom have been or will be provided
with a targeted amount of stock option grants which they may receive pursuant
to the MFS 1993 Stock Plan, may elect to continue to receive stock option
grants in lieu of participating in ShareWorks. Six months after all of such
employee's stock options have been granted (which could be as long as five
years), such employee will be eligible to participate in ShareWorks.
Each employee who participates in ShareWorks will have the opportunity to
elect to defer compensation pursuant to the Match Plan, and consequently to
participate in the Match Plan.
Approximately 3,600 people are eligible for participation in ShareWorks and,
as a result, are eligible to participate in the Match Plan.
Administration
The Match Plan is administered by the Compensation Committee. The
Compensation Committee has the authority to make all determinations with
regard to the operation of the Match Plan not relegated to the participants
pursuant to the terms of the Match Plan and may make such rules and
regulations for the administration of the Match Plan as it deems desirable.
Compensation Deferrals
An eligible employee may participate in the Match Plan by filing an election
form with MFS indicating an amount of between 1% and 10% of his or her
compensation (in 1% increments) to be deferred into the Match
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Plan. Separate elections must be made for base salary, and for bonuses and
commissions. Base salary deferral elections are made on a quarterly basis,
effective as of the beginning of the first pay period in the calendar quarter
following the quarter in which such election is made. Salary deferral
elections may be amended or revoked on a quarterly basis. Bonus and commission
deferral elections are made on an annual basis, no later than the end of the
calendar year preceding the year to which such election relates.
Notwithstanding the above, an eligible employee may elect to defer salary
and/or bonus and commissions, on a prospective basis, no later than 30 days
following the effective date of the Match Plan (October 1, 1995), or no later
than 30 days following the time when such person first becomes eligible for
the Match Plan.
Salary deferrals will be deducted from each participating employee's bi-
weekly paycheck and deferrals of bonus and commission compensation will be
deducted at the time such bonus and commission compensation otherwise would be
paid (each such deferral a "Deferral Contribution"). All Deferral
Contributions will be made on a pre-tax basis. Deferral Contributions will be
recorded on MFS's books and will be attributed to participating employee
accounts ("Deferral Accounts"). Immediately upon the crediting of amounts to
Deferral Accounts such amounts will be converted into a number of MFS Common
Stock units ("MFS Common Stock Units") by dividing such amount by the fair
market value of the MFS Common Stock on the day prior to the effective date of
the Deferral Contributions. Deferral Contributions will not be taxable to
participating employees at the time of contribution.
Matching Contributions
At the time that any Deferral Contribution is credited to a Deferral Account
on behalf of a participating employee, MFS will record on its books and
attribute to such Participating Employee in an account (a "Matching Account")
an amount of MFS Common Stock Units equal to the number of MFS Common Stock
Units credited to the Deferral Account on account of the Deferral Contribution
(a "Matching Contribution").
Each Matching Contribution will vest and become nonforfeitable on the third
anniversary of the end of the calendar quarter in which such Matching
Contribution is first credited to a Matching Account; provided such
Participating Employee has remained continuously employed for the entire
vesting period. If the Participating Employee terminates employment for any
reason, any unvested MFS Common Stock Units in his or her Matching Account are
forfeited. Matching Contributions will not be taxable to the Participating
Employees at the time of contribution.
Distributions
Distributions of MFS Common Stock attributable to a Matching Contribution,
and of MFS Common Stock relating to the Deferral Contributions attributable to
such Matching Contribution, are made automatically at the time the Matching
Contribution vests. All distributions are made in the form of shares of MFS
Common Stock. The number of shares of MFS Common Stock distributed with each
distribution is equal to the number of MFS Common Stock Units attributable to
the contribution giving rise to the distribution. Distribution of MFS Common
Stock attributable to the entire balance of a participating employee's
Deferral Account will be made upon such person's termination of employment
with MFS. Earlier distributions of MFS Common Stock attributable to a Deferral
Account are allowed in the event of unforeseeable financial emergency. The
value of all distributions will be taxable to the participating employees as
ordinary income and MFS will be allowed a deduction in the same amount at the
time of distribution. MFS Common Stock with a value of any required tax
withholding will be withheld from each distribution.
Shares Available
Distributions of MFS Common Stock pursuant to the Match Plan will be funded
through the MFS 1993 Stock Plan. 25,000,000 shares of MFS Common Stock have
been reserved for issuance for all stock-based awards made pursuant to the MFS
1993 Stock Plan (5,000,000 of which are subject to stockholder approval under
Proposal No. 3), including distributions of shares of MFS Common Stock
pursuant to the Match Plan.
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Change in Control
Upon the occurrence of a Change in Control (as defined in the Match Plan),
each participant shall receive, at the discretion of the Compensation
Committee, in complete settlement of the MFS Common Stock Units credited to
his or her Deferral Account and Matching Account, either (i) a number of
shares of MFS Common Stock equal to the number of MFS Common Stock Units so
credited as of the date on which such Change in Control occurs, (ii) an amount
of cash equal to the number of such MFS Common Stock Units multiplied by the
Change in Control Price (as defined in the Match Plan) or (iii) any equivalent
combination of shares of MFS Common Stock and cash.
Termination or Amendment
The Match Plan is an ongoing plan with no set termination date. The Board
may amend, suspend or terminate the Match Plan at any time without approval of
the stockholders provided that no such action will, without stockholder
approval, (a) materially increase the total number of shares of MFS Common
Stock which may be granted under the Match Plan, (b) materially expand the
class of persons eligible for participation in the Match Plan or (c)
materially increase the benefits accruing to participating employees under the
Match Plan.
SUMMARY OF AMENDMENTS TO THE MATCH PLAN
Change in Control
The Amended Match Plan provides that the accelerated vesting of the MFS
Common Stock Units in a participant's Matching Account upon a Change in
Control will only be implemented if such participant's employment with MFS is
terminated without cause, as determined by the Compensation Committee, or
because of a Constructive Involuntary Termination, as defined in the Amended
Match Plan following such Change in Control.
Retirement Vesting
The Amended Match Plan provides for the accelerated vesting of MFS Common
Stock Units in a participant's Matching Account upon a participant's
termination of employment with MFS or a subsidiary at age 62 or after
attaining the age of 55 if such participant's age plus complete years of
service with MFS or a subsidiary totals at least 62.
New Plan Benefits
Because contributions made pursuant to the Amended Match Plan are completely
within the discretion of each participating employee, benefits under the Match
Plan are not determinable.
THE MFS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR APPROVAL OF THE
AMENDED MATCH PLAN.
MFS RATIFICATION OF THE SELECTION OF INDEPENDENT ACCOUNTANTS PROPOSAL
Upon recommendation of its Audit Committee, the MFS Board of Directors
proposes that the MFS stockholders ratify the selection of the firm of Coopers
& Lybrand L.L.P. to serve as the independent accountants of MFS for the 1996
fiscal year. Coopers & Lybrand L.L.P. also served as MFS' independent
accountants for the 1995 fiscal year. Unless otherwise directed by the
stockholders, proxies will be voted for approval of the selection of Coopers &
Lybrand L.L.P. to audit MFS' consolidated financial statements for the 1996
fiscal year. A representative of Coopers & Lybrand, L.L.P. will attend the MFS
Annual Meeting, and will be available to respond to questions and may make a
statement if he or she desires.
THE MFS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION.
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OTHER MATTERS
It is not expected that any matters other than those described in this Joint
Proxy Statement-Prospectus will be brought before the UUNET Special Meeting or
the MFS Annual Meeting. If any other matters are presented, however, it is the
intention of the persons named in the UUNET proxy and MFS proxy to vote the
proxy in accordance with the discretion of the persons named in such proxy.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities offered
hereby and the Merger will be passed upon for MFS by Willkie Farr & Gallagher,
New York, New York. Certain tax matters with respect to the Merger will be
passed upon for MFS by Skadden, Arps, Slate, Meagher & Flom, New York, New
York. Certain tax matters in connection with the Merger will be passed upon
for UUNET by Heller Ehrman White & McAuliffe, Palo Alto, California.
EXPERTS
The Consolidated Financial Statements of MFS Communications Company, Inc. as
of December 31, 1995 and 1994 and for each of the three years in the period
ended December 31, 1995 incorporated by reference to the Annual Report on Form
10-K of MFS Communications Company, Inc. for the year ended December 31, 1995,
have been incorporated in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The Consolidated Financial Statements and Schedule of UUNET as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995 included in this Joint Proxy Statement-Prospectus have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
MFS STOCKHOLDER PROPOSALS
Any proposal which a stockholder intends to present at the MFS Annual
Meeting must be received by MFS on or before , 1996, but no earlier than
, 1996 to be included in the proxy material of MFS relating to such
meeting. In addition, such proposal must also include a brief description of
the business to be brought before the MFS annual meeting, the stockholder's
name and record address, the class or series and number of shares of MFS
Capital Stock which are owned beneficially or of record by such stockholder, a
description or any arrangements or understandings between the stockholder and
any other person in connection with such proposal and any material interest of
such stockholder in such proposal and a representation that the stockholder
intends to appear in person or by proxy at the MFS Annual Meeting. If the
stockholder wishes to nominate one or more persons for election as a director,
such stockholder's notice must comply with additional provisions as set forth
in the MFS By-laws, including certain information with respect to the persons
nominated for election as directors and any information relating to the
stockholder that would be required to be disclosed in a Proxy Filing. Any such
proposals should be directed to the Secretary, MFS Communications Company,
Inc., 11808 Miracle Hills Drive, Omaha, Nebraska 68154.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF
UUNET TECHNOLOGIES, INC.
<TABLE>
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets at December 31, 1994 and 1995................ F-3
Consolidated Statements of Operations for the Three Years Ended December
31, 1995................................................................ F-4
Consolidated Statements of Stockholders' Equity for the Three Years Ended
December 31, 1995....................................................... F-5
Consolidated Statements of Cash Flows for the Three Years Ended December
31, 1995................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
Report of Independent Public Accountants................................. F-20
Valuation and Qualifying Accounts........................................ F-21
Unaudited Condensed Consolidated Balance Sheets at December 31, 1995 and
March 31, 1996.......................................................... F-22
Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1995 and 1996.................................... F-23
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1995 and 1996.................................... F-24
Unaudited Notes to Condensed Interim Consolidated Financial Statements
for the Three Months Ended March 31, 1996............................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UUNET Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of UUNET
Technologies, Inc. (a Delaware corporation) and Subsidiaries, as of December
31, 1994 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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 an 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 financial statements referred to above present fairly,
in all material respects, the financial position of UUNET Technologies, Inc.,
and Subsidiaries, as of December 31, 1994 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Washington, D.C.
January 31, 1996
F-2
<PAGE>
UUNET TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- --------
(IN THOUSANDS,
EXCEPT PAR VALUE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $10,493 $ 60,424
Accounts receivable, net of allowance of $455 and $1,647,
respectively, for doubtful accounts...................... 5,387 17,768
Inventories............................................... 1,214 1,251
Prepaid expenses and other current assets................. 1,253 2,149
------- --------
Total current assets........................................ 18,347 81,592
Property and equipment, net................................. 11,080 54,523
Investments in affiliates................................... -- 1,321
Other assets................................................ 198 174
------- --------
Total assets................................................ $29,625 $137,610
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.......................... $ 1,060 $ 4,652
Accounts payable.......................................... 4,876 10,580
Accrued expenses.......................................... 4,826 24,604
Deferred revenues......................................... 3,315 3,421
------- --------
Total current liabilities................................... 14,077 43,257
Notes payable, net of current portion....................... 1,196 13,686
------- --------
Total liabilities........................................... 15,273 56,943
------- --------
Commitments and contingencies (Notes 6 and 9)
Redeemable Convertible Preferred Stock, $.001 par value;
(Notes 1 and 4):
Series A, B, C, D and E, 20,000 shares authorized; 11,150
shares issued and outstanding as of December 31, 1994.... 14,073 --
------- --------
Stockholders' equity (Notes 1 and 5):
Preferred Stock, $.001 par value; 500 shares authorized as
of December 31, 1995; none issued or outstanding......... -- --
Common Stock, $.001 par value; 50,000 shares authorized as
of December 31, 1995; 10,393 and 32,057 shares issued and
outstanding as of December 31, 1994 and 1995,
respectively............................................. 10 32
Additional paid-in capital................................ 9,584 108,071
Deferred compensation..................................... (207) (165)
Notes receivable from officers and stockholders (Note 5).. (113) --
Foreign currency translation adjustment................... 301 282
Accumulated deficit....................................... (9,296) (27,553)
------- --------
Total stockholders' equity.................................. 279 80,667
------- --------
Total liabilities and stockholders' equity.................. $29,625 $137,610
======= ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Internet services................................ $10,039 $16,860 $ 71,521
Software......................................... 13,980 16,278 22,940
------- ------- --------
Total revenues................................. 24,019 33,138 94,461
------- ------- --------
Costs and expenses:
Cost of revenues--
Internet services.............................. 6,452 10,262 46,393
Software....................................... 7,240 9,369 12,946
Network operations and support................... 3,850 6,764 13,127
Sales and marketing.............................. 5,558 9,681 18,762
General and administrative....................... 2,248 5,288 12,709
Acquisition expense.............................. -- -- 11,067
------- ------- --------
Total costs and expenses....................... 25,348 41,364 115,004
------- ------- --------
Loss from operations............................... (1,329) (8,226) (20,543)
Interest income.................................... 36 440 2,747
Interest expense................................... (103) (76) (808)
Equity in net loss of affiliates................... -- -- (127)
Loss on sale of investment in related party (Note
7)................................................ (433) -- --
------- ------- --------
Loss before income taxes........................... (1,829) (7,862) (18,731)
Benefit (provision) for income taxes (Note 10)..... (197) (126) 474
------- ------- --------
Net loss........................................... $(2,026) $(7,988) $(18,257)
======= ======= ========
Unaudited pro forma data (Note 1):
Pro forma net loss per common and equivalent
share........................................... $ (0.35) $ (0.63)
Shares used in computing pro forma net loss per
common and equivalent share..................... 22,946 28,987
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------
NOTES
REDEEMABLE RECEIVABLE
CONVERTIBLE FROM FOREIGN RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL OFFICERS CURRENCY EARNINGS
------------------ ------------- PAID-IN DEFERRED AND TRANSLATION (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS ADJUSTMENT DEFICIT)
-------- -------- ------ ------ ---------- ------------ ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1992, AS PREVIOUSLY
REPORTED............... 100 $ 200 5,100 $ 5 $ -- $ -- $-- $-- $ 582
Adjustment for pooling
of interests with UUNET
PIPEX (Note 1)......... 200 314 2,205 2 1,061 -- -- 255 392
-------- -------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1992, AS RESTATED...... 300 514 7,305 7 1,061 -- -- 255 974
Issuance of Series A
Preferred Stock, net of
issuance costs of $24,
together with warrants
to purchase Series B
Preferred Stock ....... 4,119 2,476 -- -- -- -- -- -- --
Redemption of UUNET
PIPEX Preferred Stock.. (200) (314) -- -- -- -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (342) --
UUNET PIPEX fiscal year
conversion (Note 1).... -- -- -- -- -- -- -- -- (127)
Net loss............... -- -- -- -- -- -- -- -- (2,026)
-------- -------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1993, AS RESTATED...... 4,219 2,676 7,305 7 1,061 -- -- (87) (1,179)
Issuance of Series B
Preferred Stock, net of
issuance costs of $15.. 3,300 3,285 -- -- -- -- -- -- --
Issuance of Series C
Preferred Stock, net of
issuance costs of $58.. 3,631 8,112 -- -- -- -- -- -- --
Exercise of stock
options and stock
purchase rights........ -- -- 2,170 2 320 -- (113) -- --
Deferred compensation.. -- -- -- -- 208 (208) -- -- --
Amortization of
deferred compensation.. -- -- -- -- -- 1 -- -- --
Sale of Common Stock in
connection with an
initial public offering
by UUNET PIPEX, net of
issuance costs of $880
(Note 1)............... -- -- 918 1 7,995 -- -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- 388 --
Dividends distributed
by UUNET PIPEX......... -- -- -- -- -- -- -- -- (129)
Net loss............... -- -- -- -- -- -- -- -- (7,988)
-------- -------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1994, AS RESTATED...... 11,150 14,073 10,393 10 9,584 (207) (113) 301 (9,296)
Issuance of Series D
Preferred Stock, net of
issuance costs of $45,
together with warrant
to purchase Series E
Preferred Stock........ 1,664 3,849 -- -- -- -- -- -- --
Issuance of Series E
Preferred Stock........ 2,500 12,500 -- -- -- -- -- -- --
Sale of Common Stock in
connection with an
initial public
offering, net of
issuance costs of
$6,576................. -- -- 5,309 5 67,742 -- -- -- --
Conversion of Preferred
Stock in connection
with an initial public
offering............... (15,314) (30,422) 15,314 15 30,407 -- -- -- --
Exercise of stock
options and stock
purchase rights........ -- -- 889 1 338 -- -- -- --
Issuance of Common
Stock for UUNET PIPEX
outstanding options
(Note 1)............... -- -- 152 1 -- -- -- -- --
Amortization of
deferred compensation.. -- -- -- -- -- 42 -- -- --
Repayment of notes
receivable............. -- -- -- -- -- -- 113 -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- -- -- (19) --
Net loss............... -- -- -- -- -- -- -- -- (18,257)
-------- -------- ------ --- -------- ----- ---- ---- --------
BALANCE, DECEMBER 31,
1995................... -- $ -- 32,057 $32 $108,071 $(165) $-- $282 $(27,553)
======== ======== ====== === ======== ===== ==== ==== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
UUNET TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(2,026) $(7,988) $(18,257)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities--
UUNET PIPEX fiscal year conversion.............. (127) -- --
Depreciation and amortization................... 1,209 2,151 8,322
Stock option compensation....................... -- 1 42
Write-off of property and equipment............. 350 582 1,846
Loss on sale of investment in related party..... 433 -- --
Equity in net loss of affiliates................ -- -- 127
Cash provided by (used in) changes in assets and
liabilities:
Accounts receivable, net....................... (58) (2,333) (12,430)
Inventories.................................... (90) (414) (39)
Prepaid expenses and other current assets...... (294) (515) (906)
Accounts payable............................... 1,042 2,124 5,741
Accrued expenses............................... 745 2,862 19,875
Deferred revenues.............................. 304 2,312 111
------- ------- --------
Net cash provided by (used in) operating
activities..................................... 1,488 (1,218) 4,432
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment.............. (3,121) (9,394) (53,654)
Repayments of notes receivable from officers and
stockholders.................................... -- -- 113
Investments in affiliates........................ (15) -- (1,462)
Advances to related party........................ (266) -- --
Repayments from related party.................... 475 -- --
------- ------- --------
Net cash used in investing activities........... (2,927) (9,394) (55,003)
------- ------- --------
Cash flows from financing activities:
Proceeds from notes payable...................... 435 1,302 20,766
Repayments of notes payable...................... (683) (740) (4,641)
Proceeds from sale of Preferred Stock, net....... 2,476 11,397 16,349
Proceeds from sale of Common Stock, net.......... -- 8,205 68,087
Redemption of shares............................. (314) -- --
Dividends distributed by UUNET PIPEX............. -- (129) --
------- ------- --------
Net cash provided by financing activities....... 1,914 20,035 100,561
------- ------- --------
Effect of foreign currency exchange rate changes
on cash and cash equivalents..................... 197 213 (59)
------- ------- --------
Net increase in cash and cash equivalents......... 672 9,636 49,931
Cash and cash equivalents, beginning of period.... 185 857 10,493
------- ------- --------
Cash and cash equivalents, end of period.......... $ 857 $10,493 $ 60,424
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest........................... $ 196 $ 121 $ 718
Cash paid for income taxes....................... 250 202 41
Supplemental disclosure of noncash financing
activities:
Stockholder notes received for shares of Common
Stock........................................... -- 113 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operations
UUNET Technologies, Inc. ("UUNET") was incorporated in the state of Delaware
in 1990. UUNET and its wholly-owned subsidiaries are collectively referred to
herein as the "Company." The Company is a leading worldwide provider of a
comprehensive range of Internet access options, applications, and consulting
services to businesses, professionals and on-line services providers. The
Company's Internet access options provide dedicated and dial-up Internet
access. Other applications and services include Web server hosting and
integration services, client software and security products, training, and
network integration and consulting services. In addition, the Company
developed, operates and maintains the high speed dial-up network for Microsoft
Corporation ("Microsoft").
The Company has incurred cumulative losses of approximately $28.3 million
during the three-year period ended December 31, 1995. The Company's operations
are subject to certain risks and uncertainties including, among others, actual
and potential competition by entities with greater financial resources,
experience and market presence than the Company, risks associated with
consolidation in the industry, risks associated with acquisitions and
international expansion, the need to manage growth and expansion, certain
technology and regulatory risks, and dependence upon sole and limited source
suppliers. See "Risk Factors" elsewhere is this Joint Proxy Statement-
Prospectus.
Acquisition of UUNET PIPEX
On November 15, 1995, UUNET acquired Unipalm Group plc (doing business as
"UUNET PIPEX") ("UUNET PIPEX"), a provider of Internet access options,
networking software, training and consulting services in the United Kingdom
and Europe. Under the terms of the tender offer made by UUNET, UUNET PIPEX
shareholders received 0.1543 of a share of UUNET Common Stock for each UUNET
PIPEX share. Each holder of a UUNET PIPEX option received 0.1543 of a share of
UUNET Common Stock for each option, after taking into account the fair market
value of such options. Accordingly, UUNET issued 3,338,009 shares of its
Common Stock for all of the outstanding shares of UUNET PIPEX stock and
options to acquire shares of UUNET PIPEX stock, and paid cash for fractional
shares. The acquisition was accounted for as a pooling of interests and, as
such, UUNET's financial statements have been restated to include the results
of UUNET PIPEX for all periods presented.
Combined and separate results of UUNET and UUNET PIPEX during the periods
preceding the acquisition are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1993 1994 1995
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Previously reported........................ $ 7,895 $12,414 $33,394
UUNET PIPEX................................ 16,124 20,724 27,260
------- ------- -------
Total.................................... $24,019 $33,138 $60,654
======= ======= =======
Net income (loss):
Previously reported........................ $(2,244) $(6,949) $ (750)
UUNET PIPEX................................ 218 (1,039) (5,641)
------- ------- -------
Total.................................... $(2,026) $(7,988) $(6,391)
======= ======= =======
</TABLE>
F-7
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UUNET PIPEX previously had an April 30 fiscal year-end. In order to conform
UUNET PIPEX's fiscal year-end to UUNET's calendar year-end, the statement of
operations for UUNET PIPEX for its fiscal year ended April 30, 1994 has been
combined with UUNET's statement of operations for its year ended December 31,
1993. The consolidated statement of operations for the year ended December 31,
1993 includes four months (January 1, 1994 through April 30, 1994) which are
also included in the consolidated statement of operations for the year ended
December 31, 1994. Accordingly, an adjustment has been made in the year ended
December 31, 1993 to retained earnings for the duplication of net income of
$127,000 for such four month period. Revenues of UUNET PIPEX for that four-
month period were approximately $6.1 million.
In connection with the acquisition, the Company recorded one-time charges in
the fourth quarter of 1995 for acquisition-related costs of $11.1 million.
These costs consisted primarily of investment banking and professional fees,
and direct costs necessary to complete the transaction, including taxes and
printing and mailing costs.
Investments in Affiliates
The following summarizes the Company's investments in various international
Internet access and related services providers (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
-------------
<S> <C> <C>
Accounted for by the equity method............................ $ -- $ 484
Accounted for by the cost method.............................. -- 837
----- -------
Total....................................................... $ -- $ 1,321
===== =======
</TABLE>
Subsequent to year end, UUNET acquired a 40% interest in the outstanding
capital of EUnet Deutschland GmbH ("EUnet Germany"), a provider of Internet
access options, applications and consulting services in Germany, for $1.6
million.
In January 1996, UUNET and UUNET Canada, Inc. ("UUNET Canada") entered into
a letter of intent providing for an increase in UUNET's equity ownership of
UUNET Canada from 20% to 51%. On April 1, 1996, UUNET paid $3,585,329 in cash
and issued 27,079 shares of Common Stock for the additional 31 percent
interest in UUNET Canada.
Initial Public Offerings
In May 1995, UUNET completed an initial public offering of 5,433,750 shares
of Common Stock at a price per share of $14.00, of which 5,308,750 shares were
sold by UUNET and 125,000 shares were sold by a selling stockholder. After the
underwriting discounts, commissions and other expenses, net proceeds to UUNET
from the initial public offering were approximately $67.7 million. Upon the
closing of the initial public offering, all outstanding shares of Redeemable
Convertible Preferred Stock, including those shares issued in connection with
warrants for the purchase of 2,500,000 shares of Series E Preferred Stock
exercised immediately prior to the closing of the initial public offering,
automatically converted into Common Stock.
In March 1994, UUNET PIPEX completed an initial public offering, with net
proceeds of approximately $8.0 million.
F-8
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summary of Significant Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting periods and reported amounts of assets and liabilities at the
date of the financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of UUNET and all
majority-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. Investments in affiliated companies owned
20% or more are accounted for using the equity method, while investments in
companies owned less than 20% are accounted for using the cost method.
Pro Forma Net Loss Per Common and Equivalent Share
Pro forma net loss per common and equivalent share is based on the weighted
average number of shares outstanding during the periods presented. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
shares, options and warrants issued during the twelve months immediately
preceding the initial public offering were treated as if they had been
outstanding through March 31, 1995, using the treasury stock method and at a
per share price of $14.00, the initial public offering price. Subsequent to
March 31, 1995, the effects of warrants and options have not been considered
because the effect would be antidilutive.
Earnings per share data prior to 1994 has been omitted because the automatic
conversion of the Redeemable Preferred Stock into Common Stock materially
changed UUNET's capitalization. Fully-diluted loss per share is not presented
as it would not materially differ from primary loss per share.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents as
of December 31, 1994 consisted of U.S. Treasury Bills totaling approximately
$3.0 million. Cash equivalents as of December 31, 1995 consisted of short-term
commercial paper totaling approximately $8.7 million. As of December 31, 1994
and 1995, the fair value of these securities approximated cost.
Concentrations of Cash and Accounts Receivable
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. As of December 31, 1994, the Company had concentrations of cash in
two banks in the form of demand deposits and money market accounts, totaling
approximately $1.2 million at one bank and $5.8 million at the other bank. As
of December 31, 1995, the Company had concentrations of cash in a financial
institution money market fund of approximately $47.8 million and short-term
commercial paper of approximately $8.7 million. Also as of December 31, 1995,
UUNET had approximately $6.4 million in accounts receivable from Microsoft
(see Note 2). The Company believes that concentrations of credit risk with
respect to the remaining balance in accounts receivable are limited due to the
large number of entities comprising the Company's customer base. The Company
maintains an allowance for doubtful accounts for accounts receivable based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market,
and consist primarily of third party packaged software for resale.
F-9
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are recorded at cost. Depreciation, including
depreciation of assets acquired under capital lease agreements, is recorded on
a straight-line basis for financial reporting purposes. Property and equipment
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- USEFUL LIVES
1994 1995 (IN YEARS)
------- ------- ------------
<S> <C> <C> <C>
Network and computer equipment................ $11,480 $58,244 4- 5
Furniture and office equipment................ 1,743 6,899 4-10
Purchased software............................ 1,357 1,908 3- 4
Vehicles...................................... 693 1,029 4
------- -------
Property and equipment, at cost............... 15,273 68,080
Less--Accumulated depreciation................ (4,193) (13,557)
------- -------
Property and equipment, net................. $11,080 $54,523
======= =======
</TABLE>
The Company leases certain vehicles and computer equipment under
noncancelable capital leases. Total cost of equipment capitalized under
capital leases as of December 31, 1994 and 1995 was approximately $1,398,000
and $5,220,000, respectively, while related accumulated depreciation was
approximately $405,000 and $1,478,000, respectively.
Accrued Expenses
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ -------
<S> <C> <C>
Network costs................................................ $ 912 $10,501
Acquisition expenses......................................... -- 7,377
Compensation and benefits.................................... 2,009 3,407
Professional fees............................................ 467 820
Other........................................................ 1,438 2,499
------ -------
Total...................................................... $4,826 $24,604
====== =======
</TABLE>
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries are translated at the
exchange rate in effect at each year-end. Statements of operations accounts
are translated at the average rate of exchange during the year. Translation
adjustments arising from differences in exchange rates from period to period
are included in the foreign currency translation adjustment account in
stockholders' equity. Gains and losses from transactions denominated in a
foreign currency are included in operations currently.
Revenue Recognition
Internet services revenues consist primarily of monthly service fees,
equipment sales and installation charges. Service fees consist of fixed
monthly amounts and/or hourly amounts based on usage and are recognized as the
service is provided. Payments received in advance of providing services are
deferred until the period such services are provided. Equipment sales and
installation charges are recognized when installation is completed.
F-10
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenues under network agreements (Note 2) are included in Internet services
revenues and are recognized as costs are incurred plus the applicable fees
earned. Adjustments to fees provided as incentives under contract provisions
and estimated losses on contracts, if any, are recorded when such adjustments
or losses are known.
Software revenues consist primarily of the sale of packaged third party
software. The Company recognizes revenue on software product sales at the time
of delivery of the software, provided no significant future vendor obligations
exist. Customer support fees are deferred and recognized ratably over the
period of the service obligation.
Cost of Revenues
Internet services cost of revenues consists primarily of network
telecommunication costs, depreciation of network equipment, and the cost of
equipment and other products sold to customers. Software cost of revenues
consists primarily of packaged third party software costs.
Network Operations and Support
Network operations and support expenses consists primarily of the costs of
operating and monitoring the network and providing technical support to
customers.
Recent Pronouncement
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-
Based Compensation," which is effective for the Company's December 31, 1996
financial statements. SFAS No. 123 allows companies to either account for
stock-based compensation under the new provisions of SFAS No. 123 or under the
provisions of APB 25, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of SFAS 123 had been
adopted. The Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB 25. As such, the
adoption of SFAS No. 123 will not impact the financial position or the results
of operations of the Company.
2. NETWORK AGREEMENTS:
In December 1994, UUNET and Microsoft entered into a binding Memorandum of
Understanding, which was formalized into a definitive agreement (the
"Microsoft Agreement") in March 1995, for the development, operation and
maintenance of a high speed dial-up and ISDN TCP/IP access network (the "Dial-
Up Network"). Microsoft is obligated to reimburse UUNET for the cost of
constructing, maintaining and operating the Dial-Up Network, as well as pay a
management fee. The initial term of the Microsoft Agreement expires in March
2000, and it may be extended by Microsoft for an additional five-year term. In
March 1995 and as part of this strategic relationship, Microsoft purchased
1,664,000 shares of Series D Preferred Stock at $2.34 per share and in May
1995 exercised warrants to purchase 2.5 million shares of Series E Preferred
Stock at $5.00 per share (Notes 4 and 5). Upon closing of the initial public
offering, Microsoft's Preferred Stock was converted into 4,164,000 shares of
Common Stock. UUNET also entered into a $26.0 million loan agreement (Note 3)
with Microsoft, which allows UUNET to borrow funds to finance the purchase of
equipment for the construction of the Dial-Up Network. UUNET owns the network
equipment, subject to Microsoft's security interest. UUNET controls and
operates the Dial-Up Network and is able to sell a portion of the Dial-Up
Network capacity to other customers. Revenues from network services relating
to the Dial-Up Network represented 20.4% of total revenues for the year ended
December 31, 1995.
F-11
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. BORROWING ARRANGEMENTS:
In December 1994, UUNET entered into a Credit Agreement with a bank to
provide for a $500,000 working capital line of credit ("Working Capital
Facility"), a $1,000,000 term facility ("Term Facility") and a $3,500,000
equipment facility ("Equipment Facility"). No amounts had been borrowed under
the Working Capital Facility, which expired in August 1995. The Term Facility
and Equipment Facility accrued interest at the bank's prime rate plus 1.75%
(10.5% at December 31, 1994). As of December 31, 1994, UUNET had borrowed the
$1,000,000 available under the Term Facility, which was repaid in June 1995.
During 1995, UUNET borrowed approximately $2,500,000 under the Equipment
Facility, all of which was repaid in June 1995. The Term Facility and
Equipment Facility expired in 1995.
UUNET had notes payable to a related party (Note 7) that were due in monthly
installments through December 1995. Interest was fixed at rates of 8% or 10%,
and the notes were secured by specified network computer equipment of UUNET.
The notes were repaid in full in April 1995. Interest expense on these notes
was approximately $58,000, $33,000 and $4,000 in 1993, 1994 and 1995,
respectively. UUNET also had a note payable to a stockholder ($59,000 at
December 31, 1993) that was due and repaid in full in September 1994. Interest
accrued at 8% annually.
In connection with the Microsoft Agreement, UUNET obtained a $26.0 million
equipment loan facility from Microsoft to finance equipment purchases in
conjunction with the construction of the Dial-Up Network. Principal and
interest, at the higher of the Applicable Federal Rate ("AFR") in effect on
the date of the Microsoft Agreement (7.74%) or the AFR in effect at the time
of the advance (5.79% as of December 31, 1995), are payable on each advance
quarterly over five years. Borrowings under the agreement are collateralized
by the equipment purchased. The carrying amount of the equipment loan facility
as of December 31, 1995 approximated fair market value. As of December 31,
1995, $10,501,000 was available for future advances under this facility.
Notes payable outstanding consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ -------
<S> <C> <C>
Note payable to Microsoft................................... $ -- $14,595
Notes payable to banks...................................... 1,000 --
Notes payable to related parties............................ 199 --
Capital leases.............................................. 1,057 3,743
------ -------
Total obligations......................................... 2,256 18,338
Less: Current portion....................................... (1,060) (4,652)
------ -------
Long-term obligations....................................... $1,196 $13,686
====== =======
</TABLE>
Aggregate future principal payments on notes payable and future minimum
lease payments under capital leases as of December 31, 1995, are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL
DECEMBER 31, NOTES LEASES TOTAL
------------ ------- ------- -------
<S> <C> <C> <C>
1996............................................. $ 3,100 $11,833 $ 4,933
1997............................................. 3,100 1,630 4,730
1998............................................. 3,100 550 3,650
1999............................................. 3,100 86 3,186
2000............................................. 2,195 -- 2,195
------- ------- -------
14,595 4,099 18,694
Less: Amount representing interest............... -- (356) (356)
------- ------- -------
Total........................................... $14,595 $ 3,743 $18,338
======= ======= =======
</TABLE>
F-12
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Redeemable Convertible Preferred Stock consists of the following (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1994 1995
-------------- -------------
SHARES AMOUNT SHARES AMOUNT
------ ------- ------ ------
<S> <C> <C> <C> <C>
Series A Preferred Stock, $.001 par value; 4,219
shares designated and authorized as Series A;
preference in liquidation of $0.64 per share,
$2,700 in the aggregate.......................... 4,219 $ 2,676 -- $--
Series B Preferred Stock, $.001 par value; 3,300
shares designated and authorized as Series B;
preference in liquidation of $1.00 per share,
$3,300 in the aggregate.......................... 3,300 3,285 -- --
Series C Preferred Stock, $.001 par value; 4,000
shares designated and authorized as Series C;
preference in liquidation of $2.25 per share,
$8,170 in the aggregate.......................... 3,631 8,112 -- --
Series D Preferred Stock, $.001 par value, 1,664
shares designated and authorized as Series D;
preference in liquidation of $2.34 per share..... -- -- -- --
Series E Preferred Stock, $.001 par value, 2,500
shares designated and authorized as Series E;
preference in liquidation of $5.00 per share..... -- -- -- --
------ ------- --- ----
Total........................................... 11,150 $14,073 -- $--
====== ======= === ====
</TABLE>
Preferred Stock Warrants
In connection with the sale of Series A Preferred Stock in 1993, UUNET
issued warrants for the purchase of 3,300,000 shares of Series B Preferred
Stock at an exercise price of $1.00 per share. These warrants were exercised
during 1994, which resulted in gross proceeds of $3,300,000 to UUNET.
As part of its strategic relationship with Microsoft, UUNET issued warrants
to Microsoft for the purchase of 2,500,000 shares of Series E Preferred Stock
in March 1995, at an exercise price of $5.00 per share. These warrants were
exercised in May 1995, which resulted in gross proceeds of $12.5 million to
UUNET.
5. STOCKHOLDERS' EQUITY:
Microsoft has agreed that it will not directly or indirectly, except in
connection with any exercise of its right of first refusal, acquire shares of
Common Stock which when combined with its holdings, would result in Microsoft
owning greater than 18.11% of the then outstanding shares of Common Stock.
Microsoft also has agreed that it will not (i) enter into any voting agreement
or voting trust in connection with UUNET securities, (ii) form, or participate
in the formation of, any legal entity for the purpose of acquiring, voting or
disposing of UUNET securities, or (iii) act in concert with any person or
entity for the purpose of acquiring, holding, voting or disposing of UUNET
securities if by so acting Microsoft or such other person would be required to
file a Schedule 13D or 13G with the Securities and Exchange Commission or to
amend a previously filed Schedule 13D or 13G. UUNET has granted Microsoft a
right of first refusal and a right of first offer with respect to certain
acquisitions of more than 50 percent of the stock or assets of UUNET that may
be proposed in the future.
Increase in Authorized Shares
On January 31, 1996, the stockholders of UUNET at a Special Meeting of
Stockholders approved the increase in the authorized shares of Common Stock to
175,000,000, and UUNET filed a Certificate of Amendment to Restated
Certificate of Incorporation effecting such increase.
F-13
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes Receivable from Employees for Stock Purchases
During 1994, certain employees of UUNET signed promissory notes in favor of
UUNET in conjunction with the purchase of stock under the terms and conditions
of UUNET's Incentive Stock Plan. The loans accrued interest at 8% annually and
were repaid during 1995.
Incentive Stock and Equity Incentive Plans
UUNET's Incentive Stock Plan (the "Option Plan") was adopted in 1990 and was
terminated on May 25, 1995. Under the Option Plan, the Board of Directors of
UUNET had the authority to grant incentive stock options, nonqualified stock
options and stock purchase rights at their discretion. Options granted under
the Option Plan are exercisable for periods up to ten years from the date of
grant. All options outstanding on the date of the Option Plan termination
remained exercisable in accordance with their terms.
In 1995, UUNET adopted an Equity Incentive Plan (the "Incentive Plan"),
which provides for the grant of options, restricted stock, stock purchase
rights and performance shares to employees of the Combined Company. Incentive
stock options and nonqualified stock options may be granted under the
Incentive Plan at exercise prices of 100% and at least 85%, respectively, of
the fair market value of Common Stock at the date of grant. Restricted stock
awards consist of shares of Common Stock with transfer restrictions that lapse
over a period not to exceed ten years. Stock purchase rights provide for the
purchase of shares of Common Stock at a price of at least 85% of the Common
Stock's fair market value. These stock purchase rights are generally
exercisable for a period of 30 days after the date of grant. Performance
awards of shares of Common Stock may be granted for attainment of performance
criteria determined by the Board of Directors of UUNET. A total of 2,669,514
shares of Common Stock were reserved for issuance under the Incentive Plan and
the Option Plan. Any shares not issued or reserved under the Option Plan
become available for issuance under the Incentive Plan. On January 31, 1996,
the stockholders of UUNET at a Special Meeting of Stockholders approved an
increase in the number of shares reserved for issuance under the Incentive
Plan to 6,669,514.
The following table summarizes all option and purchase right activity under
the Option Plan and the Incentive Plan for the three years ended December 31,
1995:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
---------- --------------
<S> <C> <C>
Outstanding as of December 31, 1992............... 350,000 $ 1.00
Granted......................................... 175,000 1.00
---------- ------------
Outstanding as of December 31, 1993............... 525,000 1.00
Granted......................................... 4,680,450 0.05-$ 0.25
Exercised....................................... (2,110,950) 0.05- 0.25
Canceled........................................ (1,160,042) 0.05- 0.16
---------- ------------
Outstanding as of December 31, 1994............... 1,934,458 0.05- 1.00
Granted......................................... 991,150 5.00- 75.00
Exercised....................................... (862,661) 0.05- 1.00
Canceled........................................ (86,783) 0.05- 45.00
---------- ------------
Outstanding as of December 31, 1995............... 1,976,164 $0.05-$75.00
========== ============
</TABLE>
As of December 31, 1994 and 1995, options to purchase 771,049 and 383,751
shares, respectively, were exercisable.
F-14
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Compensation equal to the difference between the assumed fair value of
Common Stock at the grant date and the exercise price of the options, if any,
is recognized ratably over the vesting period. Compensation expense related to
options granted in 1994 is approximately $207,000 and will be recognized over
the vesting period, which is generally five years. Compensation expense
relating to stock options was $1,000 in 1994 and $42,000 in 1995.
Prior to the acquisition, Unipalm maintained its own stock option plan.
Stock options granted under the Unipalm plan were 194,078 and 39,347 in 1994
and 1995, respectively. The statement of stockholders' equity reflects the
exercise of vested options of 36,862 and 26,089 in 1994 and 1995,
respectively. All remaining Unipalm options outstanding at the time of the
acquisition were exchanged for UUNET Common Stock.
1995 Performance Option Plan
In 1995, UUNET adopted the 1995 Performance Option Plan (the "Performance
Plan") that provides for grants of nonqualified stock options to purchase
shares of Common Stock to employees of UUNET. Options to purchase 161,180
shares of Common Stock at an exercise price of $6.00 per share were granted in
February 1995, of which options to purchase 17,600 shares were canceled as of
December 31, 1995. Options granted under the Performance Plan were exercisable
on December 31, 2004, subject to acceleration provisions if the Company met
performance goals specified in the Performance Plan. Such performance goals
were achieved in 1995, resulting in the acceleration of vesting of the options
outstanding under the Performance Plan to March 31, 1996.
Employee Stock Purchase Plan
In 1995, UUNET adopted the Employee Stock Purchase Plan (the "Purchase
Plan") to permit employees of UUNET to purchase Common Stock at a price equal
to 85% of the lesser of the fair market value at the beginning or end of the
enrollment period as defined by the Purchase Plan. The first enrollment period
begins in February 1996.
Nonemployee Directors Stock Option Plan
In 1995, UUNET adopted the Nonemployee Directors Stock Option Plan (the
"Directors Plan") to grant nonqualified stock options to directors of UUNET
who are not employees. Eligible nonemployee directors will be granted an
option to purchase 7,500 shares of Common Stock on the day of their election,
re-election or appointment. The exercise price of all options will be equal to
the fair market value of Common Stock on the grant date. The options will vest
ratably over a three-year period. As of December 31, 1995, no options had been
granted under the Directors Plan.
Reserved Shares
The Company has reserved 6,843,565 shares of Common Stock for issuance
pursuant to stock plans as of January 31, 1996.
F-15
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
Telecommunications Lines
The Company has guaranteed monthly usage levels with various communications
vendors through January 2009. As of December 31, 1995, the annual commitments
(exclusive of usage discounts) were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- --------
<S> <C>
1996............................................................... $ 37,448
1997............................................................... 31,407
1998............................................................... 30,002
1999............................................................... 22,780
2000............................................................... 10,638
Thereafter......................................................... 10,464
--------
Total............................................................ $142,739
========
</TABLE>
Facilities Leases
The Company leases and subleases office space at various locations with
expiration dates through April 2001. In 1994, UUNET terminated its then
existing office lease in conjunction with the signing of a sublease agreement
and recorded approximately $330,000 for costs associated with lease
termination and idle equipment during the lease termination period. During
1995, the Company recorded lease termination and idle equipment costs of
approximately $1.8 million classified as general and administrative expense in
the accompanying statements of operations as a result of consolidating
substantially all of UUNET PIPEX operations into a new facility. Rent expense
for the years ended December 31, 1993, 1994 and 1995, including lease
termination and idle equipment costs, was approximately $828,000, $1,323,000
and $3,361,000, respectively.
Future minimum annual lease payments under all operating lease and sublease
agreements as of December 31, 1995, were as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ------
<S> <C>
1996................................................................. $2,599
1997................................................................. 2,361
1998................................................................. 2,382
1999................................................................. 1,248
2000................................................................. 1,109
Thereafter........................................................... 284
------
Total.............................................................. $9,983
======
</TABLE>
7. RELATED PARTY TRANSACTIONS:
In 1993, UUNET realized a loss of $433,000 on the disposition to a third
party of its investment in an affiliate. The investment in this affiliate
consisted of shares of common stock, capital contributions and loans totaling
$778,000. The disposition included agreements settling guarantees and
obligations of UUNET for the benefit of this affiliate.
At its inception, UUNET acquired the assets and liabilities of UUNET
Communications Services, Inc. ("UCS"). UUNET assumed all of the assets,
liabilities and customers of UCS in exchange for a note and a five-
F-16
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
year royalty agreement. The carrying amounts of the assets and liabilities
assumed were equal to the historical book value of UCS. The agreement required
UUNET to pay UCS a royalty equal to 4% of the gross revenue billed for certain
services. Royalty expense for the years ended December 31, 1993, 1994 and
1995, was approximately $76,000, $99,000 and $55,000, respectively. In 1995,
UUNET entered into an agreement with UCS, whereby UUNET repaid all of its UCS
debt obligations and agreed upon and prepaid all of its royalty obligations to
UCS.
8. SEGMENT AND GEOGRAPHIC INFORMATION:
The Company sells its products and services in several geographic regions.
Net revenues relating to each region are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
United States........................................ $ 7,984 $13,989 $59,305
Europe............................................... 15,737 19,004 34,405
Other................................................ 298 145 751
------- ------- -------
$24,019 $33,138 $94,461
======= ======= =======
</TABLE>
A summary of net revenues, operating income (loss) and identifiable assets
by operating location is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Net revenues:
United States................................. $ 7,895 $12,414 $ 57,375
Europe........................................ 16,124 20,724 37,086
------- ------- --------
Total net revenues.......................... $24,019 $33,138 $ 94,461
======= ======= ========
Operating income (loss):
United States................................. $(1,758) $(6,974) $ (1,300)
Europe........................................ 429 (1,252) (8,176)
Acquisition costs............................. -- -- (11,067)
------- ------- --------
Total operating loss........................ $(1,329) $(8,226) $(20,543)
======= ======= ========
Identifiable assets:
United States................................. $ 3,645 $12,025 $118,385
Europe........................................ 14,312 17,600 19,225
------- ------- --------
Total identifiable assets................... $17,957 $29,625 $137,610
======= ======= ========
</TABLE>
Net revenues are categorized by the location of the office from which the
sales were generated, rather than the customer's geographic location.
9. EMPLOYEE RETIREMENT PLAN:
Effective January 1, 1995, UUNET adopted a 401(k) salary deferral plan (the
"401(k) Plan"). Employees of UUNET are eligible to participate in the 401(k)
Plan when they reach age 21 and have completed half of a year of service with
UUNET. The 401(k) Plan replaced a Simplified Employee Pension ("SEP") Plan,
which allowed UUNET to make discretionary contributions. Total expense related
to the SEP Plan was approximately
F-17
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$165,000 and $451,000 for the years ended December 31, 1993 and 1994,
respectively; no contribution was made during 1995. UUNET matched 1% of
contributions made by eligible employees in 1995 under the 401(k) Plan, which
expense totaled $71,000 for the year ended December 31, 1995.
10. INCOME TAXES:
The Company records income taxes in accordance with SFAS 109, "Accounting
for Income Taxes." The adoption of SFAS 109 by UUNET on January 1, 1993, had
no effect on the consolidated financial position or results of operations for
the year ended December 31, 1993.
The components of the benefit (provision) for income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................... $ 15 $ -- $ --
State..................................... 2 -- --
Foreign................................... (123) (242) 570
------ -------- --------
Total current........................... (106) (242) 570
------ -------- --------
Deferred:
Federal................................... -- -- --
State..................................... -- -- --
Foreign................................... (91) 116 (96)
------ -------- --------
Total deferred.......................... (91) 116 (96)
------ -------- --------
Total................................... $ (197) $ (126) $ 474
====== ======== ========
Significant components of the Company's deferred tax assets (liabilities)
are as follows (in thousands):
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C> <C>
Net operating loss carryforwards................... $ 2,146 $ 5,547
Accruals not currently deductible for tax
purposes.......................................... 1,753 2,351
Depreciation....................................... (646) (2,170)
Allowance for doubtful accounts.................... 76 446
-------- --------
Gross deferred tax assets........................ 3,329 6,174
Valuation allowance................................ (3,233) (6,174)
-------- --------
Net deferred tax assets.......................... $ 96 $ --
======== ========
A reconciliation between the Company's effective tax rate and the federal
income tax rate on loss from continuing operations is as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate........... (34)% (34)% (34)%
State income taxes.......................... (4) (4) (4)
Difference in tax rates on consolidated
foreign subsidiaries....................... (1) 1 2
Acquisition expense......................... -- -- 18
Losses not benefited........................ 47 34 16
Other....................................... 3 5 (1)
------ -------- --------
Effective income tax rate................. 11% 2% (3)%
====== ======== ========
</TABLE>
F-18
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
As of December 31, 1995, the Company had U.S. federal and foreign net
operating loss ("NOLs") of approximately $12,177,000 and $2,455,000,
respectively. The federal NOLs expire in years 2008 through 2010; foreign NOLs
may be utilized in future years to the extent of foreign income. The amount of
federal NOLs available to be used in any given year may be limited in the
event of significant changes in the ownership of UUNET. Management believes
that the prior ownership changes will not significantly limit the Company's
ability to use its NOLs. The Company has fully reserved its deferred tax
assets as of December 31, 1995.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UUNET Technologies, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of UUNET Technologies, Inc. (a Delaware
corporation) and Subsidiaries, and have issued our report thereon dated
January 31, 1996. Our audits were made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The schedule listed in the
index to the consolidated financial statements is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required
to be set forth therein, in relation to the basic financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.
January 31, 1996
F-20
<PAGE>
SCHEDULE II
UUNET TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING CHARGED TO END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1993
Allowance for doubtful accounts... $ 23 $ 112 $ -- $ 135
Deferred tax asset valuation...... -- 726 -- 726
Year Ended December 31, 1994
Allowance for doubtful accounts... 135 416 (96) 455
Deferred tax asset valuation...... 726 2,507 -- 3,233
Year Ended December 31, 1995
Allowance for doubtful accounts... 455 2,064 (872) 1,647
Deferred tax asset valuation...... 3,233 2,941 -- 6,174
</TABLE>
F-21
<PAGE>
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
(IN THOUSANDS,
EXCEPT PAR VALUE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 60,424 $ 45,413
Accounts receivable, net of allowance of $1,647 and
$1,540, respectively, for doubtful accounts........ 17,768 23,575
Inventories......................................... 1,251 1,436
Prepaid expenses and other current assets........... 2,149 3,514
-------- --------
Total current assets.................................. 81,592 73,938
Property and equipment, net........................... 54,523 75,877
Investments in affiliates............................. 1,321 6,297
Other assets.......................................... 174 166
-------- --------
Total assets.......................................... $137,610 $156,278
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.................... $ 4,652 $ 6,813
Accounts payable.................................... 10,580 17,824
Accrued expenses.................................... 24,604 26,486
Deferred revenues................................... 3,421 5,026
-------- --------
Total current liabilities............................. 43,257 56,149
Notes payable, net of current portion................. 13,686 18,045
-------- --------
Total liabilities..................................... 56,943 74,194
Commitments and contingencies Stockholders' equity:
Preferred Stock, $0.001 par value; 500 shares
authorized, none issued or outstanding............. -- --
Common Stock, $0.001 par value; 175,000 shares
authorized as of March 31, 1996; 32,057 and 32,202
shares issued and outstanding, respectively........ 32 32
Additional paid-in capital.......................... 108,071 109,328
Deferred compensation............................... (165) (154)
Foreign currency translation adjustment............. 282 198
Accumulated deficit................................. (27,553) (27,320)
-------- --------
Total stockholders' equity............................ 80,667 82,084
-------- --------
Total liabilities and stockholders' equity............ $137,610 $156,278
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-22
<PAGE>
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues:
Internet services..................................... $ 8,815 $39,004
Software.............................................. 6,205 4,009
--------- ---------
Total revenues...................................... 15,020 43,013
--------- ---------
Costs and expenses:
Cost of revenues--
Internet services................................... 4,490 25,062
Software............................................ 3,557 2,391
Network operations and support........................ 2,315 5,265
Sales and marketing................................... 3,210 6,798
General and administrative............................ 1,839 3,126
--------- ---------
Total costs and expenses............................ 15,411 42,642
--------- ---------
Income (loss) from operations........................... (391) 371
Interest income......................................... 194 577
Interest expense........................................ (83) (329)
Equity in net loss of affiliates........................ -- (386)
--------- ---------
Income (loss) before income taxes....................... (280) 233
Benefit for income taxes................................ 17 --
--------- ---------
Net income (loss)....................................... $ (263) $ 233
========= =========
Net income (loss) per common and equivalent share (Note
2)..................................................... $ (0.01) $ 0.01
Shares used in computing net income (loss) per common
and equivalent share (Note 2).......................... 25,774 33,436
</TABLE>
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ (263) $ 233
Adjustments to reconcile net income (loss) to net cash
provided by operating activities--
Depreciation and amortization........................ 1,025 3,948
Stock option compensation............................ 11 10
Equity in net loss of affiliates..................... -- 386
Cash provided by (used in) changes in assets and
liabilities:
Accounts receivable, net........................... (2,679) (5,675)
Inventories........................................ (446) (202)
Prepaid expenses and other current assets.......... 42 (1,451)
Accounts payable................................... 4,650 7,330
Accrued expenses................................... 1,001 2,015
Deferred revenues.................................. (963) 1,642
--------- ---------
Net cash provided by operating activities............ 2,378 8,236
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................... (7,363) (25,330)
Investments in affiliates.............................. -- (4,398)
--------- ---------
Net cash used in investing activities................ (7,363) (29,728)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable............................ 2,957 7,316
Repayments of notes payable............................ (291) (840)
Proceeds from sale of Preferred Stock, net............. 3,849 --
Proceeds from sale of Common Stock, net................ 38 101
--------- ---------
Net cash provided by financing activities................ 6,553 6,577
--------- ---------
Effect of foreign currency exchange rate changes on cash
and cash equivalents.................................... 264 (96)
--------- ---------
Net increase (decrease) in cash and cash equivalents..... 1,832 (15,011)
Cash and cash equivalents, beginning of period........... 10,493 60,424
--------- ---------
Cash and cash equivalents, end of period................. $ 12,325 $ 45,413
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 56 $ 239
Cash paid for income taxes............................. -- --
Supplemental disclosure of noncash financing activities:
Capital lease obligations.............................. -- 110
</TABLE>
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
UUNET Technologies, Inc., together with its wholly-owned subsidiaries
("UUNET" or the "Company"), is a leading provider of a comprehensive range of
Internet access options, applications and consulting services to businesses,
professionals and on-line services providers.
The condensed interim consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures made are adequate to make the information
presented not misleading. The condensed interim consolidated financial
statements should be read in conjunction with the financial statements and the
notes thereto, included in the Company's Annual Report on Form 10-K/A as filed
with the Securities and Exchange Commission on April 1, 1996, for the year
ended December 31, 1995.
The accompanying condensed interim consolidated financial statements have
been prepared, in all material respects, in conformity with the standards of
accounting measurements set forth in Accounting Principles Board Opinion No.
28 and reflect, in the opinion of management, all adjustments, which are of a
normal recurring nature, necessary to summarize fairly the financial position
and results of operations for such periods. The results of operations for such
interim periods are not necessarily indicative of the results to be expected
for the full year.
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents. As of March
31, 1996, the Company's cash and cash equivalents consisted of demand deposits
and money market accounts in banks and other financial institutions totaling
approximately $43.0 million and available-for-sale securities consisting of
commercial paper totaling approximately $2.4 million, which approximated
market value.
2. NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE:
Net income (loss) per common and equivalent share is based on the weighted
average number of shares outstanding during the periods presented. Pursuant to
the Securities and Exchange Commission Staff Accounting Bulletin No. 83, all
shares, options and warrants issued during the twelve months immediately
preceding the initial public offering were treated as if they had been
outstanding through March 31, 1995, using the treasury stock method and at a
per share price of $14.00, the initial public offering price.
Fully-diluted net income (loss) per share is not presented as it would not
materially differ from primary net income (loss) per share.
F-25
<PAGE>
UUNET TECHNOLOGIES, INC.
NOTES TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Network and computer equipment.................... $ 58,244 $ 80,743
Furniture and office equipment.................... 6,899 8,720
Purchased software................................ 1,908 2,727
Vehicles.......................................... 1,029 1,071
-------- --------
Property and equipment, at cost................. 68,080 93,261
Less--Accumulated depreciation and amortization... (13,557) (17,384)
-------- --------
$ 54,523 $ 75,877
======== ========
</TABLE>
4. MFS AND UUNET MERGER AGREEMENT:
On April 30, 1996, UUNET and MFS Communications Company, Inc. ("MFS")
announced that the two companies had entered into an Agreement and Plan of
Merger (the "Merger Agreement"). Under the terms of the Merger Agreement, each
share of UUNET common stock would be converted into 1.777776 shares of MFS
common stock. Consummation of the merger is subject to, among other things,
approval by the stockholders of each company and clearance under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended. Stockholders of
UUNET owning approximately 59.5 percent of the outstanding shares and
stockholders of MFS owning approximately 12 percent of the outstanding shares
have committed to vote in favor of the merger. The merger will be accounted
for by MFS as a purchase.
MFS is a leading provider of telecommunications services to business and
government end users. The combined company would provide a single source for a
full range of Internet, voice, data and video services through an
international network platform.
5. ACQUISITION OF UNIPALM:
On November 15, 1995, UUNET acquired Unipalm Group plc ("Unipalm"), (doing
business as "UUNET PIPEX") ("UUNET PIPEX"), a provider of Internet access
options, networking software, training and consulting services in the United
Kingdom and Europe. The acquisition was accounted for as a pooling of
interests and, as such, UUNET's financial statements for the three months
ended March 31, 1995 have been restated to include the results of UUNET PIPEX.
For the three month period ended March 31, 1995, UUNET had previously reported
revenues of $6,482,000 as compared to combined revenues of $15,020,000 and a
net loss of $792,000 as compared to a combined net loss of $263,000.
6. INVESTMENTS IN AFFILIATES:
During the quarter ended March 31, 1996, UUNET acquired a 40% interest in
the outstanding capital stock of EUnet Deutschland GmbH ("EUnet Germany"), a
provider of Internet access options, applications and consulting services in
Germany, for $1.6 million. The investment in EUnet Germany is accounted for
under the equity method.
On April 1, 1996, UUNET paid approximately $3.6 million in cash and issued
27,079 shares of its Common Stock with a then fair market value of
approximately $0.7 million to increase UUNET's equity ownership of UUNET
Canada, Inc. ("UUNET Canada"), from 20% to 51%. The financial statements of
UUNET Canada will be consolidated with UUNET's financial statements beginning
with the second quarter of 1996.
F-26
<PAGE>
ANNEX A
AGREEMENT AND PLAN
OF MERGER
DATED AS OF
APRIL 29, 1996
AMONG
MFS COMMUNICATIONS COMPANY, INC.
MFS GLOBAL INTERNET SERVICES, INC.
AND
UUNET TECHNOLOGIES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I.THE MERGER....................................................... 1
Section 1.1. The Merger............................................... 1
Section 1.2. Effective Date of the Merger............................. 1
ARTICLE II.THE SURVIVING CORPORATION....................................... 2
Section 2.1. Certificate of Incorporation............................. 2
Section 2.2. By-Laws.................................................. 2
Section 2.3. Board of Directors; Officers............................. 2
Section 2.4. Effects of Merger........................................ 2
ARTICLE III.CONVERSION OF SHARES........................................... 2
Section 3.1. Exchange Ratio........................................... 2
Section 3.2. Parent to Make Certificates Available.................... 2
Section 3.3. Dividends; Transfer Taxes................................ 3
Section 3.4. No Fractional Shares..................................... 4
Section 3.5. Stock Options............................................ 4
Section 3.6. Stockholders' Meetings................................... 5
Section 3.7. Closing of the Company's Transfer Books.................. 5
Section 3.8. Assistance in Consummation of the Merger................. 5
Section 3.9. Closing.................................................. 5
Section 3.10. No Further Rights in Company Common Stock................ 6
Section 3.11. No Liability............................................. 6
Section 3.12. Withholding Rights....................................... 6
ARTICLE IV.REPRESENTATIONS AND WARRANTIES OF PARENT........................ 6
Section 4.1. Organization and Qualification........................... 6
Section 4.2. Capitalization........................................... 6
Section 4.3. Subsidiaries............................................. 7
Section 4.4. Authority Relative to this Merger Agreement.............. 7
Section 4.5. Reports and Financial Statements......................... 8
Section 4.6. Absence of Certain Changes or Events..................... 8
Section 4.7. Employee Benefit Plans................................... 8
Section 4.8. ERISA.................................................... 9
Section 4.9. Parent Action............................................ 9
Section 4.10. Fairness Opinion......................................... 9
Section 4.11. No Brokers............................................... 9
Section 4.12. Parent Ownership of Company Common Stock................. 9
ARTICLE V.REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................... 9
Section 5.1. Organization and Qualification........................... 9
Section 5.2. Capitalization........................................... 10
Section 5.3. Subsidiaries............................................. 10
Section 5.4. Authority Relative to this Merger Agreement.............. 10
Section 5.5. Reports and Financial Statements......................... 11
Section 5.6. Absence of Certain Changes or Events..................... 12
Section 5.7. Employee Benefit Plans................................... 12
Section 5.8. ERISA.................................................... 12
Section 5.9. Takeover Provisions Inapplicable......................... 13
Section 5.10. Company Action........................................... 13
Section 5.11. Fairness Opinion......................................... 13
Section 5.12. No Brokers............................................... 13
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE VI.REPRESENTATIONS AND WARRANTIES REGARDING SUB.................. 13
Section 6.1. Organization.......................................... 13
Section 6.2. Capitalization........................................ 13
Section 6.3. Authority Relative to this Merger Agreement........... 13
ARTICLE VII.CONDUCT OF BUSINESS PENDING THE MERGER....................... 14
Conduct of Business by the Company Pending the Merg-
Section 7.1. er................................................... 14
Section 7.2. Conduct of Business by Parent Pending the Merger...... 16
Section 7.3. Conduct of Business of Sub............................ 16
Section 7.4. Notice of Breach...................................... 16
ARTICLE VIII.ADDITIONAL AGREEMENTS....................................... 16
Section 8.1. Access and Information................................ 16
Section 8.2. Registration Statement/Proxy Statement................ 16
Section 8.3. Compliance with the Securities Act.................... 17
Section 8.4. Listing............................................... 17
Section 8.5. Indemnification....................................... 17
Section 8.6. HSR Act............................................... 19
Section 8.7. Additional Agreements................................. 19
Section 8.8. No Solicitation....................................... 19
Section 8.9. Limitation on Acquisition Activities.................. 20
Section 8.10. Notice of Actions..................................... 20
Section 8.11. Benefit Plans Generally............................... 20
Section 8.12. Stockholders' Rights Plan............................. 21
ARTICLE IX.CONDITIONS PRECEDENT.......................................... 21
Conditions to Each Party's Obligation to Effect the
Section 9.1. Merger............................................... 21
Conditions to Obligation of the Company to Effect the
Section 9.2. Merger............................................... 21
Conditions to Obligations of Parent and Sub to Effect
Section 9.3. the Merger........................................... 22
ARTICLE X.TERMINATION, AMENDMENT AND WAIVER.............................. 22
Section 10.1. Termination........................................... 22
Section 10.2. Effect of Termination................................. 23
Section 10.3. Amendment............................................. 23
Section 10.4. Extension; Waivers.................................... 23
ARTICLE XI.GENERAL PROVISIONS............................................ 23
Non-Survival of Representations, Warranties and Agree-
Section 11.1. ments................................................ 23
Section 11.2. Notices............................................... 24
Section 11.3. Fees and Expenses..................................... 24
Section 11.4. Publicity............................................. 25
Section 11.5. Specific Performance.................................. 25
Section 11.6. Assignment; Binding Effect............................ 25
Section 11.7. Entire Agreement...................................... 26
Section 11.8. Governing Law......................................... 26
Section 11.9. Counterparts.......................................... 26
Section 11.10. Headings, Table of Contents, Index of Defined Terms... 26
Section 11.11. Interpretation........................................ 26
Section 11.12. Waivers............................................... 26
Section 11.13. Severability.......................................... 26
Section 11.14. Subsidiaries.......................................... 26
Exhibit 1.1(a)--The Stock Option Agreement
Exhibit 1.1(b)--The Parent Voting Agreement
Exhibit 8.3(a)--The Affiliate Letter
</TABLE>
ii
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Acquisition Proposal........................................................ 20
Affiliate................................................................... 17
Certificates................................................................ 3
Claim....................................................................... 18
Code........................................................................ 1
Commission.................................................................. 7
Company..................................................................... 1
Company Benefit Plans....................................................... 12
Company Common Stock........................................................ 2
Company Disclosure Letter................................................... 10
Company ERISA Affiliate..................................................... 12
Company Material Adverse Effect............................................. 10
Company Meeting............................................................. 5
Company SEC Reports......................................................... 11
DGCL........................................................................ 2
Effective Date.............................................................. 1
Encumbrances................................................................ 7
ERISA....................................................................... 8
Excess Shares............................................................... 4
Exchange Act................................................................ 8
Exchange Agent.............................................................. 2
Exchange Fund............................................................... 3
Exchange Ratio.............................................................. 2
Form S-4.................................................................... 16
Fractional Securities Fund.................................................. 4
HSR Act..................................................................... 8
Indemnified Party........................................................... 18
IRS......................................................................... 9
Merger...................................................................... 1
Merger Agreement............................................................ 1
MS.......................................................................... 11
MS Agreement................................................................ 11
Nasdaq...................................................................... 4
Options..................................................................... 10
Outstanding Options......................................................... 4
Parent...................................................................... 1
Parent Benefit Plans........................................................ 8
Parent Common Stock......................................................... 2
Parent Disclosure Letter.................................................... 6
Parent ERISA Affiliate...................................................... 9
Parent Material Adverse Effect.............................................. 6
Parent Meeting.............................................................. 5
Parent Rights Plan.......................................................... 2
Parent SEC Reports.......................................................... 8
Parent Share Proposal....................................................... 5
Parent Stock Split.......................................................... 2
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
Parent Voting Agreement..................................................... 1
Parent Voting Debt.......................................................... 6
Permitted Options........................................................... 14
Proposed Transactions....................................................... 10
Proxy Statement/Prospectus.................................................. 16
Purchase Event.............................................................. 22
Securities Act.............................................................. 8
Share Consideration......................................................... 3
Significant Subsidiaries.................................................... 7
Stock Option Agreement...................................................... 1
Stock Option Plans.......................................................... 4
Stock Purchase Plan......................................................... 5
Sub......................................................................... 1
Surviving Corporation....................................................... 1
Voting Debt................................................................. 10
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (the "Merger Agreement"), dated as of
April 29, 1996, by and among MFS Communications Company, Inc., a Delaware
corporation ("Parent"), MFS Global Internet Services, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent ("Sub"), and UUNET
Technologies, Inc., a Delaware corporation (the "Company").
WITNESSETH:
Whereas, Parent and the Company desire to effect a business combination (the
"Merger") by means of the merger of Sub with and into the Company;
Whereas, the Boards of Directors of Parent, Sub and the Company have
approved the Merger, upon the terms and subject to the conditions set forth
herein;
Whereas, as a condition and inducement to Parent's and Sub's entering into
this Merger Agreement and incurring the obligations set forth herein,
concurrently with the execution and delivery of this Merger Agreement, Parent
is entering into a Stockholder Option, Voting and Proxy Agreement with certain
stockholders of the Company, in the form of Exhibit 1.1(a) (the "Stock Option
Agreement"), pursuant to which, among other things, such stockholders have
agreed to grant Parent the irrevocable option to purchase the shares of
Company Common Stock owned by such stockholders; and agreed to vote the shares
of Company Common Stock (as defined below) owned by such stockholders in favor
of the Merger provided for herein and to grant Parent irrevocable proxies to
vote such shares of Company Common Stock;
Whereas, as a condition and inducement to the Company's entering into this
Merger Agreement and incurring the obligations set forth herein, concurrently
with the execution and delivery of this Merger Agreement, the Company is
entering into a Parent Voting and Proxy Agreement with certain stockholders of
Parent, in the form of Exhibit 1.1(b) (the "Parent Voting Agreement"),
pursuant to which, among other things, such stockholders have agreed to vote
the shares of Parent Common Stock (as defined below) owned by such
stockholders in favor of the Parent Share Proposal (as defined below) provided
for herein and to grant the Company irrevocable proxies to vote such shares of
Parent Common Stock;
Whereas, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
Now, therefore, in consideration of the foregoing premises and the
representations, warranties and agreements contained herein, the parties
hereto agree as follows:
ARTICLE I.
The Merger
Section 1.1. The Merger. Upon the terms and subject to the conditions
hereof, on the Effective Date (as defined in Section 1.2), Sub shall be merged
with and into the Company and the separate existence of Sub shall thereupon
cease, and the Company, as the surviving corporation in the Merger (the
"Surviving Corporation"), shall by virtue of the Merger continue its corporate
existence under the laws of the State of Delaware.
Section 1.2. Effective Date of the Merger. The Merger shall become effective
at the date and time (the "Effective Date") when a properly executed
Certificate of Merger is duly filed with the Secretary of State of the State
of Delaware, which filing shall be made as soon as practicable following
fulfillment of the conditions set forth in Article IX hereof, or at such time
thereafter as is provided in such Certificate.
<PAGE>
ARTICLE II.
The Surviving Corporation
Section 2.1. Certificate of Incorporation. Subject to Section 8.5 of this
Merger Agreement, after the Effective Date, the Certificate of Incorporation
of the Surviving Corporation shall be amended and restated in its entirety to
read as the Certificate of Incorporation of Sub as in effect immediately prior
to the Effective Date, except that Article One shall be amended to read as
follows: "The name of the Corporation is UUNET TECHNOLOGIES, INC."
Section 2.2. By-Laws. Subject to Section 8.5 of this Merger Agreement, after
the Effective Date, the By-laws of Sub, as in effect immediately prior to the
Effective Date, shall be the By-laws of the Surviving Corporation until
thereafter amended as provided by law, the Certificate of Incorporation of the
Surviving Corporation and such By-laws.
Section 2.3. Board of Directors; Officers. The directors of Sub immediately
prior to the Effective Date and John W. Sidgmore shall be the directors of the
Surviving Corporation and the officers of the Company immediately prior to the
Effective Date shall be the officers of the Surviving Corporation, in each
case until their respective successors are duly elected and qualified.
Section 2.4. Effects of Merger. The Merger shall have the effects set forth
in Section 259 of the Delaware General Corporation Law (the "DGCL").
ARTICLE III.
Conversion of Shares
Section 3.1. Exchange Ratio. On the Effective Date, by virtue of the Merger
and without any action on the part of any holder of any common stock, $0.001
par value, of the Company ("Company Common Stock"):
(a) All shares of Company Common Stock which are held by the Company or
any subsidiary of the Company, and any shares of Company Common Stock owned
by Parent, Sub or any other subsidiary of Parent, shall be canceled.
(b) Subject to Section 3.4, each remaining outstanding share of Company
Common Stock shall be converted into and represent the right to receive
1.777776, subject to adjustment pursuant to Section 3.1(c) (as may be
adjusted, the "Exchange Ratio") fully paid and nonassessable shares of the
common stock, $.01 par value, of Parent (the "Parent Common Stock"), which
reflects the stock split of the Parent Common Stock that was paid on April
26, 1996 (the "Parent Stock Split"), together with the associated rights
under Parent's Rights Agreement, dated as of September 30, 1995, between
Parent and Continental Stock Transfer & Trust Company (the "Parent Rights
Plan").
(c) In the event of any stock dividend, stock split, reclassification,
recapitalization, combination or exchange of shares with respect to, or
rights issued in respect of, Parent Common Stock other than the Parent
Stock Split after the date hereof, the Exchange Ratio shall be adjusted
accordingly.
(d) Each issued and outstanding share of capital stock of Sub shall be
converted into and become one fully paid and nonassessable share of Common
Stock, $.01 par value, of the Surviving Corporation.
Section 3.2. Parent to Make Certificates Available.
(a) Prior to the Effective Date, Parent shall appoint Continental Stock
Transfer and Trust Company to act as exchange agent (the "Exchange Agent")
for the Merger. At the Effective Date, Parent shall deposit with the
Exchange Agent, for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article III, through the
Exchange Agent, certificates representing a number of shares of Parent
Common Stock equal to the product (rounded down to the nearest whole
number) of the Exchange
2
<PAGE>
Ratio multiplied by the number of shares of Company Common Stock
outstanding immediately prior to the Effective Date. For purposes of the
Merger Agreement, shares of Parent Common Stock, together with any
dividends or distributions with respect thereto, are hereinafter referred
to as the "Exchange Fund" and such shares of Parent Common Stock, is
hereinafter referred to as the "Share Consideration." The Exchange Agent
shall deliver the Share Consideration out of the Exchange Fund as directed
by Parent. The Share Consideration shall be deemed to have been issued on
the Effective Date.
(b) On the Effective Date, Parent shall instruct the Exchange Agent to
mail to each holder of record of a certificate or certificates which
immediately prior to the Effective Date represented outstanding shares of
Company Common Stock (collectively, the "Certificates") whose shares were
converted into the right to receive the Share Consideration pursuant to
Section 3.1(b) within three business days of receiving from the Company a
list of such holders of record, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
the Share Consideration. Upon surrender of a Certificate for cancellation
to the Exchange Agent, together with such letter of transmittal, duly
executed, and such other documents as reasonably may be required by the
Exchange Agent, and acceptance thereof by the Exchange Agent, each holder
of a Certificate shall be entitled to receive in exchange therefor
certificates representing the Share Consideration that such holder has the
right to receive pursuant to the provisions of this Article III, and the
Certificate so surrendered shall forthwith be canceled. The Exchange Agent
shall accept such Certificates upon compliance with such reasonable terms
and conditions as the Exchange Agent may impose to effect an orderly
exchange thereof in accordance with normal exchange practices. Subject to
applicable law, following surrender of any such Certificate, there shall be
paid to the record holder thereof the certificates representing the Share
Consideration and cash in consideration of fractional shares as provided in
Section 3.4.
(c) Any portion of the Exchange Fund and the Fractional Securities Fund
(as defined below) that remains undistributed to the former stockholders of
the Company for 12 months after the Effective Date shall be delivered to
Parent upon demand. Any holder of shares of Company Common Stock who has
not exchanged his shares for Parent Common Stock in accordance with
subsection (a) within 12 months after the Effective Date shall have no
further claim upon the Exchange Agent and shall thereafter look only to
Parent for payment in respect of his shares of Company Common Stock. Until
so surrendered, certificates representing Company Common Stock shall
represent solely the right to receive the Share Consideration.
(d) Notwithstanding paragraph (b) above, all shares of Company Common
Stock subject to a right of repurchase which remains in effect following
the Merger shall continue to bear a restrictive legend with respect to such
right of repurchase and shall be delivered to Parent to hold, pending the
lapse of the right of repurchase.
Section 3.3. Dividends; Transfer Taxes. No dividends or other distributions
that are declared or made on Parent Common Stock will be paid to persons
entitled to receive certificates representing Parent Common Stock pursuant to
this Merger Agreement until such persons surrender their Certificates
representing Company Common Stock. Upon such surrender, there shall be paid to
the person in whose name the certificates representing such Parent Common
Stock shall be issued any dividends or other distributions which shall have
become payable with respect to such Parent Common Stock in respect of a record
date after the Effective Date. In no event shall the person entitled to
receive such dividends be entitled to receive interest on such dividends. In
the event that any certificates for any shares of Parent Common Stock are to
be issued in a name other than that in which the Certificates representing
shares of Company Common Stock surrendered in exchange therefor are
registered, it shall be a condition of such exchange that the Certificate or
Certificates so surrendered shall be properly endorsed or be otherwise in
proper form for transfer and that the person requesting such exchange shall
pay to the Exchange Agent any transfer or other taxes required by reason of
the issuance of certificates for such shares of Parent Common Stock in a name
other than that of the registered holder of the Certificate surrendered, or
shall establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not applicable.
3
<PAGE>
Section 3.4. No Fractional Shares. No certificates or scrip representing
less than one share of Parent Common Stock shall be issued upon the surrender
for exchange of Certificates representing Company Common Stock pursuant to
Section 3.1(b). In lieu of any such fractional share, each holder of Company
Common Stock who would otherwise have been entitled to a fraction of a share
of Parent Common Stock upon surrender of Certificates for exchange pursuant to
Section 3.1(b) shall be paid upon such surrender cash (without interest) in an
amount equal to such holder's proportionate interest in the net proceeds from
the sale or sales in the open market by the Exchange Agent, on behalf of all
such holders, of the aggregate fractional Parent Common Stock issued pursuant
to this Section 3.4. As soon as practicable following the Effective Date, the
Exchange Agent shall determine the excess of (i) the number of full shares of
Parent Common Stock delivered to the Exchange Agent by Parent over (ii) the
aggregate number of full shares of Parent Common Stock to be distributed to
holders of Company Common Stock (such excess being herein called the "Excess
Shares"), and the Exchange Agent, as agent for the former holders of Company
Common Stock, shall sell the Excess Shares at the prevailing prices on The
Nasdaq Stock Market ("Nasdaq"). The Exchange Agent shall deduct from the
proceeds of the sale of the Excess Shares all commissions and transfer taxes
incurred in connection with such sale of Excess Shares. Until the net proceeds
of such sale have been distributed to the former stockholders of the Company,
the Exchange Agent will hold such proceeds in trust for such former
stockholders (the "Fractional Securities Fund"). As soon as practicable after
the determination of the amount of cash to be paid to former stockholders of
the Company in lieu of any fractional interests, the Exchange Agent shall make
available in accordance with the terms of this Merger Agreement such amounts
to such former stockholders.
Section 3.5. Stock Options. At or prior to the Effective Date, the Company
and Parent shall take all action necessary to cause the assumption by Parent
as of the Effective Date of the Company's 1995 Performance Option Plan,
Incentive Stock Option Plan, Equity Incentive Plan and Nonemployee Directors
Stock Option Plan (the "Stock Option Plans"). Each of the options to purchase
Company Common Stock, whether vested or unvested, issued under the Stock
Option Plans or pursuant to separate option agreements outstanding as of the
Effective Date (the "Outstanding Options") shall be converted without any
action on the part of the holder thereof into an option to purchase shares of
Parent Common Stock as of the Effective Date. The number of shares of Parent
Common Stock that the holder of an Outstanding Option shall be entitled to
receive upon the exercise of such option shall be a number of whole shares
determined by multiplying the number of shares of Company Common Stock subject
to such option, determined immediately before the Effective Date, by the
Exchange Ratio. The option price of each share of Parent Common Stock subject
to an Outstanding Option shall be the amount (rounded up to the nearest whole
cent) obtained by dividing the exercise price per share of Company Common
Stock at which such option is exercisable immediately before the Effective
Date by the Exchange Ratio. The assumption and substitution of options as
provided herein shall not give the holders of such options additional benefits
or additional vesting rights (other than rights to the acceleration of vesting
or the lapse of the right of repurchase caused by the Merger under existing
contractual arrangements) which they did not have immediately prior to the
Effective Date or relieve the holders of any obligations or restrictions
applicable to their options or the shares obtainable upon exercise of the
options. After the Effective Date, the Stock Option Plans shall be continued
in effect by Parent subject to amendment, modification, suspension,
abandonment or termination as provided therein, and the Stock Option Plans as
so continued shall relate only to the issuance of Parent Common Stock as
provided in this Section 3.5. Parent shall comply with the terms of the Stock
Option Plans and use all reasonable efforts to ensure, to the extent required
by, and subject to the provisions of such Stock Option Plans, that the
Outstanding Options which qualified as incentive stock options prior to the
Effective Date continue to qualify as incentive stock options after the
Effective Date. Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Parent Common Stock for delivery
under Outstanding Options assumed in accordance with this Section 3.5. As soon
as practicable after the Effective Date, and not more than one business day
thereafter, Parent shall file a registration statement on Form S-8 relating to
such assumed options and shall use all reasonable efforts to maintain the
effectiveness of such registration statement (and maintain the current status
of the prospectus or prospectuses contained therein) for so long as such
options remain outstanding. Parent shall use all reasonable efforts to qualify
as soon as practicable after the Effective Date under applicable state
securities laws the issuance of such shares of Parent Common Stock issuable
upon exercise of such Outstanding Options. With respect to those individuals
who subsequent to the
4
<PAGE>
Merger will be subject to the reporting requirements under Section 16(a) of
the Exchange Act, Parent shall administer the Stock Option Plans assumed
pursuant to this Section 3.5 in a manner that complies with Rule 16b-3
promulgated under the Exchange Act to the extent the Stock Option Plans
complied with such rule prior to the Merger. Upon the earlier to occur of (i)
July 31, 1996 or (ii) the trading day immediately preceding the Effective
Date, all then outstanding rights to acquire shares of Company Common Stock
under the Company's Employee Stock Purchase Plan (the "Stock Purchase Plan")
will be exercised for the purchase of shares of Company Common Stock.
Effective no later than the close of the second trading day immediately
preceding the Effective Date, (but in no event prior to the exercise
contemplated in the previous sentence), the Board of Directors of the Company
shall terminate the Stock Purchase Plan and all outstanding options to
purchase Company Common Stock thereunder. All funds contributed to the Stock
Purchase Plan that have not been used to purchase shares of Company Common
Stock shall be returned, in cash, to participants of the Stock Purchase Plan
as soon as administratively feasible after such termination date, in
accordance with Section 17(b) of the Stock Purchase Plan.
Section 3.6. Stockholders' Meetings.
(a) The Company shall take all action necessary, in accordance with
applicable law and its Certificate of Incorporation and By-laws, to convene
a special meeting of the holders of Company Common Stock (the "Company
Meeting") as promptly as practicable for the purpose of considering and
taking action upon this Merger Agreement. The Board of Directors of the
Company will recommend that holders of Company Common Stock vote in favor
of and approve the Merger and the adoption of the Merger Agreement at the
Company Meeting. The Company shall use all reasonable efforts to solicit
from its stockholders proxies in favor of the adoption of the Merger
Agreement and shall take all other action necessary or advisable to secure
the vote or consent of stockholders required by Delaware law to obtain such
approval. At the Company Meeting, all of the shares of Company Common Stock
then owned by Parent, Sub, or any other subsidiary of Parent, or with
respect to which Parent, Sub, or any other subsidiary of Parent holds the
power to direct the voting, will be voted in favor of approval of the
Merger and adoption of this Merger Agreement.
(b) Parent shall take all action necessary, in accordance with applicable
law and its Certificate of Incorporation and By-laws, to convene a special
meeting of the holders of Parent capital stock (the "Parent Meeting") as
promptly as practicable for the purpose of considering and taking action to
authorize the issuance of Parent Common Stock associated with the Merger
under the applicable guidelines of Nasdaq (the "Parent Share Proposal").
The Board of Directors of Parent will recommend that holders of Parent
Common Stock vote in favor of and approve the Parent Share Proposal at the
Parent Meeting. Parent shall use all reasonable efforts to solicit from its
stockholders proxies in favor of the adoption of the Parent Share Proposal
and shall take all other action necessary or advisable to secure the vote
or consent of stockholders required by Delaware law to obtain such
approval.
Section 3.7. Closing of the Company's Transfer Books. At the Effective Date,
the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock shall be made thereafter. In the event that,
after the Effective Date, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged for Parent Common Stock
and/or cash as provided in Sections 3.1(b) and 3.4.
Section 3.8. Assistance in Consummation of the Merger. Each of Parent, Sub
and the Company shall provide all reasonable assistance to, and shall
cooperate with, each other to bring about the consummation of the Merger as
soon as possible in accordance with the terms and conditions of this Merger
Agreement. Parent shall cause Sub to perform all of its obligations in
connection with this Merger Agreement.
Section 3.9. Closing. The closing of the transactions contemplated by this
Merger Agreement shall take place (i) at the offices of Willkie Farr &
Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York
10022, as soon as practicable after the last of the conditions set forth in
Article IX is fulfilled or waived or (ii) at such other time and place as
Parent and the Company shall agree in writing.
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Section 3.10. No Further Rights in Company Common Stock. All shares of
Parent Common Stock issued upon conversion of the shares of Company Common
Stock in accordance with the terms hereof (including any cash paid pursuant to
Sections 3.3 or 3.4) shall be deemed to have been issued in full satisfaction
of all rights pertaining to such shares of Company Common Stock.
Section 3.11. No Liability. Neither Parent nor the Company shall be liable
to any holder of shares of Company Common Stock for any such shares of Company
Common Stock (or dividends or distributions with respect hereto), or cash
delivered to a public official pursuant to any abandoned property, escheat or
similar law, rule, regulation, statute, order, judgment or decree.
Section 3.12. Withholding Rights. Each of Surviving Corporation and Parent
shall be entitled to deduct and withhold from the consideration otherwise
payable pursuant to this Merger Agreement to any holder of shares of Company
Common Stock such amounts as it is required to deduct and withhold with
respect to the making of such payment under the Code, or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
the Surviving Corporation or Parent, as the case may be, such withheld amounts
shall be treated for all purposes of this Merger Agreement as having been paid
to the holder of the shares of Company Common Stock in respect of which such
deduction and withholding was made by the Surviving Corporation or Parent, as
the case may be.
ARTICLE IV.
Representations and Warranties of Parent
Parent represents and warrants to the Company as follows:
Section 4.1. Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has the corporate power to carry on its business as it is now
being conducted or currently proposed to be conducted. Parent is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or held under
lease or the nature of its activities make such qualification necessary,
except where the failure to be so qualified will not, individually or in the
aggregate, have a material adverse effect on the business, properties, assets,
condition (financial or otherwise), liabilities or operations of Parent and
its subsidiaries taken as a whole (a "Parent Material Adverse Effect").
Complete and correct copies as of the date hereof of the Certificate of
Incorporation and By-laws of Parent have been delivered to the Company as part
of a disclosure letter delivered by Parent to the Company prior to the date of
this Merger Agreement (the "Parent Disclosure Letter").
Section 4.2. Capitalization. The authorized capital stock of Parent consists
of 400,000,000 shares of Parent Common Stock, and 25,000,000 shares of
preferred stock, $.01 par value. As of April 26, 1996, as adjusted for the
Parent Stock Split (i) 125,804,234 shares of Parent Common Stock were validly
issued and outstanding, fully paid and nonassessable, (ii) 95,000 shares of
Parent's Series A 8% Cumulative Convertible Preferred Stock, were validly
issued and outstanding, fully paid, and nonassessable and (iii) 15,000,000
shares of Series B Cumulative Convertible Preferred Stock were validly issued
and outstanding, fully paid, and nonassessable. As of the date hereof, there
are no bonds, debentures, notes or other indebtedness having the right to vote
on any matters on which the Parent's stockholders may vote ("Parent Voting
Debt") issued or outstanding. As of April 26, 1996, after giving effect to the
Parent Stock Split, except for options to acquire 20,614,274 shares of Parent
Common Stock pursuant to the Parent's 1992 Stock Plan and 1993 Stock Plan,
warrants to purchase 1,500,000 shares of Parent Common Stock, commitments to
issue shares of Parent Common Stock under Parent's Shareworks and Shareworks
Plus programs and commitments to issue shares of Parent Common Stock to non-
employee directors pursuant to Parent's 1993 Stock Plan, and, except as
provided herein and in the Parent Rights Plan, there are no options, warrants,
calls or other rights, agreements or commitments presently outstanding
obligating Parent to issue, deliver or sell shares of its capital stock or
debt securities, or obligating Parent to grant, extend or enter into any such
option, warrant, call or other such right, agreement or
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commitment. All of the shares of Parent Common Stock issuable in accordance
with this Merger Agreement in exchange for Company Common Stock at the
Effective Date will be, when so issued, duly authorized, validly issued, fully
paid and nonassessable and shall be delivered free and clear of any pledge,
lien, security interest, mortgage, charge, claim, equity, option, proxy,
voting restriction, right of first refusal, limitation on disposition, adverse
claim of ownership or use or encumbrance of any kind ("Encumbrances"),
including any preemptive rights of any stockholder of Parent.
Section 4.3. Subsidiaries. The only "Significant Subsidiaries" (as such term
is defined in Rule 1-02 of Regulation S-X of the Securities and Exchange
Commission (the "Commission")) ("Significant Subsidiaries") of Parent are
those named in Section 4.3 of the Parent Disclosure Letter or set forth on
Exhibit 21 to Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. Each Significant Subsidiary incorporated in the United
States is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has the corporate
power to carry on its business as it is now being conducted or currently
proposed to be conducted. Each Significant Subsidiary is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease
or the nature of its activities makes such qualification necessary except
where the failure to be so qualified will not have a Parent Material Adverse
Effect. Except as disclosed in Section 4.3 of the Parent Disclosure Letter,
all the outstanding shares of capital stock of each Significant Subsidiary are
validly issued, fully paid and nonassessable and owned by Parent or by a
Significant Subsidiary of Parent free and clear of any Encumbrances. There are
no existing options, warrants, calls or other rights, agreements or
commitments of any character relating to the issued or unissued capital stock
or other securities of any of the Significant Subsidiaries of Parent. Except
as set forth in the Parent's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, as disclosed in Section 4.3 of the Parent Disclosure
Letter and except for wholly owned subsidiaries which are formed after the
date hereof in the ordinary course of business, Parent does not directly or
indirectly own any interest in any other corporation, partnership, joint
venture or other business association or entity that is a Significant
Subsidiary.
Section 4.4. Authority Relative to this Merger Agreement.
(a) Parent has the corporate power to execute and deliver this Merger
Agreement and to carry out its obligations hereunder. The execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by Parent's Board of
Directors. The Merger Agreement constitutes a valid and binding obligation
of Parent, enforceable against Parent in accordance with its terms, except
as enforcement may be limited by bankruptcy, insolvency or other similar
laws affecting the enforcement of creditors' rights generally and except
that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought. Except for the approval of the holders
of the Parent capital stock described in Section 3.6(b), no other corporate
proceedings on the part of Parent are necessary to authorize the execution
and delivery by Parent of this Merger Agreement or the consummation of the
transactions contemplated hereby.
(b) The execution and delivery of this Merger Agreement and the
consummation of the transactions contemplated hereby, does not and will not
result in the change in conversion ratios, conversion rights or voting
rights, or the breach, violation, default (with or without notice or lapse
of time, or both), termination, cancellation or acceleration of any
obligation or the loss of a material benefit, under (i) the Parent's
charter or by-laws or (ii) any indenture or other loan document provision
or other contract, license, franchise, permit, order, decree, concession,
lease, instrument, judgment, statute, law, ordinance, rule or regulation
applicable to Parent or any of its subsidiaries or their respective
properties or assets, other than, in the case of clause (ii) only, (A) any
breaches, violations, defaults, terminations, cancellations, accelerations
or losses which, either singly or in the aggregate, will not have a Parent
Material Adverse Effect or prevent the consummation of the transactions
contemplated hereby and (B) the laws and regulations referred to in the
next paragraph.
(c) Except as disclosed in Section 4.4 of the Parent Disclosure Letter,
or in connection, or in compliance, with the provisions of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended
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(the "HSR Act"), the Securities Act of 1933, as amended (the "Securities
Act"), the Securities Exchange Act of 1934 (the "Exchange Act"), and the
corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation
by Parent of the Merger or the other transactions contemplated by this
Merger Agreement, other than filings, registrations, authorizations,
consents or approvals the failure of which to make or obtain will not have
a Parent Material Adverse Effect or prevent the consummation of the
transactions contemplated hereby.
Section 4.5. Reports and Financial Statements. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Report
on Form 10-K, as amended, for the fiscal years ended December 31, 1994 and
December 31, 1995, as filed with the Commission, (ii) proxy statements related
to all meetings of its stockholders (whether annual or special) since January
1, 1994, and (iii) all other reports or registration statements filed by
Parent with the Commission under the Exchange Act since December 31, 1992
through the date hereof, except Quarterly Reports on Form 10-Q for fiscal
quarters ended prior to December 31, 1995 (the items in clauses (i) through
(iii) being referred to herein collectively as the "Parent SEC Reports"). As
of their respective dates, the Parent SEC Reports complied in all material
respects with the requirements of the Exchange Act, and the rules and
regulations of the Commission thereunder applicable to such Parent SEC
Reports. As of their respective dates, the Parent SEC Reports did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of Parent included in the Parent SEC Reports comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto. The
financial statements included in the Parent SEC Reports: have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto);
present fairly, in all material respects, the financial position of Parent and
its subsidiaries as at the dates thereof and the results of their operations
and cash flows for the periods then ended subject, in the case of the
unaudited interim financial statements, to normal year-end audit adjustments,
any other adjustments described therein and the fact that certain information
and notes have been condensed or omitted in accordance with the Exchange Act
and the rules promulgated thereunder; and are in all material respects, in
accordance with the books of account and records of Parent.
Section 4.6. Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports or as disclosed in Section 4.6 of the Parent Disclosure
Letter, from December 31, 1995 through the date of this Merger Agreement,
there has not been (i) any transaction, commitment, dispute or other event or
condition (financial or otherwise) of any character (whether or not in the
ordinary course of business) individually or in the aggregate having a Parent
Material Adverse Effect (other than as a result of changes in laws or
regulations of general applicability); (ii) any damage, destruction or loss,
whether or not covered by insurance, which would have a Parent Material
Adverse Effect; or (iii) any entry into any commitment or transaction material
to Parent and its subsidiaries taken as a whole (including, without
limitation, any borrowing or sale of assets) except in the ordinary course of
business consistent with past practice.
Section 4.7. Employee Benefit Plans. Except as disclosed in the Parent SEC
Reports or as disclosed in Section 4.7 of the Parent Disclosure Letter, there
are no material employee benefit or compensation plans, agreements or
arrangements, including "employee benefit plans," as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and including, but not limited to, plans, agreements or arrangements relating
to former employees, including, but not limited, to retiree medical plans,
maintained or contributed to by Parent or any of its subsidiaries or material
collective bargaining agreements to which Parent or any of its subsidiaries is
a party, other than "multiemployer plans," as defined in Section 3(37) of
ERISA (together, the "Parent Benefit Plans"). To the best knowledge of Parent,
no default exists with respect to the obligations of Parent or any of its
subsidiaries under any Parent Benefit Plan, which default, alone or in the
aggregate, would have a Parent Material Adverse Effect. Since January 1, 1995,
there have been no disputes or grievances subject to any grievance procedure,
unfair labor practice proceedings, arbitration or litigation under
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any Parent Benefit Plans, which have not been finally resolved, settled or
otherwise disposed of (other than claims for benefits in the ordinary course),
nor, to the best knowledge of Parent, is there any condition related to any
Parent Benefit Plans which, with notice or lapse of time or both, which
failure to resolve, settle or otherwise dispose of, alone or in the aggregate
with any other such conditions, would have a Parent Material Adverse Effect.
Since January 1, 1995, there have been no strikes, lockouts or work stoppages
or slowdowns, or to the best knowledge of Parent, jurisdictional disputes or
organizing activity occurring or threatened with respect to the business or
operations of Parent or its subsidiaries which have had or would have a Parent
Material Adverse Effect.
Section 4.8. ERISA. All Parent Benefit Plans have been administered in
accordance, and are in compliance with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Parent
Material Adverse Effect. Each of the Parent Benefit Plans which is intended to
meet the requirements of Section 401(a) of the Code has been determined by the
Internal Revenue Service (the "IRS") to meet the requirements of such section
of the Code (except with respect to any such benefit plans which have not yet
been submitted to the IRS, each of which is still within the "remedial
amendment period" described in Section 401(b) of the Code), and Parent knows
of no fact which is likely to have an adverse affect on the qualified status
of such plans. None of the Parent Benefit Plans are subject to Title IV of
ERISA, and neither Parent nor any entity treated as a single employer with
Parent under Section 414(b) or (c) of the Code (a "Parent ERISA Affiliate")
has maintained such a plan during the six-year period ended on the date
hereof. To the best knowledge of Parent, there are not now nor have there been
any non-exempt "prohibited transactions," as such term is defined in Section
4975 of the Code or Section 406 of ERISA, involving the Parent Benefit Plans
which could subject Parent or its subsidiaries to any penalty or tax imposed
under Section 502(i) of ERISA or Section 4975 of the Code other than a de
minimis penalty or tax. Neither Parent nor any Parent ERISA Affiliate has any
obligation to contribute to, or has had within the six-year period ending on
the date hereof, any obligation to or has actually contributed to, any
multiemployer plan. Neither Parent nor any ERISA Affiliate has engaged in any
transaction described in Section 4069 of ERISA within the five-year period
ending on the date hereof.
Section 4.9. Parent Action. The Board of Directors of Parent (at a meeting
duly called and held) has by the unanimous vote of all directors present with
no abstentions (a) determined that the Parent Share Proposal is advisable and
in the best interests of Parent and its stockholders and (b) recommended the
approval of the Parent Share Proposal by the holders of Parent Common Stock
and directed that the Parent Share Proposal be submitted for consideration by
Parent's stockholders at the Parent Meeting.
Section 4.10. Fairness Opinion. Parent has received the written opinion of
Gleacher NatWest Inc., financial advisor to Parent, dated no later than the
date hereof, to the effect that the Exchange Ratio is fair to the stockholders
of Parent from a financial point of view.
Section 4.11. No Brokers. Except for Gleacher NatWest Inc., no broker,
finder or investment banker is entitled to any brokerage, finder's or other
fee or commission in connection with the Merger or the transactions
contemplated by this Merger Agreement based upon arrangements made by or on
behalf of Parent.
Section 4.12. Parent Ownership of Company Common Stock. Parent and its
"associates" and "affiliates" (as defined under both Section 203 of the DGCL
and Rule 405 under the Securities Act), collectively beneficially own and have
beneficially owned at all times during the three-year period prior to the date
hereof less than 1% of the shares of Company Common Stock outstanding (other
than shares of Company Common Stock issuable pursuant to the Stock Option
Agreement to be entered into concurrently herewith).
ARTICLE V.
Representations and Warranties of the Company
The Company represents and warrants to Parent and Sub as follows:
Section 5.1. Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to carry on
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its business as it is now being conducted or currently proposed to be
conducted. The Company is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary, except where the failure to be so qualified will
not have a material adverse effect on the business, properties, assets,
condition (financial or otherwise), liabilities or operations of the Company
and its subsidiaries taken as a whole (a "Company Material Adverse Effect").
Complete and correct copies as of the date hereof of the Certificate of
Incorporation and By-laws of the Company and each of its subsidiaries have
been delivered to Parent as part of a disclosure letter delivered by the
Company to Parent on or prior to the date of this Merger Agreement (the
"Company Disclosure Letter").
Section 5.2. Capitalization. The authorized capital stock of the Company
consists of 175,000,000 shares of Company Common Stock and 500,000 shares of
preferred stock, $0.001 par value. As of April 26, 1996, (i) 32,258,139 shares
of Company Common Stock were validly issued and outstanding, fully paid and
nonassessable and (ii) no shares of preferred stock were issued and
outstanding. As of the date hereof, there are no bonds, debentures, notes or
other indebtedness having the right to vote on any matters on which the
Company's stockholders may vote ("Voting Debt") issued or outstanding. As of
April 26, 1996, except for (i) options to acquire 3,232,015 shares of Company
Common Stock (the "Options"), (ii) options outstanding under the Company's
Employee Stock Purchase Plan, and (iii) the issuance of shares pursuant to the
proposed transactions described in Section 5.2 of the Company Disclosure
Letter (the "Proposed Transactions"), there are no options, warrants, calls or
other rights, agreements or commitments presently outstanding obligating the
Company to issue, deliver or sell shares of its capital stock or debt
securities, or obligating the Company to grant, extend or enter into any such
option, warrant, call or other such right, agreement or commitment.
Section 5.3. Subsidiaries. The only Significant Subsidiaries of the Company
are disclosed in Section 5.3 of the Company Disclosure Letter, all of which
have been named in the Company SEC Reports (as hereinafter defined). Each
Significant Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of its jurisdiction of incorporation and has
the corporate power to carry on its business as it is now being conducted or
currently proposed to be conducted. Each Significant Subsidiary incorporated
in the United States is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary except where the failure to be so qualified will
not have a Company Material Adverse Effect. All the outstanding shares of
capital stock of each Significant Subsidiary are validly issued, fully paid
and nonassessable and owned by the Company or by a subsidiary of the Company
free and clear of any Encumbrances. There are no existing options, warrants,
calls or other rights, agreements or commitments of any character relating to
the issued or unissued capital stock or other securities of any of the
Significant Subsidiaries of the Company. Except as set forth in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as
disclosed in Section 5.3 of the Company Disclosure Letter and except for
wholly owned subsidiaries which are formed after the date hereof in the
ordinary course of business, the Company does not directly or indirectly own
any interest in any other corporation, partnership, joint venture or other
business association or entity.
Section 5.4. Authority Relative to this Merger Agreement.
(a) The Company has the corporate power to execute and deliver this
Merger Agreement and to carry out its obligations hereunder and, subject to
approval of the Merger Agreement by the holders of the Company Common
Stock, to carry out its obligations hereunder. The execution and delivery
of this Merger Agreement and the consummation of the transactions
contemplated hereby have been duly authorized by the Company's Board of
Directors. This Merger Agreement constitutes a valid and binding obligation
of the Company, enforceable against the Company in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency or
other similar laws affecting the enforcement of creditors' rights generally
and except that the availability of equitable remedies, including specific
performance, is subject to the discretion of the court before which any
proceeding therefor may be brought.
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(b) Except as disclosed in Section 5.4 of the Company Disclosure Letter,
the execution and delivery of this Merger Agreement and the consummation of
the transactions contemplated hereby, does not and will not result in the
breach, violation, default (with or without notice or lapse of time, or
both), termination, cancellation or acceleration of any obligation or the
loss of a material benefit, under (i) the Company's charter or by-laws or
(ii) any indenture or other loan document provision or other contract,
license, franchise, permit, order, decree, concession, lease, instrument,
judgment, statute, law, ordinance, rule or regulation applicable to the
Company or any of its subsidiaries or their respective properties or
assets, other than, in the case of clause (ii) only, (A) any breaches,
violations, defaults, terminations, cancellations, accelerations or losses
which, either singly or in the aggregate, will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby and (B) the laws and regulations referred to in the next paragraph.
Contemporaneously with the execution and delivery of this Merger Agreement,
Microsoft Corporation ("MS") has delivered a written waiver of any (i) MS
right of first refusal or first offer contained in that certain TCP/IP
Local Access Network Agreement, dated as of March 6, 1995, by and between
MS and the Company (the "MS Agreement"), (ii) any MS right of termination
of the MS Agreement, in each case as a result of the execution and delivery
of this Merger Agreement and the consummation of the transactions
contemplated hereby, (iii) any MS right to declare a default under the
Equipment Loan Agreement dated as of March 6, 1996, between MS and the
Company as a result of the exercise of the rights granted under the Stock
Option Agreement or the consummation of the transactions contemplated
hereby and (iv) any MS right to have representation on the Company's Board
of Directors. In addition, contemporaneously with the execution and
delivery of this Merger Agreement, Microsoft Network L.L.C. has delivered a
written waiver of any right of termination of the TCP/IP Network Access
Provider Agreement, dated April 9, 1996, as a result of the execution and
delivery of this Merger Agreement and the consummation of the transactions
contemplated hereby.
(c) Except as disclosed in Section 5.4 of the Company Disclosure Letter
or transactions contemplated thereby in connection, or in compliance, with
the provisions of the HSR Act, the Securities Act, the Exchange Act, and
the corporation, securities or blue sky laws or regulations of the various
states, no filing or registration with, or authorization, consent or
approval of, any public body or authority is necessary for the consummation
by the Company of the Merger or the other transactions contemplated hereby,
other than filings, registrations, authorizations, consents or approvals
the failure of which to make or obtain will not have a Company Material
Adverse Effect or prevent the consummation of the transactions contemplated
hereby.
Section 5.5. Reports and Financial Statements. The Company has previously
furnished Parent with true and complete copies of its (i) Annual Report on
Form 10-K, as amended, for the fiscal year ended December 31, 1995, as filed
with the Commission, (ii) proxy statements related to all meetings of its
stockholders (whether annual or special) since January 1, 1995, and (iii) all
other reports or registration statements filed by the Company with the
Commission under the Exchange Act since December 31, 1994, except Quarterly
Reports on Form 10-Q for fiscal quarters ended prior to December 31, 1995 (the
items in clauses (i) through (iii) being referred to herein collectively as
the "Company SEC Reports"). As of their respective dates, the Company SEC
Reports complied in all material respects with the requirements of the
Exchange Act and the rules and regulations of the Commission thereunder
applicable to such Company SEC Reports. As of their respective dates, the
Company SEC Reports did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The audited consolidated financial statements and
unaudited interim financial statements of the Company included in the Company
SEC Reports comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
Commission with respect thereto. The financial statements included in the
Company SEC Reports: have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis (except as may be
indicated therein or in the notes thereto); present fairly, in all material
respects, the financial position of the Company and its subsidiaries as at the
dates thereof and the results of their operations and cash flow for the
periods then ended subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments and any other adjustments
described therein and the fact that certain information and notes have
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been condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder; and are in all material respects, in accordance with
the books of account and records of the Company.
Section 5.6. Absence of Certain Changes or Events. Except as disclosed in
the Company SEC Reports or as disclosed in Section 5.6 of the Company
Disclosure Letter, from December 31, 1995 through the date of this Merger
Agreement, there has not been (i) any transaction, commitment, dispute or
other event or condition (financial or otherwise) of any character (whether or
not in the ordinary course of business) individually or in the aggregate
having a Company Material Adverse Effect (other than as a result of changes in
laws or regulations of general applicability); (ii) any damage, destruction or
loss, whether or not covered by insurance, which would have a Company Material
Adverse Effect; or (iii) any entry into any commitment or transaction material
to the Company and its subsidiaries taken as a whole (including, without
limitation, any borrowing or sale of assets) except in the ordinary course of
business consistent with past practice.
Section 5.7. Employee Benefit Plans. Except as disclosed in the Company SEC
Reports or as disclosed in Section 5.7 of the Company Disclosure Letter, there
are no material employee benefit or compensation plans, agreements or
arrangements, including "employee benefit plans," as defined in Section 3(3)
of ERISA, and including, but not limited to, plans, agreements or arrangements
relating to former employees, including, but not limited, to retiree medical
plans, maintained or contributed to by the Company or any of its subsidiaries
or material collective bargaining agreements to which the Company or any of
its subsidiaries is a party, other than "multiemployer plans," as defined in
Section 3(37) of ERISA (together, the "Company Benefit Plans"). To the best
knowledge of the Company, no default exists with respect to the obligations of
the Company or any of its subsidiaries under any Company Benefit Plan, which
default, alone or in the aggregate, would have a Company Material Adverse
Effect. Since January 1, 1995, there have been no disputes or grievances
subject to any grievance procedure, unfair labor practice proceedings,
arbitration or litigation under any Company Benefit Plans, which have not been
finally resolved, settled or otherwise disposed of (other than claims for
benefits in the ordinary course), nor, to the best knowledge of the Company,
is there any condition related to any Company Benefit Plans which, with notice
or lapse of time or both, which failure to resolve, settle or otherwise
dispose of, alone or in the aggregate with any other such conditions, would
have a Company Material Adverse Effect. Since January 1, 1995, there have been
no strikes, lockouts or work stoppages or slowdowns, or to the best knowledge
of the Company, jurisdictional disputes or organizing activity occurring or
threatened with respect to the business or operations of the Company or its
subsidiaries which have had or would have a Company Material Adverse Effect.
Section 5.8. ERISA. All Company Benefit Plans have been administered in
accordance, and are in compliance with the applicable provisions of ERISA,
except where such failures to administer or comply would not have a Company
Material Adverse Effect. Each of the Company Benefit Plans which is intended
to meet the requirements of Section 401(a) of the Code has been determined by
the IRS to meet the requirements of such section of the Code (except with
respect to any such benefit plans which have not yet been submitted to the
IRS, each of which is still within the "remedial amendment period" described
in Section 401(b) of the Code), and the Company knows of no fact which is
likely to have an adverse affect on the qualified status of such plans. None
of the Company Benefit Plans are subject to Title IV of ERISA, and neither the
Company nor any entity treated as a single employer with Company under Section
414(b) or (c) of the Code (a "Company ERISA Affiliate") has maintained such a
plan during the six-year period ended on the date hereof. To the best
knowledge of the Company, there are not now nor have there been any non-exempt
"prohibited transactions," as such term is defined in Section 4975 of the Code
or Section 406 of ERISA, involving the Company Benefit Plans which could
subject the Company or its subsidiaries to any penalty or tax imposed under
Section 502(i) of ERISA or Section 4975 of the Code other than a de minimis
penalty or tax. Neither the Company nor any Company ERISA Affiliate has any
obligation to contribute to, or has had within the six-year period ending on
the date hereof, any obligation to or has actually contributed to, any
multiemployer plan. Neither the Company nor any Company ERISA Affiliate has
engaged in any transaction described in Section 4069 of ERISA within the five-
year period ending on the date hereof.
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Section 5.9. Takeover Provisions Inapplicable. Assuming the accuracy of the
representation of Parent set forth in Section 4.12, as of the date hereof and
at all times on or prior to the Effective Date, Section 203 of the DGCL is,
and shall be, inapplicable to the Merger and the transactions contemplated by
this Merger Agreement, the approval of the execution and delivery of the Stock
Option Agreement.
Section 5.10. Company Action. The Board of Directors of the Company (at a
meeting duly called and held) has by the unanimous vote of all directors
present with no abstentions (a) determined that the Merger is advisable and
fair and in the best interests of the Company and its stockholders, (b)
approved the Merger in accordance with the provisions of Section 251 of the
DGCL, (c) recommended the approval of this Merger Agreement and the Merger by
the holders of the Company Common Stock and directed that the Merger be
submitted for consideration by the Company's stockholders at the Company
Meeting, (d) taken all necessary steps to render Section 203 of the DGCL
inapplicable to the Merger and the transactions contemplated by this Merger
Agreement (assuming the accuracy of the representation of Parent set forth in
Section 4.12), and (e) adopted a resolution having the effect of causing the
Company not to be subject, to the extent permitted by applicable law, to any
state takeover law that may purport to be applicable to the Merger and the
transactions contemplated by this Merger Agreement.
Section 5.11. Fairness Opinion. The Company has received the written opinion
of Goldman, Sachs & Co., financial advisor to the Company dated no later than
the date hereof, to the effect that the Exchange Ratio is fair to the
stockholders of the Company.
Section 5.12. No Brokers. (i) Except as set forth in Section 5.12 of the
Company Disclosure Letter and for Goldman, Sachs & Co., no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Merger Agreement based upon arrangements made by or on behalf of the
Company, and (ii) the fees and commissions payable as contemplated by this
Section 5.12.
ARTICLE VI.
Representations and Warranties Regarding Sub
Parent and Sub jointly and severally represent and warrant to the Company as
follows:
Section 6.1. Organization. Sub is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware. Sub was
incorporated on March 27, 1996. Except as related to the Merger, this Merger
Agreement and the consummation of the transactions contemplated hereby, Sub
has not engaged in any business or activities (other than certain
organizational matters) or incurred any commitments or liabilities since it
was incorporated.
Section 6.2. Capitalization. The authorized capital stock of Sub consists of
1,000 shares of Common Stock, par value $0.01 per share, 100 shares of which
are validly issued and outstanding, fully paid and nonassessable and, except
as disclosed in Section 6.2 of the Parent Disclosure Letter, are owned by
Parent free and clear of all Encumbrances.
Section 6.3. Authority Relative to this Merger Agreement. Sub has the
corporate power to enter into this Merger Agreement and to carry out its
obligations hereunder. The execution and delivery of this Merger Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by its Board of Directors and sole stockholder, and no other
corporate proceedings on the part of Sub are necessary to authorize this
Merger Agreement and the transactions contemplated hereby. Except as referred
to herein or in connection, or in compliance, with the provisions of the HSR
Act, the Securities Act, the Exchange Act and the corporation, securities or
blue sky laws or regulations of the various states, no filing or registration
with, or authorization, consent or approval of, any Governmental Entity is
necessary for the consummation by Sub of the Merger or the transactions
contemplated by this Merger Agreement, other than filings, registrations,
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authorizations, consents or approvals the failure to make or obtain would not
prevent the consummation of the transactions contemplated hereby.
ARTICLE VII.
Conduct of Business Pending the Merger
Section 7.1. Conduct of Business by the Company Pending the Merger. Prior to
the Effective Date, unless Parent shall otherwise agree in writing:
(a) the Company shall, and shall cause its subsidiaries to, carry on
their respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted, and shall, and shall
cause its subsidiaries to, use all reasonable efforts to preserve intact
their present business organizations, keep available the services of their
present officers and employees and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end that their goodwill and on-going businesses shall be unimpaired at the
Effective Date, except such impairment as would not have a Company Material
Adverse Effect. The Company shall, and shall cause its subsidiaries to, (a)
maintain insurance coverages and its books, accounts and records in the
usual manner consistent with prior practices; (b) comply in all material
respects with all laws, ordinances and regulations of Governmental Entities
applicable to the Company and its subsidiaries; (c) maintain and keep its
properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted; and (d) perform in all material respects
its obligations under all contracts and commitments to which it is a party
or by which it is bound, in each case other than where the failure to so
maintain, comply or perform, either individually or in the aggregate, would
result in a Company Material Adverse Effect;
(b) except as required by this Merger Agreement the Company shall not and
shall not propose to (A) sell or pledge or agree to sell or pledge any
capital stock owned by it in any of its subsidiaries, (B) amend its
Certificate of Incorporation or By-laws, (C) split, combine or reclassify
its outstanding capital stock, or declare, set aside or pay any dividend or
other distribution payable in cash, stock or property, or (D) directly or
indirectly redeem, purchase or otherwise acquire or agree to redeem,
purchase or otherwise acquire any shares of capital stock of the Company
except for the repurchase at cost of shares of Company Common Stock from
employees, consultants or directors of the Company upon termination of
their relationship with the Company in accordance with existing contractual
rights of repurchase in favor of the Company;
(c) the Company shall not, nor shall it permit any of its subsidiaries
to, (A) except as required by this Merger Agreement, issue, propose to
issue, deliver or sell or agree to issue, deliver or sell any additional
shares of, or rights of any kind to acquire any shares of, its capital
stock of any class, any option, rights or warrants to acquire, or
securities convertible into, shares of capital stock other than issuances
of options to purchase Company Common Stock under the Stock Option Plans on
or after the date of this Merger Agreement to employees of the Company or
its subsidiaries (including subsidiaries acquired or formed on or after the
date of this Merger Agreement) in the ordinary course of business and
consistent with past practice, other than to such employees who are
executive officers of the Company ("Permitted Options") or issuances of
Company Common Stock pursuant to the Proposed Transactions, the Stock
Purchase Plan or the exercise of options outstanding on the date of this
Merger Agreement or Permitted Options; (B) acquire, lease or dispose or
agree to acquire, lease or dispose of any capital assets or any other
assets other than (i) in the ordinary course of business or (ii) in
connection with any additional deployment or expansion of network
infrastructure requested by MS; (C) incur additional Indebtedness or
encumber or grant a security interest in any asset or enter into any other
material transaction other than in each case (i) in the ordinary course of
business, (ii) pursuant to any extension of credit by MS, or (iii) pursuant
to credit facilities in an aggregate amount not to exceed $40,000,000; (D)
acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, in each case in this Clause (D) which are
material, individually or in the aggregate, to the Company and its
subsidiaries taken as a whole, except that the Company may acquire or
create new wholly owned subsidiaries in the
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ordinary course of business and as contemplated by the Proposed
Transactions; (E) authorize any capital expenditures in excess of the
Company's 1996 capital expenditure budget provided to Parent prior to the
date hereof, except for capital expenditures funded by an increase in
credit facilities with MS; or (F) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(d) except as disclosed in the Company Disclosure Letter, the Company
shall not, nor shall it permit, any of its subsidiaries to, except as
required to comply with applicable law and except as provided in Section
3.5 hereof, (A) adopt, enter into, terminate or amend any bonus, profit
sharing, compensation, severance, termination, stock option, pension,
retirement, deferred compensation, employment or other Company Benefit
Plan, agreement, trust, fund or other arrangement for the benefit or
welfare of any director, officer or current or former employee, other than
in the ordinary course of business consistent with past practice (B)
increase in any manner the compensation or fringe benefit of any director,
officer or employee (except for normal increases in the ordinary course of
business that are consistent with past practice and that, in the aggregate,
do not result in a material increase in benefits or compensation expense to
the Company and its subsidiaries relative to the level in effect prior to
such amendment and except for increases pursuant to the Company's pending
1996 salary increases in an aggregate amount not to exceed 15% of the base
salary of current employees, (C) pay any benefit not provided under any
existing plan or arrangement, (D) grant any awards under any bonus,
incentive, performance or other compensation plan or arrangement or Company
Benefit Plan (including, without limitation, the grant of stock options,
stock appreciation rights, stock based or stock related awards, performance
units or restricted stock, or the removal of existing restrictions in any
benefit plans or agreements or awards made thereunder) (other than such
plans and arrangements (other than stock options) which are made in the
ordinary course of business consistent with past practice, including
Permitted Options), (E) take any action to fund or in any other way secure
the payment of compensation or benefits under any employee plan, agreement,
contract or arrangement or Company Benefit Plan other than in the ordinary
course of business consistent with past practice, or (F) adopt, enter into,
amend or terminate any contract, agreement, commitment or arrangement to do
any of the foregoing;
(e) except as set forth on Section 7.1(e) of the Company Disclosure
Letter, the Company shall not, nor shall it permit any of its subsidiaries
to, make any investments in non-investment grade securities exceeding
$1,000,000; provided, however, that the Company will be permitted to create
new wholly owned subsidiaries in the ordinary course of business or
pursuant to the Proposed Transactions.
(f) the Company shall not, nor shall it permit any of its subsidiaries
to, take or cause to be taken any action (other than in the ordinary course
of business consistent with past practices), with respect to accounting
policies or procedures (including, without limitation, procedures with
respect to the payment of accounts payable and collection of accounts
receivable);
(g) the Company shall prepare and file all tax returns required to be
filed with respect to the Company and its subsidiaries (or any of them)
after the date of this Merger Agreement and on or before the Effective Date
in a timely manner, and in a manner consistent with prior years and
applicable laws and regulations other than such tax returns for which the
failure to file would not have a Company Material Adverse Effect; and
(h) the Company shall file with the Commission all reports required to be
filed under the Exchange Act on or prior to the date each such report is
due and all such reports shall comply in all material respects with the
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder applicable to such reports and, upon such filing,
shall not contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. The unaudited interim financial statements of the
Company included in such reports shall comply as to form in all material
respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto and shall be
prepared in accordance with generally accepted accounting principles
applied on a consistent basis (except as may be indicated therein or in the
notes thereto), shall present fairly, in all material respects, the
financial position of the Company and its subsidiaries as at the dates
thereof and the results of their operations and cash flows for the periods
then ended subject to normal year-end audit
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adjustments, any other adjustments described therein and the fact that
certain information and notes shall be condensed or omitted in accordance
with the Exchange Act and the rules and regulations promulgated thereunder,
and shall be in all material respects, in accordance with the books of
account and records of the Company.
Section 7.2. Conduct of Business by Parent Pending the Merger. Prior to the
Effective Date, unless the Company shall otherwise agree in writing or except
as otherwise required by this Merger Agreement, Parent shall, and shall cause
its subsidiaries to, carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as heretofore
conducted, and shall, and shall cause its subsidiaries to, use all reasonable
efforts to preserve intact their present business organizations, keep
available the services of their present officers and employees and preserve
their relationships with customers, suppliers and others having business
dealings with them to the end that their goodwill and on-going businesses
shall be unimpaired at the Effective Date. From the date of this Merger
Agreement through the Effective Date. From the date of this Merger Agreement
through the Effective Date, Parent shall not pay or declare any dividend or
make any distribution with respect to the Parent Common Stock, other than the
events contemplated by Section 3.1(c).
Section 7.3. Conduct of Business of Sub. During the period from the date of
this Merger Agreement to the Effective Date, Sub shall not engage in any
activities of any nature except as provided in or contemplated by this Merger
Agreement.
Section 7.4. Notice of Breach. Each party shall promptly give written notice
to the other party upon becoming aware of the occurrence or, to its best
knowledge, impending or threatened occurrence, of any event which would cause
or constitute a breach of any of its representations, warranties or covenants
contained or referenced in this Merger Agreement and will use all reasonable
efforts to prevent or promptly remedy the same. Any such notification shall
not be deemed an amendment of the Company Disclosure Letter or the Parent
Disclosure Letter.
ARTICLE VIII.
Additional Agreements
Section 8.1. Access and Information. Each of the Company and Parent and
their respective subsidiaries shall afford to the other and to the other's
accountants, counsel and other representatives full access during normal
business hours after reasonable notice (and at such other times as the parties
may mutually agree) throughout the period prior to the Effective Date to all
of its properties, books, contracts, commitments, records and personnel and,
during such period, each shall furnish promptly to the other (i) a copy of
each report, schedule and other document filed or received by it pursuant to
the requirements of Federal or state securities laws, and (ii) all other
information concerning its business, properties and personnel as the other may
reasonably request. Each of the Company and Parent shall hold, and shall cause
their respective employees and agents to hold, in confidence all such
information in accordance with the terms of the Confidentiality Agreement
dated March 5, 1996 between Parent and the Company.
Section 8.2. Registration Statement/Proxy Statement. Parent and the Company
shall cooperate and promptly prepare and Parent shall file with the Commission
as soon as practicable a Registration Statement of Form S-4 (the "Form S-4")
under the Securities Act, with respect to the Parent Common Stock issuable in
the Merger, a portion of which Registration Statement shall also serve as the
joint proxy statement with respect to the Company Meeting and the Parent
Meeting (the "Proxy Statement/Prospectus"). The respective parties will cause
the Proxy Statement/Prospectus and the Form S-4 to comply as to form in all
material respects with the applicable provisions of the Securities Act, the
Exchange Act and the rules and regulations thereunder. Parent shall use all
reasonable efforts, and the Company will cooperate with Parent, to have the
Form S-4 declared effective by the Commission as promptly as practicable and
to keep the Form S-4 effective as long as is necessary to consummate the
Merger. Parent shall, as promptly as practicable, provide copies of any
written comments
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received from the Commission with respect to the Form S-4 to the Company and
advise the Company of any verbal comments with respect to the Form S-4
received from the Commission. Parent shall use its best efforts to obtain,
prior to the effective date of the Form S-4, all necessary state securities
law or "Blue Sky" permits or approvals required to carry out the transactions
contemplated by the Merger Agreement and will pay all expenses incident
thereto. Parent agrees that the Proxy Statement/Prospectus and each amendment
or supplement thereto at the time of mailing thereof and at the time of the
Company Meeting and the Parent Meeting, or, in the case of the Form S-4 and
each amendment or supplement thereto, at the time it is filed or becomes
effective, will not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing shall not apply to the
extent that any such untrue statement of a material fact or omission to state
a material fact was made by Parent in reliance upon and in conformity with
written information concerning the Company furnished to Parent by the Company
specifically for use in the Proxy Statement/Prospectus. The Company agrees
that the written information concerning the Company provided by it for
inclusion in the Proxy Statement/Prospectus and each amendment or supplement
thereto, at the time of mailing thereof and at the time of the Company Meeting
and the Parent Meeting, or, in the case of written information concerning the
Company provided by the Company for inclusion in the Form S-4 or any amendment
or supplement thereto, at the time it is filed or becomes effective, will not
include an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. No amendment or supplement to the Proxy Statement/Prospectus will
be made by Parent or the Company without the approval of the other party.
Parent will advise the Company, promptly after it receives notice thereof, of
the time when the Form S-4 has become effective or any supplement or amendment
has been filed, the issuance of any stop order, the suspension of the
qualification of Parent Common Stock issuable in connection with the Merger
for offering or sale in any jurisdiction, or any request by the Commission for
amendment of the Proxy Statement/Prospectus or the Form S-4 or comments
thereon and responses thereto or requests by the Commission for additional
information. At the effective date of the registration statement on Form S-4,
all of the Parent Common Stock to be issued in the Merger shall be covered by
such registration statement.
Section 8.3. Compliance with the Securities Act. At least 30 days prior to
the Closing Date, the Company shall deliver to Parent a list of names and
addresses of those persons who were, in the Company's reasonable judgment, at
the record date for the Company Meeting, "affiliates" (each such person, an
"Affiliate") of the Company within the meaning of Rule 145 of the rules and
regulations promulgated under the Securities Act. The Company shall use all
reasonable efforts to deliver or cause to be delivered to Parent, prior to the
Effective Date, from each of the Affiliates of the Company identified in the
foregoing list, an Affiliate Letter in the form attached hereto as Exhibit
8.3. Parent shall be entitled to place legends as specified in such Affiliate
Letters on the certificates evidencing any Parent Company Common Stock to be
received by such Affiliates pursuant to the terms of the Merger Agreement, and
to issue appropriate stop transfer instructions to the transfer agent for the
Parent Company Common Stock, consistent with the terms of such Affiliate
Letters.
Section 8.4. Listing. Parent shall use its best efforts to include on
Nasdaq, upon official notice of issuance, the Parent Common Stock to be issued
pursuant to the Merger.
Section 8.5. Indemnification.
(a) The By-laws and the Certificate of Incorporation of the Surviving
Corporation shall be amended prior to the Effective Date to contain
provisions identical with respect to indemnification to those set forth in
the By-laws and the Certificate of Incorporation of the Company as in
effect on the date of this Merger Agreement, which provisions of the By-
laws and the Certificate of Incorporation of the Surviving Corporation
shall not be amended, repealed or otherwise modified for a period of six
years after the Effective Date in any manner that would adversely affect
the rights thereunder of individuals who immediately prior to the Effective
Date were directors, officers, agents or employees of the Company. Parent
and the Surviving Corporation shall jointly and severally indemnify, defend
and hold harmless the directors, officers and agents of the Company as
provided in the Company's Certificate of Incorporation, By-Laws or
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indemnification agreements, as in effect as of the date hereof, with
respect to matters occurring through the Effective Date. Parent agrees to
cause Surviving Corporation to maintain in effect for not less than three
years after the Effective Date the current policies of directors' and
officers' liability insurance maintained by the Company with respect to
matters occurring prior to the Effective Date; provided, however, that (i)
the Surviving Corporation may substitute therefor policies of at least the
same coverage (with carriers comparable to the Company's existing carriers)
containing terms and conditions which are no less advantageous to the
officers, directors and employees of the Company and (ii) the Surviving
Corporation shall not be required to pay an annual premium for such
insurance in excess of three times the last annual premium paid prior to
the date hereof, but in such case shall purchase as much coverage as
possible for such amount.
(b) The Company's Board of Directors has consulted with financial and
legal advisors in connection with the execution, delivery and performance
by the Company of this Merger Agreement and the approval for purposes of
Section 203 of the DGCL, the transactions contemplated by the execution and
delivery of a Stock Option Agreement by certain members of the Company's
Board of Directors or an affiliate or employer of certain members of the
Company's Board of Directors, and the Company's Board of Directors believes
that the members of the Company's Board of Directors have complied with
their fiduciary duties under Delaware law and that there is no pending or,
to the best knowledge of the Company, threatened suit, action or proceeding
against the Company or any member of the Company's Board of Directors
asserting a claim that the Company's Board of Directors or any individual
member of the Company's Board of Directors did not comply with its or his
fiduciary duties under Delaware law.
(c) In reliance upon the representations in paragraph (b), Parent agrees
to indemnify, defend and hold harmless each member of the Company's Board
of Directors that has executed and delivered, or whose affiliate or
employer has executed and delivered, a Stock Option Agreement (each an
"Indemnified Party") against any loss, claim, damage, liability or expense,
to which such Indemnified Party may become subject, insofar, but only
insofar, as such loss, claim, damage, liability or expense arises solely
out of, or is based solely upon, a claim that an Indemnified Party's
fiduciary duty as a member of the Company's Board of Directors under
Delaware law was breached by the execution and delivery by him, or his
affiliate or employer, in his or its capacity as a stockholder of the
Company, of a Stock Option Agreement (a "Claim"). Should a court of
competent jurisdiction award damages against any Indemnified Party without
specifying the portion thereof allocable solely to the matters referred to
in the preceding sentence, the Parent and the Company shall petition such
court to make such allocation. If the court refuses to do so, the Parent
and the Company shall negotiate in good faith to reach an agreement with
respect to such allocation.
(d) Notwithstanding the provisions of paragraph (c) above, Parent shall
have no obligation to indemnify, defend and hold harmless any Indemnified
Party pursuant to paragraph (c) unless: (i) the representations contained
in paragraph (b) above are true and (ii) neither the Indemnified Party nor
any affiliate or employer of the Indemnified Party is a party to a Claim;
provided that if the Company is the beneficiary of any Claim, the amount
that such Indemnified Party is entitled to receive pursuant to paragraph
(c) shall be reduced by an amount equal to the pro rata amount of such
Claim paid to the Company, indirectly attributable to the Indemnified Party
by reason of its stockholdings in the Company. In addition, Parent's
obligation to indemnify, defend and hold harmless any Indemnified Party
shall be reduced by and to the extent that (i) such Indemnified Party is
indemnified pursuant to the Company's By-laws and (ii) such Indemnified
Party is indemnified from, or receive proceeds of, any insurance policy
applicable to a Claim. Each Indemnified Party shall make any and all claims
pursuant to the Company's By-laws with respect to seeking indemnification
for a Claim and shall file any and all claims under such insurance policy
with respect to a Claim and use its reasonable efforts to file any and all
claims under such By-law provisions and insurance policy on a timely basis.
If Parent shall release an Indemnified Party from its obligations under the
Stock Option Agreement prior to the use of the Proxy granted therein at the
Company Meeting or the exercise of the option contemplated by the Stock
Option Agreement, Parent shall have no obligation to indemnify, defend and
hold harmless such Indemnified Party for loss claim, damage, liability or
expense incurred after such release.
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(e) If any Claim shall be brought against an Indemnified Party, Parent
shall assume the defense thereof with counsel of its selection, and shall
have absolute discretion to settle any Claims, and each Indemnified Party
shall cooperate with the defense or settlement thereof. After Parent has
assumed the defense of such claim, Parent shall not be liable to the
Indemnified Party under this Section 8.5 for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the
defense thereof.
Section 8.6. HSR Act. The Company and Parent shall use their best efforts to
file as soon as practicable notifications under the HSR Act in connection with
the Merger and the transactions contemplated hereby, and to respond as
promptly as practicable to any inquiries received from the Federal Trade
Commission and the Antitrust Division of the Department of Justice for
additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other governmental authority in connection with antitrust matters.
Section 8.7. Additional Agreements.
(a) Subject to the terms and conditions herein provided, each of the
parties hereto agrees to use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated by this Merger Agreement,
including using all reasonable efforts to obtain all necessary waivers,
consents and approvals, to effect all necessary registrations and filings
(including, but not limited to, filings under the HSR Act and with all
applicable Governmental Entities) and to lift any injunction or other legal
bar to the Merger (and, in such case, to proceed with the Merger as
expeditiously as possible), subject, however, in the case of the Merger
Agreement and the Parent Share Proposal, to the appropriate vote of the
stockholders of the Company and Parent. Notwithstanding the foregoing,
there shall be no action required to be taken and no action will be taken
in order to consummate and make effective the transactions contemplated by
this Merger Agreement if such action, either alone or together with another
action, would result in a Company Material Adverse Effect or a Parent
Material Adverse Effect.
(b) In case at any time after the Effective Date any further action is
necessary or desirable to carry out the purposes of this Merger Agreement,
the proper officers and/or directors of Parent, the Company and the
Surviving Corporation shall take all such necessary action.
(c) Following the Effective Date, Parent shall use its best efforts to
conduct the business, and shall cause the Surviving Corporation to use its
best efforts to conduct its business, except as otherwise contemplated by
this Merger Agreement, in a manner which would not jeopardize the
characterization of the Merger as a reorganization within the meaning of
Section 368(a) of the Code.
Section 8.8. No Solicitation. Neither the Company nor any of its
subsidiaries shall, directly or indirectly, take (nor shall the Company
authorize or permit its subsidiaries, officers, directors, employees,
representatives, investment bankers, attorneys, accountants or other agents or
affiliates, to take) any action to (i) encourage, solicit or initiate the
submission of any Acquisition Proposal, (ii) enter into any agreement with
respect to any Acquisition Proposal or (iii) participate in any way in
discussions or negotiations with, or furnish any information to, any person in
connection with, or take any other action to facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal; provided, however, that nothing contained in
this Merger Agreement shall prevent the Company or its Board of Directors from
(A) furnishing non-public information to, or entering into discussions with
any person or entity in connection with an unsolicited bona fide written
Acquisition Proposal by such person or entity (including a new and unsolicited
Acquisition Proposal received by the Company after the execution of this
Merger Agreement from a person or entity whose initial contact with the
Company may have been solicited by the Company prior to the execution of this
Merger Agreement) if prior to furnishing such non-public information to, or
entering into discussions or negotiations with, such person or entity, such
Board of Directors receives from such person or entity an executed
confidentiality agreement or, (B) withdrawing the Company's Board of
Directors' recommendation of the Merger Agreement, if and only to the extent
that the Company's Board of Directors believes in good faith (after
consultation with and based upon the advice of its financial advisor) that
such
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Acquisition Proposal would, if consummated, result in a transaction more
favorable to the Company's stockholders than the Merger and the Board of
Directors of the Company determines in good faith after consultation with and
based upon a written opinion of its outside legal counsel that such withdrawal
is necessary for the directors to comply with their fiduciary duties to the
stockholders under applicable Delaware law and that such withdrawal will not
affect the validity of the submission of the Merger Agreement to the
stockholders of the Company pursuant to Delaware law or the enforceability of
the Stock Option Agreement; or (B) complying with Rule 14e-2(a)(2) or (3)
promulgated under the Exchange Act with regard to an Acquisition Proposal. The
Company will promptly communicate to Parent any solicitation by the Company
and the terms of any proposal or inquiry, including the identity of the person
and its affiliates making the same, that it may receive in respect of any such
transaction, or of any such information requested from it or of any such
negotiations or discussions being sought to be initiated with it. "Acquisition
Proposal" shall mean any proposed (A) merger, consolidation or similar
transaction involving the Company, (B) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise
of assets of the Company or its subsidiaries representing 10% or more of the
consolidated assets of the Company and its subsidiaries, (C) issue, sale, or
other disposition of (including by way of merger, consolidation, share
exchange or any similar transaction) securities (or options, rights or
warrants to purchase, or securities convertible into or exchangeable for, such
securities) representing 10% or more of the voting power of the Company or (D)
transaction in which any person shall acquire beneficial ownership (as such
term is defined in Rule 13d-3 under the Exchange Act), or the right to acquire
beneficial ownership or any "group" (as such term is defined under the
Exchange Act) shall have been formed which beneficially owns or has the right
to acquire beneficial ownership of 25% or more of the outstanding Company
Common Stock.
Section 8.9. Limitation on Acquisition Activities. From the date of the
Merger Agreement until the Effective Date, Parent shall not participate in any
way in discussions or negotiations with, or enter into any agreement pursuant
to which Parent would acquire or agree to acquire by merging or consolidating
with, or by purchasing a substantial equity interest in, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, in which case either (i) the
acquired business or entity is in the business of providing Internet access,
(ii) the acquisition would involve aggregate consideration in excess of
$500,000,000, or (iii) the acquisition could reasonably be expected to delay
the satisfaction of the conditions set forth in Article IX hereof.
Section 8.10. Notice of Actions. From the date of the Merger Agreement until
the Effective Date, each party shall promptly notify the other party in
writing of any pending or, to the best knowledge of the first party,
threatened action, proceeding or investigation by any Governmental Entity or
any other person (i) challenging or seeking material damages in connection
with the Merger or the conversion of the Company Common Stock into Parent
Common Stock pursuant to the Merger or (ii) seeking to restrain or prohibit
the consummation of the Merger or otherwise limit the right of Parent or, to
the best knowledge of such party, Parent's subsidiaries to own or operate all
or any portion of the businesses or assets of the Company, which in either
case is reasonably likely to have a Company Material Adverse Effect prior to
or after the Effective Date, or a Parent Material Adverse Effect after the
Effective Date.
Section 8.11. Benefit Plans Generally. Parent agrees to honor in accordance
with their terms all employment, severance and similar agreements to which the
Company or any subsidiary is a party and all accrued benefits that are vested
as of the Effective Date under any Company Benefit Plan or Stock Option Plan,
except as provided by the terms thereof. Parent agrees to provide employees of
the Company and its subsidiaries with credit for all service with the Company
or its affiliates for purposes of vesting and eligibility under any employee
benefit plan, program or arrangement of Parent or its affiliates, including
all employee equity incentive programs of Parent. To the extent not otherwise
specified in this Merger Agreement, Parent agrees that employees of the
Company and its subsidiaries who continue to be employed by the Company or its
subsidiaries after the Effective Date may continue to participate in their
current Company sponsored employee benefit programs through twelve months
following the Effective Date. After the Effective Date, the employees of the
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Company and its subsidiaries shall be eligible to participate in the
appropriate employee equity incentive programs of Parent, as determined by
Parent in its sole discretion.
Section 8.12. Stockholders' Rights Plan. From the date of this Merger
Agreement until the expiration or termination of the Stock Option Agreement,
the Company shall not amend its certificate of incorporation or otherwise take
action to provide for the issuance of securities pursuant to a stockholder
rights plan or any similar program or plan.
ARTICLE IX.
Conditions Precedent
Section 9.1. Conditions to each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the following conditions:
(a) This Merger Agreement and the transactions contemplated hereby shall
have been approved and adopted by the requisite vote of the holders of the
Company Common Stock.
(b) The Parent Share Proposal shall have been approved by the requisite
vote of the holders of the Parent capital stock.
(c) The Parent Common Stock issuable in the Merger shall have been
authorized for inclusion in Nasdaq upon official notice of issuance.
(d) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated.
(e) The Registration Statement shall have become effective in accordance
with the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect and all necessary approvals under state
securities laws relating to the issuance or trading of the Parent Common
Stock to be issued to the Company stockholders in connection with the
Merger shall have been received.
(f) No preliminary or permanent injunction or other order by any Federal
or state court in the United States which prevents the consummation of the
Merger shall have been issued and remain in effect (each party agreeing to
use its best efforts to have any such injunction lifted).
Section 9.2. Conditions to Obligation of the Company to Effect the
Merger. The obligation of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Effective Date of the additional following
conditions, unless waived by the Company:
(a) Parent and Sub shall have performed in all material respects their
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
Parent and Sub contained in this Merger Agreement shall be true in all
material respects when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), and the Company shall have received a certificate of the President
or Chief Executive Officer or a Vice President of Parent and Sub to that
effect.
(b) The Company shall have received an opinion dated the Effective Date
from Heller Ehrman White & McAuliffe, counsel to the Company, that, based
upon certain factual representations of the Company, Parent and Sub
reasonably requested by such counsel, the Merger will be treated as a
reorganization within the meaning of Section 368(a).
(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 4.4 of
the Parent Disclosure Letter shall have been obtained, and all filings and
notices set forth in Section 4.4 of the Parent Disclosure Letter shall have
been submitted by Parent.
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(d) Parent shall have taken all action necessary to cause Mr. John W.
Sidgmore and up to two additional individuals designated by the Company and
acceptable to Parent, to become members of the Board of Directors of Parent
subject to the consummation of the Merger.
Section 9.3. Conditions to Obligations of Parent and Sub to Effect the
Merger. The obligations of Parent and Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Date of the additional
following conditions, unless waived by Parent:
(a) The Company shall have performed in all material respects its
agreements contained in this Merger Agreement required to be performed on
or prior to the Effective Date and the representations and warranties of
the Company contained in this Merger Agreement shall be true in all
material respects when made and on and as of the Effective Date as if made
on and as of such date (except to the extent they relate to a particular
date), except as contemplated or permitted by this Merger Agreement, and
Parent and Sub shall have received a certificate of the President or Chief
Executive Officer or a Vice President of the Company to that effect.
(b) Parent shall have received an opinion of counsel to Parent that, the
Merger will be treated as a reorganization within the meaning of Section
368(a) of the Code, and that the Company, Parent and Sub will each be a
party to that reorganization within the meaning of Section 368(b) of the
Code.
(c) All permits, consents, authorizations, approvals, registrations,
qualifications, designations and declarations set forth in Section 5.4 of
the Company Disclosure Letter shall have been obtained and to the extent
required to be submitted prior to the Effective Date, all filings and
notices set forth in Section 5.4 of the Company Disclosure Letter shall
have been submitted by the Company.
(d) Parent shall have received the Affiliate Letters.
ARTICLE X.
Termination, Amendment and Waiver
Section 10.1. Termination. This Merger Agreement may be terminated at any
time prior to the Effective Date, whether before or after approval by the
stockholders of the Company:
(a) by mutual consent of the Board of Directors of Parent and the Board
of Directors of the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before November 30, 1996 (provided the terminating party
is not otherwise in material breach of its representations, warranties or
obligations under this Merger Agreement);
(c) by the Company if any of the conditions specified in Sections 9.1 and
9.2 have not been met or waived by the Company at such time as such
condition is no longer capable of satisfaction;
(d) by Parent if any of the conditions specified in Sections 9.1 and 9.3
have not been met or waived by Parent at such time as such condition is no
longer capable of satisfaction;
(e) by Parent if any of the following shall have occurred (each, a
"Purchase Event"):
(i) any person (other than Parent or any subsidiary of Parent) shall
have commenced (as such term is defined in Rule 14d-2 under the
Exchange Act), a tender offer or exchange offer to purchase any shares
of Company Common Stock such that, upon consummation of such offer,
such person would own or control 50% or more of the then outstanding
Company Common Stock, and the Board of Directors of the Company, within
ten business days after such tender or exchange offer shall have been
so commenced, fails to recommend against acceptance of such tender or
exchange offer by its stockholders, and Parent shall deliver a written
notice of termination to the Company within 20 business days after the
expiration of such 10 day period;
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(ii) the Company or any subsidiary of the Company shall have
authorized, recommended, proposed or publicly announced an intention to
authorize, recommend or propose, or entered into, an agreement with any
person (other than Parent or any subsidiary of Parent) to (A) effect a
merger, consolidation or similar transaction involving the Company or
any of its material subsidiaries, (B) sell, lease or otherwise dispose
of assets of the Company or its subsidiaries representing 10% or more
of the consolidated assets of the Company and its subsidiaries (other
than in the ordinary course of business) or (C) issue, sell or
otherwise dispose of (including by way of merger, consolidation, share
exchange or any similar transaction) securities (or options, rights or
warrants to purchase, or securities convertible into, such securities)
representing 10% or more of the voting power of the Company or any of
its subsidiaries;
(iii) any person (other than Parent, any subsidiary of Parent or the
Company or any of its subsidiaries in a fiduciary capacity) shall have
acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership
of, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the then outstanding
Company Common Stock; or
(f) by either Parent or the Company if the approval of the Company's
stockholders required by Section 9.1(a) shall not have been obtained at the
Company Meeting; or
(g) by either Parent or the Company if the approval of Parent's
stockholders required by Section 9.1(b) shall not have been obtained at the
Parent Meeting.
Section 10.2. Effect of Termination. In the event of termination of this
Merger Agreement by either Parent or the Company, as provided above, this
Merger Agreement shall forthwith become void and (except for the willful
breach of this Merger Agreement by any party hereto) there shall be no
liability on the part of either the Company, Parent or Sub or their respective
officers, directors, employees or agents; provided that the last sentence of
Section 8.1 and Sections 8.5, 8.6, 8.12, 10.2 and Article XI (other than
Section 11.4) shall survive the termination.
Section 10.3. Amendment. This Merger Agreement may be amended by the parties
hereto, by or pursuant to action taken by their respective Boards of
Directors, at any time before or after approval hereof by the stockholders of
the Company and Parent, but, after such approval, no amendment shall be made
which changes the ratios at which Company Common Stock is to be converted into
Parent Common Stock as provided in Section 3.1 or which in any way materially
adversely affects the rights of such stockholders, without the further
approval of such stockholders. This Merger Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto.
Section 10.4. Extension; Waivers. At any time prior to the Effective Date,
the parties hereto, by or pursuant to action taken by their respective Boards
of Directors, may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
documents delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE XI.
General Provisions
Section 11.1. Non-Survival of Representations, Warranties and
Agreements. All representations and warranties set forth in the Merger
Agreement shall terminate at the Effective Date. All covenants and agreements
set forth in the Merger Agreement shall survive in accordance with their
terms.
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Section 11.2. Notices. All notices or other communications under this Merger
Agreement shall be in writing and shall be given by delivery in person, by
facsimile, cable, telegram, telex or other standard form of
telecommunications, or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows (or such other address for a
party as shall be specified in a notice given in accordance with this Section
11.2) and shall be deemed to have been given one business day after
transmission by facsimile, cable, telegram, telex or other standard form of
telecommunications or four days after deposit in the U.S. mail:
If to the Company:
UUNET Technologies, Inc.
3060 William Drive
Fairfax, Virginia 22031
Attention: John W. Sidgmore
Martina W. Knee, Esq.
Facsimile No.: (703) 206-5807
with a copy to:
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, California 94301
Attention: August J. Moretti, Esq.
and Richard Friedman, Esq.
Facsimile No.: (415) 324-0638
If to Parent or Sub:
Prior to May 18, 1996:
MFS Communications Company, Inc.
3555 Farnam Street, 2nd Floor
Omaha, Nebraska 68131
Attention: General Counsel
Facsimile No.: (402) 977-5335
On or after May 18, 1996:
MFS Communications Company, Inc.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Attention: General Counsel
Facsimile No.: (402) 231-3545
With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111
or to such other address as any party may have furnished to the other parties
in writing in accordance with this Section.
Section 11.3. Fees and Expenses.
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Merger Agreement and the transactions
contemplated by this Merger Agreement shall be paid by the party incurring
such expenses.
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(b) If (i) Parent has terminated this Agreement pursuant to the
provisions of (A) Section 10.1(f) or (B) Section 10.1(d) as such Section
relates to Section 9.3(a) and (ii) within 18-months after the date of such
termination, the Company shall either accept, or recommend to its
stockholders for approval, an Acquisition Proposal that Parent in good
faith believes would, if consummated, result in a transaction more
favorable to the stockholders of the Company than the Merger, the Company
shall pay to Parent a fee of $60,000,000, which amount shall be payable by
wire transfer of immediately available funds within two business days after
the acquisition contemplated by such Acquisition Proposal is consummated.
The obligation of the Company pursuant to this paragraph (b) shall not be
prejudiced by an exercise of termination rights by the Company within five
business days prior to the exercise by Parent of its termination rights
under this Merger Agreement.
(c) If (i) the Company has terminated this Agreement pursuant to the
provisions of (A) Section 10.1(g) or (B) Section 10.1(c) as such Section
relates to Section 9.2(a), Parent shall:
(i) pay to the Company a fee of $60,000,000, which amount shall be
payable by wire transfer of immediately available funds within two
business days after such termination;
(ii) at the option of the Company, purchase from the Company
1,551,724 shares of Company Common Stock (as adjusted for stock splits,
reverse stock splits, stock dividends, recapitalizations and other
similar events) for an aggregate purchase price of $90,000,000, which
purchase shall take place on the fifth business day following the later
of (A) written notice by the Company to the Parent that a registration
statement under the Securities Act pursuant to which such shares will
be sold to the Parent has been declared effective and (B) written
notice by the Company to the Parent that the waiting period applicable
to such purchase under the HSR Act has expired or has been terminated;
and
(iii) at the option of the Company, commencing on a date to be
mutually agreed upon by the Company and Parent, but in no event later
than 180 days after notification by the Company, provide data
communications services, including private line and local special
access circuits to the Company at Parent's cost for a period of five
years, with an aggregate total value of such circuits not to exceed
$100,000,000, with no more than $25,000,000 in any calendar year, and
the cost of such services to be jointly determined by the parties or by
a mutually acceptable third-party. Parent will provide the Company with
timely network planning information regarding Parent's network
expansions and service availability.
The obligation of Parent pursuant to this paragraph (c) shall not be
prejudiced by an exercise of termination rights by Parent within five
business days prior to the exercise by the Company of its termination
rights under this Merger Agreement.
Section 11.4. Publicity. So long as this Merger Agreement is in effect,
Parent, Sub and the Company agree to consult with each other in issuing any
press release or otherwise making any public statement with respect to the
transactions contemplated by this Merger Agreement, and none of them shall
issue any press release or make any public statement relating to the
transactions contemplated hereby prior to such consultation, except as may be
required by law or by obligations pursuant to any listing agreement with
Nasdaq. The commencement of litigation relating to the Merger Agreement or the
transactions contemplated hereby or any proceedings in connection therewith
shall not be deemed a violation of this Section 11.4.
Section 11.5. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Merger Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent breaches of this Merger
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
Section 11.6. Assignment; Binding Effect. Neither this Merger Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto (whether by operation of law or otherwise) without the
prior written consent of the other parties, except that Sub shall have the
right to assign to
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Parent or any direct wholly owned subsidiary of Parent any and all rights and
obligations of Sub under this Merger Agreement. Subject to the preceding
sentence, this Merger Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns.
Nothing in this Merger Agreement, expressed or implied, except as specifically
set forth in Sections 8.5 or 10.2, is intended to confer on any person other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations or liabilities under or by reason of this Merger
Agreement.
Section 11.7. Entire Agreement. This Merger Agreement, the Exhibits, the
Company Disclosure Letter, the Parent Disclosure Letter, the Confidentiality
Agreement dated March 5, 1996, between the Company and Parent and any
documents delivered by the parties in connection herewith constitute the
entire agreement among the parties with respect to the subject matter hereof
and supersede all prior agreements and understandings among the parties with
respect thereto. No addition to or modification of any provision of this
Merger Agreement shall be binding upon any party hereto unless made in writing
and signed by all parties hereto.
Section 11.8. Governing Law. THIS MERGER AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO ITS RULES OF CONFLICT OF LAWS.
Section 11.9. Counterparts. This Merger Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but all such counterparts shall together
constitute one and the same instrument. Each counterpart may consist of a
number of copies hereof each signed by less than all, but together signed by
all of the parties hereto.
Section 11.10. Headings, Table of Contents, Index of Defined Terms. Headings
of the Articles and Sections of this Merger Agreement, the Table of Contents
and the Index of Defined Terms are for the convenience of the parties only,
and shall be given no substantive or interpretive effect whatsoever.
Section 11.11. Interpretation. In this Merger Agreement, unless the context
otherwise requires, words describing the singular number shall include the
plural and vice versa, and words denoting any gender shall include all genders
and words denoting natural persons shall include corporations and partnerships
and vice versa.
Section 11.12. Waivers. Except as provided in this Merger Agreement, no
action taken pursuant to this Merger Agreement, including, without limitation,
any investigation by or on behalf of any party, shall be deemed to constitute
a waiver by the party taking such action of compliance with any
representations, warranties, covenants or agreements contained in this Merger
Agreement. The waiver by any party hereto of a breach of any provision
hereunder shall not operate or be construed as a waiver of any prior or
subsequent breach of the same or any other provision hereunder.
Section 11.13. Severability. Any term or provision of this Merger Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining
terms and provisions of this Merger Agreement or affecting the validity or
enforceability of any of the terms or provisions of this Merger Agreement in
any other jurisdiction. If any provision of this Merger Agreement is so broad
as to be unenforceable, the provision shall be interpreted to be only so broad
as is enforceable.
Section 11.14. Subsidiaries. As used in this Merger Agreement, the word
"subsidiary" when used with respect to any party means any corporation or
other organization, whether incorporated or unincorporated, of which such
party directly or indirectly owns or controls at least a majority of the
securities or other interests having by their terms ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization, or any
organization of which such party is a general partner.
[Signature pages follow.]
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In Witness Whereof, Parent, Sub and the Company have caused this Merger
Agreement to be executed by their respective officers thereunder duly
authorized all as of the date first written above.
MFS Communications Company, Inc.
/s/ James Q. Crowe
_____________________________________
Name: James Q. Crowe
Title: Chairman and CEO
MFS Global Internet Services, Inc.
/s/ James Q. Crowe
_____________________________________
Name: James Q. Crowe
Title: President
UUNET Technologies, Inc.
/s/ John W. Sidgmore
_____________________________________
Name: John W. Sidgmore
Title: President and CEO
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ANNEX B
STOCKHOLDER OPTION, VOTING AND PROXY AGREEMENT
DATED AS OF APRIL 29, 1996
AMONG
MFS COMMUNICATIONS COMPANY, INC
MFS GLOBAL INTERNET SERVICES, INC.
AND EACH OTHER PERSON AND ENTITY
LISTED ON THE SIGNATURE PAGES HEREOF.
<PAGE>
Stockholder Option, Voting and Proxy Agreement, dated as of April 29, 1996,
(this "Agreement") among MFS Communications Company, Inc., a Delaware
corporation ("Parent"), MFS Global Internet Services, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent ("Sub"), and each other
person and entity listed on the signature pages hereof (each, a
"Stockholder").
Whereas, as of the date hereof, each Stockholder owns of record the number
of shares of common stock, $0.001 par value (the "Common Stock"), of UUNET
Technologies, Inc., a Delaware corporation (the "Company"), set forth opposite
such Stockholder's name on Exhibit A hereto (all such shares, together with
all shares of Common Stock of the Company which are hereafter acquired by the
Stockholders, being referred to herein as the "Shares");
Whereas, Parent, Sub and the Company have entered into an Agreement and Plan
of Merger dated as of the date hereof (the "Merger Agreement"; capitalized
terms used but not otherwise defined in this Agreement have the meanings
assigned to such terms in the Merger Agreement), which provides, upon the
terms and subject to the conditions set forth therein, for the merger of Sub
with and into the Company (the "Merger"); and
Whereas, as a condition to the willingness of Parent and Sub to enter into
the Merger Agreement and in furtherance of the acquisition of the Company by
Parent, Parent and Sub have required that the Stockholders agree, and in order
to induce Parent and Sub to enter into the Merger Agreement, each Stockholder
has agreed, severally and not jointly, to enter into this Agreement.
Now, Therefore, in consideration of the foregoing premises and agreements
contained herein, the parties hereto agree as follows:
ARTICLE I.
Grant of Option and Exercise; Transfer and Voting of Shares
Section 1.1. Grant of Option. Subject to the terms and conditions set forth
herein, each Stockholder hereby grants to Parent an irrevocable option (the
"Option") to purchase all such Stockholder's Shares held on the date of Option
exercise for 1.777776 fully paid and nonassessable shares of Parent Common
Stock (as adjusted in the circumstances described in Section 3.1(c) of the
Merger Agreement) per Share, together with the associated rights under
Parent's Rights Agreement ("Parent Rights Plan") dated as of September 30,
1995 between Parent and Continental Stock Transfer & Trust (together, the
"Purchase Price").
Section 1.2. Exercise of Option. Parent may exercise the Option, in whole
with respect to all of the Shares held by all of the Stockholders covered
hereby but not in part, at any time following the occurrence of a Purchase
Event (as defined in the Merger Agreement); provided that, except as provided
in the last sentence of this Section 1.2(a), the Option shall terminate and be
of no further force and effect upon the earliest to occur of (i) the Effective
Date, (ii) 20 Business Days after the termination of the Merger Agreement
other than by reason of an event described in clause (iv) or (v) below, (iii)
[INTENTIONALLY OMITTED], (iv) exercise of the Company's right to terminate the
Merger Agreement because of a breach by Parent or Sub of any covenant or
agreement set forth in the Merger Agreement or the failure of any
representation or warranty of the Parent or Sub under Article IV of the Merger
Agreement or of the Parent under Article III of this Agreement to have been
true in all material respects when made or the failure of the holders of
capital stock of Parent to approve the Merger at the Parent Meeting, (v) the
Merger Agreement has been terminated pursuant to Section 10.1(a) or (b) of the
Merger Agreement, or (vi) the failure of the Closing (defined in Section 1.3
below) to occur within 30 Business Days of the Notice Date (defined in Section
1.3 below) unless (A) the reason for such failure relates to the inability to
satisfy the conditions to register the shares of Parent Common Stock set forth
in Section 1.9 of this Agreement or for the notification period under the HSR
Act to have expired, in either case, for reasons outside of the control of
Parent, and (B) Parent is diligently pursuing the registration of such shares
with the Commission or promptly providing all necessary information to the
Federal Trade Commission and the Antitrust Division of the Department of
Justice, as the case may be. Notwithstanding the termination of the Option,
Parent
<PAGE>
shall be entitled to purchase the Shares in accordance with the terms hereof
if it has exercised the Option prior to the termination date, unless clause
(iv) or (vi) above has been triggered in which case the rights to exercise
this Option shall immediately cease.
Section 1.3. Closing Date. In the event Parent wishes to exercise the
Option, which may be exercised in whole with respect to all of the Shares of
all of the Stockholders covered hereby but not in part, it shall send to each
Stockholder a written notice (the date of which being herein referred to as
the "Notice Date") specifying a place and date not earlier than five business
days nor later than 10 Business Days from the Notice Date for the closing of
such purchase (the "Closing Date"); provided that if the closing of the
purchase and sale pursuant to the Option (the "Closing") cannot be consummated
by reason of any applicable judgment, decree, order, law or regulation, the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which such restriction on consummation has expired or
been terminated; and, provided further that, without limiting the foregoing,
if prior notification to or approval of any regulatory authority is required
in connection with such purchase, Parent and, if applicable, a Stockholder
shall promptly file the required notice or application for approval and shall
expeditiously process the same (and such Stockholder shall cooperate with
Parent in the filing of any such notice or application and the obtaining of
any such approval), and the period of time that otherwise would run pursuant
to this sentence shall run instead from the date on which, as the case may be,
(i) any required notification period has expired or been terminated or (ii)
such approval has been obtained, and in either event, any requisite waiting
period has passed. Parent agrees that it shall include the issuance of shares
of Parent Common Stock under this Agreement in the notifications under the HSR
Act filed pursuant to Section 8.6 of the Merger Agreement.
Section 1.4. Payment and Delivery of Certificates.
(a) On the Closing Date, (i) Parent will deliver to the Stockholders the
Purchase Price and a certificate signed by the President or Chief Executive
Officer of Parent to the effect that Parent and the Sub have complied with
all covenants and agreements set forth in the Merger Agreement and that all
representations and warranties of the Parent and Sub under Article IV of
the Merger Agreement and of the Parent under Article III of this Agreement
were true in all material respects when made, and (ii) the Stockholders
shall deliver to Parent certificates representing the Shares sold by the
Stockholders to Parent at the Closing, duly endorsed in blank or
accompanied by stock powers duly executed by the Stockholders in blank, in
proper form for transfer.
(b) No certificates or scrip representing less than one share of Parent
Common Stock shall be issued upon the exercise of the Option. In lieu of
any such fractional share, each Stockholder who would otherwise have been
entitled to a fraction of a share of Parent Common Stock upon exercise of
the Option shall be paid at the Closing cash (without interest) in an
amount equal to such Stockholder's fractional part of a share of Parent
Common Stock multiplied by the last reported sale price of Parent Common
Stock, as reported on the Nasdaq National Market, on the Closing Date.
Section 1.5. Legends.
(a) Each Stockholder shall instruct the Company to cause each certificate
of any Stockholder evidencing the Shares to bear a legend in the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED
OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE
TERMS AND CONDITIONS OF THE STOCKHOLDER OPTION, VOTING AND PROXY
AGREEMENT DATED AS OF APRIL 29, 1996, AS IT MAY BE AMENDED, AMONG MFS
COMMUNICATIONS COMPANY, INC., MFS GLOBAL INTERNET SERVICES, INC. AND
THE REGISTERED HOLDER OF THIS CERTIFICATE, A COPY OF WHICH IS ON FILE
AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
(b) In the event that the Shares shall cease to be subject to the
restrictions on transfer set forth in this Agreement, the Company shall,
upon the written request of the holder thereof, issue to such holder a new
certificate evidencing such Shares without the legend required by Section
1.5(a).
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Section 1.6. Voting Agreement. Each Stockholder hereby agrees that from the
date hereof to the earlier to occur of the termination of the Merger Agreement
or the Effective Date, at any meeting of the stockholders of the Company,
however called, and in any action by consent of the stockholders of the
Company, such Stockholder shall vote the Shares; (A) in favor of the Merger,
the Merger Agreement (as amended from time to time) and the transactions
contemplated by the Merger Agreement and (B) against any proposal for any
recapitalization, merger (other than the Merger), sale of assets or other
business combination between the Company and any person or entity (other than
Parent or Sub) or any other action or agreement that would result in a breach
of any covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or which would result in
any of the conditions to the Merger Agreement not being fulfilled.
Section 1.7. No Disposition or Encumbrance of Shares and Options. Except to
the extent set forth in Exhibit A, each Stockholder hereby covenants and
agrees that, from the date hereof to the termination of the rights of Parent
under Sections 1.2, 1.6 and 1.8 of this Agreement, it shall not, and shall not
offer or agree to, sell, transfer, tender, assign, hypothecate or otherwise
dispose of, or create or permit to exist any Encumbrance (as hereinafter
defined) on the Shares owned by such Stockholder at any time prior to the
Effective Date.
Section 1.8. Voting of Shares; Further Assurances.
(a) Each Stockholder, by this Agreement, with respect to its Shares, does
hereby constitute and appoint Sub and Parent, or any nominee of Sub and
Parent, with full power of substitution, from the date hereof to the
earlier to occur of the termination of the Merger Agreement or the
Effective Date, as its true and lawful attorney and proxy (its "Proxy"),
for and in its name, place and stead, to vote each of such Shares as its
Proxy, at every annual, special or adjourned meeting of the stockholders of
the Company, including the right to sign its name (as stockholder) to any
consent, certificate or other document relating to the Company that the law
of the State of Delaware may permit or require:
(i) in favor of the Merger, the Merger Agreement (as amended from
time to time) and the transactions contemplated by the Merger
Agreement; and
(ii) against any proposal for any recapitalization, merger (other
than the Merger), sale of assets or other business combination between
the Company and any person or entity (other than Parent or Sub) or any
other action or agreement that would result in a breach of any
covenant, representation or warranty or any other obligation or
agreement of the Company under the Merger Agreement or which could
result in any of the conditions to the Merger Agreement not being
fulfilled.
THIS POWER OF ATTORNEY IS IRREVOCABLE, IS GRANTED IN CONSIDERATION OF
PARENT AND SUB ENTERING INTO THE MERGER AGREEMENT AND IS COUPLED WITH AN
INTEREST SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE POWER. This
appointment shall revoke all prior attorneys and proxies appointed by any
Stockholder at any time with respect to the Shares and no subsequent
attorneys or proxies will be appointed by such Stockholder, or be
effective, with respect thereto during the term of this Agreement.
(b) Each Stockholder shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in
Sub and Parent the power to carry out and give effect to the provisions of
this Agreement.
Section 1.9. Registration. Notwithstanding anything in this Agreement to the
contrary, the obligation of the Stockholders to transfer their Shares to
Parent at the Closing shall be conditioned upon the issuance of Parent Common
Stock to the Stockholders being registered pursuant to the Securities Act at
the Closing. Parent shall include such issuance of shares of Parent Common
Stock in the Registration Statement on Form S-4 being filed pursuant to the
Merger Agreement.
ARTICLE II.
Representations and Warranties of the Stockholders
Each Stockholder, severally and not jointly, hereby represents and warrants
to Parent as follows:
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Section 2.1. Due Organization, Authorization, Etc. Such Stockholder (if it
is a corporation, partnership or other legal entity) is duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation or organization. Such Stockholder has all requisite power
(corporate or otherwise) to execute and deliver this Agreement, to grant the
Option and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement, the appointment of Parent and Sub as such
Stockholder's Proxy, the granting of the Option and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
action (corporate or otherwise) on the part of such Stockholder. This
Agreement has been duly executed and delivered by or on behalf of such
Stockholder and, assuming its due authorization, execution and delivery by
Parent, constitutes a legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms.
Section 2.2. No Conflicts, Required Filings and Consents.
(a) Except as disclosed on Exhibit A, the execution and delivery of this
Agreement by such Stockholder do not, and the performance of this Agreement
by such Stockholder will not, (i) conflict with or violate the Certificate
of Incorporation by By-Laws or other similar organizational documents of
such Stockholder (in the case of a Stockholder that is a corporation,
partnership or other legal entity), (ii) conflict with or violate any
statute, law, ordinance, rule, regulation, order, decree or judgment
applicable to such Stockholder or by which it or any of its properties is
bound or affected, or (iii) result in any breach of or constitute a default
(with notice or lapse of time, or both) under, or give to others any rights
of termination, amendment, acceleration or cancellation of, or result in
the creation of a lien or encumbrance on any of the property or assets of
such Stockholder or (if such Stockholder is a corporation, partnership or
other legal entity) any of its subsidiaries, including, without limitation,
the Shares, pursuant to, any indenture or other loan document provision or
other contract, license, franchise, permit or other instrument or
obligation to which such Stockholder is a party or by which such
Stockholder or any of its properties is bound or affected, except, in the
case of clauses (ii) and (iii), for any such breaches, defaults or other
occurrences that would not prevent or delay the performance by such
Stockholder of its obligations under this Agreement.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this agreement by such Stockholder will not,
require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, except where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not prevent or delay the performance by the Stockholder of its obligations
under this Agreement.
Section 2.3. Title to Shares. Such Stockholder has, and the transfer by the
Stockholder of the Shares hereunder will pass, good and marketable title to
the Shares listed on Exhibit A hereto, free and clear of any pledge, lien,
security interest, mortgage, charge, claim, equity, option, proxy, voting
restriction, right of first refusal, limitation on disposition, adverse claim
of ownership or use or encumbrance of any kind ("Encumbrances"), except to the
extent disclosed on Exhibit A and for Shares sold prior to the Closing as
permitted under Section 1.7.
Section 2.4. No Brokers. Except for Goldman, Sachs & Co. or as set forth in
the Company Disclosure Letter, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of such Stockholder.
ARTICLE III.
Representations and Warranties of Parent
Parent represents and warrants to each Stockholder as follows:
Section 3.1. Organization and Qualification. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has the corporate power to carry on its business
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as it is now being conducted or currently proposed to be conducted. Parent is
duly qualified as a foreign corporation to do business, and is in good
standing, in each jurisdiction where the character of its properties owned or
held under lease or the nature of its activities make such qualification
necessary, except where the failure to be so qualified will not, individually
or in the aggregate, have a material adverse effect on the business,
properties, assets, condition (financial or otherwise), liabilities or
operations of Parent and its subsidiaries taken as a whole (a "Parent Material
Adverse Effect"). Complete and correct copies as of the date hereof of the
Certificate of Incorporation and By-laws of Parent have been delivered to the
Company as part of a disclosure letter delivered by Parent to the Company on
or prior to the date of this Agreement pursuant to the Merger Agreement (the
"Parent Disclosure Letter").
Section 3.2. Capitalization. The authorized capital stock of Parent consists
of 400,000,000 shares of Parent Common Stock, and 25,000,000 shares of
preferred stock, $.01 par value. As of April 26, 1996 (after giving effect to
the stock split on that day), (i) 125,804,234 shares of Parent Common Stock
were validly issued and outstanding, fully paid and nonassessable, (ii) 95,000
shares of Parent's Series A 8% Cumulative Convertible Preferred Stock, were
validly issued and outstanding, fully paid, and nonassessable and (iii)
15,000,000 shares of Series B Cumulative Convertible Preferred Stock were
validly issued and outstanding, fully paid, and nonassessable. As of the date
hereof, there are no bonds, debentures, notes or other indebtedness having the
right to vote on any matters on which the Parent's stockholders may vote
("Parent Voting Debt") issued or outstanding. As of April 26, 1996 (after
giving effect to the stock split on that day), except for options to acquire
20,614,274 shares of Parent Common Stock pursuant to the Parent's 1992 Stock
Plan and 1993 Stock Plan, warrants to purchase 1,500,000 shares of Parent
Common Stock, commitments to issue shares of Parent Common Stock under
Parent's Shareworks and Shareworks Plus programs and commitments to issue
shares of Parent Common Stock to non-employee directors pursuant to Parent's
1993 Stock Plan, and, except as provided herein and in the Parent Rights Plan,
there are no options, warrants, calls or other rights, agreements or
commitments presently outstanding obligating Parent to issue, deliver or sell
shares of its capital stock or debt securities, or obligating Parent to grant,
extend or enter into any such option, warrant, call or other such right,
agreement or commitment. All of the shares of Parent Common Stock issuable in
accordance with this Agreement in exchange for Company Common Stock at the
Closing will be, when so issued, duly authorized, validly issued, fully paid
and nonassessable and shall be delivered free and clear of any pledge, lien,
security interest, mortgage, charge, claim, equity, option, proxy, voting
restriction, right of first refusal, limitation on disposition, adverse claim
of ownership or use or encumbrance of any kind ("Encumbrances"), including any
preemptive rights of any stockholder of Parent.
Section 3.3. Subsidiaries. The only "Significant Subsidiaries" (as such term
is defined in Rule 1-02 of Regulation S-X of the Securities and Exchange
Commission (the "Commission")) ("Significant Subsidiaries") of Parent are
those named in Section 4.3 of the Parent Disclosure Letter or set forth on
Exhibit 22 to Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995. Each Significant Subsidiary incorporated in the United
States is a corporation duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has the corporate
power to carry on its business as it is now being conducted or currently
proposed to be conducted. Each Significant Subsidiary is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease
or the nature of its activities makes such qualification necessary except
where the failure to be so qualified will not have a Parent Material Adverse
Effect. Except as disclosed in Section 4.3 of the Parent Disclosure Letter,
all the outstanding shares of capital stock of each Significant Subsidiary are
validly issued, fully paid and nonassessable and owned by Parent or by a
Significant Subsidiary of Parent free and clear of any Encumbrances. There are
no existing options, warrants, calls or other rights, agreements or
commitments of any character relating to the issued or unissued capital stock
or other securities of any of the Significant Subsidiaries of Parent. Except
as set forth in the Parent's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995, as disclosed in Section 4.3 of the Parent Disclosure
Letter and except for wholly owned subsidiaries which are formed after the
date hereof in the ordinary course of business, Parent does not directly or
indirectly own any interest in any other corporation, partnership, joint
venture or other business association or entity that is a Significant
Subsidiary.
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Section 3.4. Authority Relative to the Agreement.
(a) Parent has the corporate power to execute and deliver this Agreement
and to carry out its obligations hereunder. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by Parent's Board of Directors. The Agreement
constitutes a valid and binding obligation of Parent, enforceable against
Parent in accordance with its terms, except as enforcement may be limited
by bankruptcy, insolvency or other similar laws affecting the enforcement
of creditors' rights generally and except that the availability of
equitable remedies, including specific performance, is subject to the
discretion of the court before which any proceeding therefor may be
brought. No other corporate proceedings on the part of Parent are necessary
to authorize the execution and delivery by Parent of this Agreement or the
consummation of the transactions contemplated hereby.
(b) The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby, does not and will not result in the
change in conversion ratios, conversion rights or voting rights, or the
breach, violation, default (with or without notice or lapse of time, or
both), termination, cancellation or acceleration of any obligation, or the
loss of a material benefit, under (i) the Parent's charter or by-laws or
(ii) any indenture or other loan document provision or other contract,
license, franchise, permit, order, decree, concession, lease, instrument,
judgment, statute, law, ordinance, rule or regulation applicable to Parent
or any of its subsidiaries or their respective properties or assets, other
than, in the case of clause (ii) only, (A) any breaches, violations,
defaults, terminations, cancellations, accelerations or losses which,
either singly or in the aggregate, will not have a Parent Material Adverse
Effect or prevent the consummation of the transactions contemplated hereby
and (B) the laws and regulations referred to in the next paragraph.
(c) Except as disclosed in Section 4.4 of the Parent Disclosure Letter,
or in connection, or in compliance, with the provisions of the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the
Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934 (the "Exchange Act"), and the corporation, securities
or blue sky laws or regulations of the various states, no filing or
registration with, or authorization, consent or approval of, any public
body or authority is necessary for the consummation by Parent of the
transactions contemplated by this Agreement, other than filings,
registrations, authorizations, consents or approvals the failure of which
to make or obtain will not have a Parent Material Adverse Effect or prevent
the consummation of the transactions contemplated hereby.
Section 3.5. Reports and Financial Statements. Parent has previously
furnished the Company with true and complete copies of its (i) Annual Report
on Form 10-K, as amended, for the fiscal years ended December 31, 1994 and
December 31, 1995, as filed with the Commission, (ii) proxy statements related
to all meetings of its stockholders (whether annual or special) since January
1, 1994, and (iii) all other reports or registration statements filed by
Parent with the Commission under the Exchange Act since December 31, 1992
through the date hereof, except Quarterly Reports on Form 10-Q for fiscal
quarters ended prior to December 31, 1995 (the items in clauses (i) through
(iii) being referred to herein collectively as the "Parent SEC Reports"). As
of their respective dates, the Parent SEC Reports complied in all material
respects with the requirements of the Exchange Act, and the rules and
regulations of the Commission thereunder applicable to such Parent SEC
Reports. As of their respective dates, the Parent SEC Reports did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited consolidated financial statements and unaudited interim financial
statements of Parent included in the Parent SEC Reports comply as to form in
all material respects with applicable accounting requirements and with the
published rules and regulations of the Commission with respect thereto. The
financial statements included in the Parent SEC Reports: have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis (except as may be indicated therein or in the notes thereto);
present fairly, in all material respects, the financial position of Parent and
its subsidiaries as at the dates thereof and the results of their operations
and cash flows for the periods then ended subject, in the case of the
unaudited interim financial statements, to normal year-end audit adjustments,
any other adjustments described therein and the fact that certain information
and notes have been
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condensed or omitted in accordance with the Exchange Act and the rules
promulgated thereunder; and are in all material respects, in accordance with
the books of account and records of Parent.
Section 3.6. Absence of Certain Changes or Events. Except as disclosed in
the Parent SEC Reports or as disclosed in Section 4.6 of the Parent Disclosure
Letter, from December 31, 1995 through the date of this Agreement, there has
not been (i) any transaction, commitment, dispute or other event or condition
(financial or otherwise) of any character (whether or not in the ordinary
course of business) individually or in the aggregate having a Parent Material
Adverse Effect (other than as a result of changes in laws or regulations of
general applicability); (ii) any damage, destruction or loss, whether or not
covered by insurance, which would have a Parent Material Adverse Effect; or
(iii) any entry into any commitment or transaction material to Parent and its
subsidiaries taken as a whole (including, without limitation, any borrowing or
sale of assets) except in the ordinary course of business consistent with past
practice.
ARTICLE IV.
Adjustments
Section 4.1. Distributions; Adjustment Upon Changes in Capitalization.
(a) Any dividends or other distributions (whether payable in cash, stock
or otherwise) by the Company with respect to any Shares purchased hereunder
with a record date on or after the Closing Date will belong to Parent. If
any such dividend or distribution belonging to Parent is paid by the
Company to the Stockholder, the Stockholder shall hold such dividend or
distribution in trust for the benefit of Parent and shall promptly remit
such dividend or distribution to Parent in exactly the form received,
accompanied by appropriate instruments of transfer.
(b) If on or after the date of this Agreement there shall occur any stock
dividend, stock split, recapitalization, combination or exchange of shares,
merger, consolidation, reorganization or other change or transaction of or
by the Company, as a result of which shares of any class of stock, other
securities, cash or other property shall be issued in respect of any Shares
or if any Shares shall be changed into the same or another class of stock
or other securities, then, upon exercise of the Option, Parent shall
receive for the aggregate price payable upon exercise of the Option with
respect to the Shares, all such shares of stock, other securities, cash or
other property issued, delivered or received with respect to such Shares
(or if the Option shall not be exercised, appropriate adjustment shall be
made for purposes of the calculations set forth in this Agreement).
ARTICLE V.
Section 5.1. No Solicitation of Transactions.
Each Stockholder covenants and agrees that in its capacity as a stockholder
of the Company it shall not, directly or indirectly, take (nor shall the
Stockholder authorize or permit its officers, directors, partners,
stockholders, employees, representatives, investment bankers, attorneys,
accountants or other agents or affiliates (the "Representatives"), to take and
the Representatives shall not take, on behalf of the Stockholder) any action
to (i) encourage, solicit or initiate the submission of any Acquisition
Proposal or a proposal for the acquisition, purchase or option to purchase any
of the Shares, (ii) enter into any agreement with respect to any Acquisition
Proposal or any acquisition or purchase of all or any of the Shares or (iii)
participate in any way in discussions or negotiations with, or furnish any
information to, any person in connection with, or take any other action to
facilitate any inquiries or the making of any proposal that constitutes, or
may reasonably be expected to lead to, any Acquisition Proposal or a proposal
to acquire or purchase any of the Shares. The Stockholder will promptly
communicate to Parent any solicitation received by it in its capacity as a
stockholder of the Company with respect to an Acquisition Proposal and the
terms of such proposal or inquiry, including the identity of the person and
its affiliates making the same, that it may receive in respect of any such
transaction, or of any such
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information requested from it or of any such negotiations or discussions being
sought to be initiated with it. "Acquisition Proposal" shall mean any proposed
(A) merger, consolidation or similar transaction involving the Company, (B)
sale, lease or other disposition directly or indirectly by merger,
consolidation, share exchange or otherwise of assets of the Company or its
subsidiaries representing 10% or more of the consolidated assets of the
Company and its subsidiaries other than in the ordinary course of business,
(C) issue, sale, or other disposition of (including by way of merger,
consolidation, share exchange or any similar transaction) securities (or
options, rights or warrants to purchase, or securities convertible into or
exchangeable for, such securities) representing 10% or more of the voting
power of the Company or (D) transaction in which any person shall acquire
beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange
Act), or the right to acquire beneficial ownership or any "group" (as such
term is defined under the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of 25% or
more of the outstanding Common Stock.
ARTICLE VI.
Covenants of the Stockholders.
Section 6.1. Negative Covenants. Each Stockholder agrees, until the Option
has terminated, not to:
(a) sell, transfer, pledge, assign or otherwise dispose of, or enter into
any contract, option or other arrangement with respect to the sale,
transfer, pledge, assignment or other disposition of, the Shares owned by
such Stockholder to any person other than Parent or Parent's designee and
except as contemplated in Exhibit A;
(b) acquire any additional shares of Common Stock without the prior
consent of Parent other than pursuant to rights under the Company Employees
Stock Purchase Plan or options outstanding on the date of this Agreement;
or
(c) deposit any Shares into a voting trust or grant a proxy or enter into
a voting agreement with respect to any Shares, except for this Agreement.
Section 6.2. Further Assurances. If Parent shall exercise the Option in
accordance with the terms of this Agreement, from time to time and without
additional consideration the Stockholder will execute and deliver, or cause to
be executed and delivered, such additional or further transfers, assignments,
endorsements, consents and other instruments as Parent may reasonably request
for the purpose of effectively carrying out the transactions contemplated by
this Agreement, including the transfer of the Shares to Parent and the release
of any and all Encumbrances with respect thereto.
ARTICLE VII.
Miscellaneous
Section 7.1. Non-Survival of Representations, Warranties and Agreements. All
representations, warranties and agreements made by the parties to this
Agreement shall terminate at the Closing.
Section 7.2. Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses.
Section 7.3. Notices. All notices or other communications under this
Agreement shall be in writing and shall be given by delivery in person, by
facsimile, cable, telegram, telex or other standard form of
telecommunications, or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows (or such other address for a
party as shall be specified in a notice given in accordance with this Section
6.3) and shall be deemed to have been given one business day after
transmission by facsimile, cable, telegram, telex of other standard form of
telecommunications or four days after deposit in the U.S. mail:
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If to a Stockholder, at the address or facsimile number of such
Stockholder set forth on Exhibit A, with a copy to:
UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Attention: General Counsel
Facsimile No.: (703) 206-5807
and
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, CA 94301
Attn: August J. Moretti and Richard Friedman
Facsimile: (415) 324-0638
If to Parent or Sub:
MFS Communications Company, Inc.
3555 Farnam Street, 2nd Floor
Omaha, Nebraska 68131
Attention: General Counsel
Facsimile No.: (402) 977-5335
With a copy to:
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111
Section 7.4. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
Section 7.5. Entire Agreement. This Agreement and any documents delivered by
the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be
binding upon any party hereto unless made in writing and signed by all parties
hereto.
Section 7.6. Assignment, Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties, except that Parent or Sub may assign all
or any of their rights and obligations hereunder to any affiliate of Parent,
provided that no such assignment shall relieve Parent or Sub of its
obligations hereunder if such assignee does not perform such obligations.
Subject to the preceding sentence, this Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and assigns. Notwithstanding anything contained in this Agreement
to the contrary, nothing in this Agreement, expressed or implied, is intended
to confer on any person other than the parties hereto or their respective
successors and assigns any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
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Section 7.7. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Delaware Court, this being
in addition to any other remedy to which they are entitled at law or in
equity.
Section 7.8. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO ITS RULES OF CONFLICT OF LAWS.
Section 7.9. Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
Section 7.10. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
[SIGNATURE PAGES FOLLOW.]
10
<PAGE>
In Witness Whereof, Parent has caused this Agreement to be executed by its
officers thereunto duly authorized and each Stockholder has caused this
Agreement to be executed, or duly executed by an authorized signatory, all as
of the date first written above.
MFS Communications Company, Inc.
/s/ James Q. Crowe
By __________________________________
Name: James Q. Crowe
Title: Chairman of the Board and
Chief Executive Officer
MFS Global Internet Services, Inc.
/s/ James Q. Crowe
By __________________________________
Name: James Q. Crowe
Title: President
/s/ Richard L. Adams, Jr.
_________________________________
Richard L. Adams, Jr.
Microsoft Corporation
/s/ Nathan Myhrvoid
By: ____________________________
Name: Nathan Myhrvoid
Title: Group Vice President
Menlo Ventures IV, L.P.
MV Management IV, L.P.,
By: ____________________________
its General Partner
/s/ John W. Jarve
By: ________________________
General Partner
Menlo Evergreen V, L.P.
MV Management IV, L.P.,
By: ____________________________
its General Partner
/s/ John W. Jarve
By: ________________________
General Partner
/s/ John W. Sidgmore
_________________________________
John W. Sidgmore
11
<PAGE>
New Enterprise Associates V, Limited
Partnership
NEA Partners V, Limited
Partnership
By: ____________________________
its General Partner
/s/ Nancy Dorman
By: ________________________
General Partner
Accel Investors '93, L.P.
/s/ Arthur C. Patterson
By: ____________________________
General Partner
Accel IV L.P.
Accel IV Associates, L.P.
By: ____________________________
its General Partner
/s/ Arthur C. Patterson
By: ________________________
General Partner
/s/ Les B. Strauss
By: ____________________________
Les Straus
/s/ Daniel C. Lynch
By: ____________________________
Daniel C. Lynch
12
<PAGE>
EXHIBIT A
LIST OF STOCKHOLDERS
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF STOCKHOLDER OF COMMON STOCK
---------------- ----------------
<S> <C>
Richard L. Adams, Jr.................................... 4,700,000(1)
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
Microsoft Corporation................................... 4,164,000
1 Microsoft Way
Redmond, WA 98052
Attn: Robert Eschelman
Facsimile: (206) 869-1327
Menlo Ventures IV, L.P.................................. 2,563,031
Menlo Evergreen V, L.P.................................. 666,667
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Attn: John W. Jarve
Facsimile: (415) 854-7059
John W. Sidgmore 3060 Williams Drive ................... 1,091,455(2)
c/o UUNET Technologies, Inc.
Fairfax, VA 22031
Facsimile: (703) 206-5805
New Enterprise Associates V, Limited Partnership ....... 3,229,698
1119 St. Paul Street
Baltimore, MD 21202
Attn: Peter J. Barris and Nancy Dorman
Facsimile: (410) 752-7721
Accel IV L.P............................................ 2,958,403
Accel Investors '93 L.P. ............................... 119,499
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui
Facsimile: (609) 683-0384
Les B. Straus .......................................... 53,472
PictureTel
The Tower at Northwoods
222 Rosewood Drive
Danvers, MA 01923
Facsimile: (508) 762-5219
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF STOCKHOLDER OF COMMON STOCK
---------------- ----------------
<S> <C>
Daniel C. Lynch ........................................ 34,500
25560 La Lanne Court
Los Altos Hills, CA 94022
Facsimile: (415) 948-0757
----------
TOTAL 19,580,725
==========
</TABLE>
- --------
(1) Of the 4,700,000 shares held by Mr. Adams, 325,000 shares may be sold,
gifted or otherwise transferred without restriction under this Agreement
prior to the Closing.
(2) Of the 1,091,455 shares held by Mr. Sidgmore, 355,458 of such shares are
subject to a right of repurchase by the Company if Mr. Sidgmore
voluntarily terminates his employment with the Company before June 27,
1996. In addition, as of April 30, 1996, the Company has a right of
repurchase with respect to another 562,807 of such shares in the event
that Mr. Sidgmore's employment with the Company is terminated and which
right of repurchase expires with respect to 14,810.70 shares of the last
day of each calendar month so long as Mr. Sidgmore remains employed by the
Company; provided, that such right of repurchase expires with respect to
50 percent of such shares subject to a right of repurchase in the event of
a Change in Control or involuntary Termination Other Than For Cause (each,
as defined in the Nonstatutory Stock Option Agreement between the Company
and Mr. Sidgmore dated as of July 20, 1994).
14
<PAGE>
AMENDMENT TO
STOCKHOLDER OPTION, VOTING AND PROXY AGREEMENT
This AMENDMENT (the "Amendment") to STOCKHOLDER OPTION, VOTING AND PROXY
AGREEMENT dated as of April 29, 1996 (the "Agreement") among MFS
COMMUNICATIONS COMPANY, INC., a Delaware corporation (Parent), MFS GLOBAL
INTERNET SERVICES, INC., a Delaware corporation and a wholly owned subsidiary
of Parent (Sub), and each other person and entity a signatory to the Agreement
(each, a Stockholder) is entered into this 30th day of June 1996.
WHEREAS, the parties to the Agreement desire to amend the Agreement;
The parties to the Agreement agree as follows:
1. Definitions. Capitalized terms used without definition in this Amendment
shall have the same meaning as set forth in the Agreement.
2. Amendment of Exhibit A. The parties to the Agreement agree to amend
Exhibit A to the Agreement to read in its entirety as set forth on Exhibit A
to this Amendment.
3. Ratification. The parties to the Agreement hereby confirm and ratify the
Agreement, as amended hereby, and acknowledge that the Agreement as so amended
shall remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, Parent has caused this Amendment to be executed by its
officers thereunto duly authorized and each Stockholder has caused this
Amendment to be executed, or duly executed by an authorized signatory, all as
of the date first written above.
MFS Communications Company, Inc.
/s/ Terrence J. Ferguson
By: ____________________________
Senior Vice President
Title: _________________________
MFS Global Internet Services, Inc.
/s/ Terrence J. Ferguson
By: ____________________________
Vice President
Title: _________________________
/s/ Richard L. Adams, Jr.
_________________________________
Richard L. Adams, Jr.
Microsoft Corporation
/s/ Nathan Myhrvoid
By: ____________________________
Name: Nathan Myhrvoid
Title: Group Vice President
15
<PAGE>
Menlo Ventures IV, L.P.
MV Management IV, L.P.,
By: ____________________________
its General Partner
/s/ John W. Jarve
By: ________________________
General Partner
Menlo Evergreen V, L.P.
MV Management IV, L.P.,
By: ____________________________
its General Partner
/s/ John W. Jarve
By: ________________________
General Partner
/s/ John W. Sidgmore
_________________________________
John W. Sidgmore
New Enterprise Associates V, Limited
Partnership
NEA Partners V, Limited
Partnership
By: ____________________________
its General Partner
/s/ Nancy Dorman
By: ________________________
General Partner
Accel Investors '93, L.P.
/s/ Arthur C. Patterson
By: ____________________________
General Partner
Accel IV L.P.
Accel IV Associates, L.P.
By: ____________________________
its General Partner
/s/ Arthur C. Patterson
By: ________________________
General Partner
/s/ Les B. Strauss
By: ____________________________
Les B. Strauss
/s/ Daniel C. Lynch
By: ____________________________
Daniel C. Lynch
16
<PAGE>
EXHIBIT A
LIST OF STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS SHARES OF
OF STOCKHOLDER COMMON STOCK
---------------- ------------
<S> <C>
Richard L. Adams, Jr. ................................... 4,700,00(1)
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
Microsoft Corporation.................................... 4,164,000
1 Microsoft Way
Redmond, WA 98052
Attn: Robert Eschelman
Facsimile: (206) 869-1327
Menlo Ventures IV, L.P. ................................. 2,563,031
Menlo Evergreen V, L.P. ................................. 666,667
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Attn: John W. Jarve
Facsimile: (415) 854-7059
John W. Sidgmore......................................... 1,136,643
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
New Enterprise Associates V,
Limited Partnership..................................... 3,229,698
1119 St. Paul Street
Baltimore, MD 21202
Attn: Peter J. Barris and
Nancy Dorman
Facsimile: (410) 752-7721
Accel IV L.P. ........................................... 2,958,403
Accel Investors '93 L.P. ............................... 119,499
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui
Facsimile: (609) 683-0384
Les B. Strauss........................................... 53,472
PictureTel
The Tower at Northwoods
222 Rosewood Drive
Danvers, MA 01923
Facsimile: (508) 762-5219
Daniel C. Lynch.......................................... 34,500
25560 La Lanne Court
Los Altos Hills, CA 94022
Facsimile: (415) 948-0757
----------
TOTAL.................................................. 19,625,913
</TABLE>
17
<PAGE>
- --------
(1) Of the 4,700,000 shares held by Mr. Adams, 325,000 shares may be sold,
gifted or otherwise transferred without restriction under this Agreement
prior to the Closing. In addition, 3,371 shares issuable upon exercise of
a stock option outstanding on the date of the Agreement may be gifted
without restriction under the Agreement prior to the Closing.
(2) Of the 1,136,643 shares held by Mr. Sidgmore, 355,458 of such shares are
subject to a right of repurchase by the Company if Mr. Sidgmore
voluntarily terminates his employment with the Company before June 27,
1996. In addition, as of April 30, 1996, the Company has a right of
repurchase with respect to another 562,807 of such shares in the event
that Mr. Sidgmore's employment with the Company is terminated and which
right of repurchase expires with respect to 14,810.70 shares on the last
day of each calendar month so long as Mr. Sidgmore remains employed by the
Company; provided, that such right of repurchase expires with respect to
50 percent of such shares subject to a right of repurchase in the event of
a Change in Control or involuntary Termination Other Than For Cause (each,
as defined in the Nonstatutory Stock Option Agreement between the Company
and Mr. Sidgmore dated as of July 20, 1994). 45,188 of the shares held by
Mr. Sidgmore are held in a trust of which Mr. Sidgmore is the trustor and
the sole trustee.
18
<PAGE>
ANNEX C
PARENT VOTING AND PROXY AGREEMENT
DATED AS OF APRIL 29, 1996
AMONG
UUNET TECHNOLOGIES, INC.
AND
EACH OTHER PERSON
LISTED ON THE SIGNATURE PAGES HEREOF
<PAGE>
Parent Voting and Proxy Agreement, dated as of April 29, 1996, (this
"Agreement") among UUNET Technologies, Inc., a Delaware corporation (the
"Company") and each other person listed on the signature pages hereof (each, a
"Stockholder").
Whereas, as of the date hereof, each Stockholder owns of record the number
of shares of common stock, $0.01 par value (the "Common Stock"), of MFS
Communications Company, Inc., a Delaware corporation ("Parent"), set forth
opposite such Stockholder's name on Exhibit A hereto (all such shares now
owned of record and which may hereafter be acquired, as a result of exercise
of an option to acquire shares of Common Stock or otherwise, by such
Stockholder prior to the termination of this Agreement being referred to
herein as the "Shares");
Whereas, the Company, Parent and MFS Global Internet Services, Inc., a
wholly owned subsidiary of Parent ("Sub"), have entered into an Agreement and
Plan of Merger dated as of the date hereof (the "Merger Agreement";
capitalized terms used but not otherwise defined in this Agreement have the
meanings assigned to such terms in the Merger Agreement), which provides, upon
the terms and subject to the conditions set forth therein, for the merger of
Sub with and into the Company (the "Merger"); and
Whereas, as a condition to the willingness of the Company to enter into the
Merger Agreement and in furtherance of the acquisition of the Company by
Parent, the Company has have required that the Stockholders agree, and in
order to induce the Company to enter into the Merger Agreement, each
Stockholder has agreed, severally and not jointly, to enter into this
Agreement.
Now, Therefore, in consideration of the foregoing premises and agreements
contained herein, the parties hereto agree as follows:
ARTICLE I.
Transfer and Voting of Shares
Section 1.1. Voting Agreement. Each Stockholder hereby agrees that during
the time this Agreement is in effect, at any meeting of the stockholders of
Parent, however called, and in any action by consent of the stockholders of
Parent, such Stockholder shall vote the Shares in favor of the Parent Share
Proposal.
Section 1.2. No Disposition or Encumbrance of Shares and Options. Each
Stockholder hereby covenants and agrees that, from the date hereof to the
termination of this Agreement, it shall not, and shall not offer or agree to,
sell, transfer, tender, assign, hypothecate or otherwise dispose of, or create
or permit to exist any Encumbrance (as hereinafter defined) on the Shares at
any time prior to the Effective Date.
Section 1.3. Voting of Shares; Further Assurances.
(a) Each Stockholder, by this Agreement, with respect to its Shares, does
hereby constitute and appoint the Company, or any nominee of the Company,
with full power of substitution, from the date hereof to the earlier to
occur of the termination of this Agreement or the Effective Date, as its
true and lawful attorney and proxy (its "Proxy"), for and in its name,
place and stead, to vote each of such Shares as its Proxy, at every annual,
special or adjourned meeting of the stockholders of Parent, including the
right to sign its name (as stockholder) to any consent, certificate or
other document relating to Parent that the law of the State of Delaware may
permit or require in favor of the Parent Share Proposal and the
transactions contemplated by the Merger Agreement.
THIS POWER OF ATTORNEY IS IRREVOCABLE, IS GRANTED IN CONSIDERATION OF
PARENT AND SUB ENTERING INTO THE MERGER AGREEMENT AND IS COUPLED WITH AN
INTEREST SUFFICIENT IN LAW TO SUPPORT AN IRREVOCABLE POWER. This
appointment shall revoke all prior attorneys and proxies appointed by any
Stockholder at any time with respect to the Shares and no subsequent
attorneys or proxies will be appointed by such Stockholder, or be
effective, with respect thereto.
<PAGE>
(b) Each Stockholder shall perform such further acts and execute such
further documents and instruments as may reasonably be required to vest in
the Company the power to carry out and give effect to the provisions of
this Agreement.
Section 1.4. Legends.
(a) Each Stockholder shall instruct Parent to cause each certificate of
any Stockholder evidencing the Shares to bear a legend in the following
form:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED
OR OTHERWISE TRANSFERRED OR DISPOSED OF EXCEPT IN COMPLIANCE WITH THE
TERMS AND CONDITIONS OF THE PARENT VOTING AND PROXY AGREEMENT DATED AS
OF APRIL 29, 1996, AS IT MAY BE AMENDED, AMONG UUNET TECHNOLOGIES, INC.
AND THE REGISTERED HOLDER OF THIS CERTIFICATE, A COPY OF WHICH IS ON
FILE AT THE PRINCIPAL EXECUTIVE OFFICES OF THE ISSUER.
(b) In the event that the Shares shall cease to be subject to the
restrictions on transfer set forth in this Agreement, Parent shall, upon
the written request of the holder thereof, issue to such holder a new
certificate evidencing such Shares without the legend required by Section
1.4(a).
ARTICLE II.
Representations and Warranties of the Stockholders
Each Stockholder, severally and not jointly, hereby represents and warrants
to the Company as follows:
Section 2.1. Due Organization, Authorization, Etc. Such Stockholder has all
requisite power to execute and deliver this Agreement, to appoint the Company
as its Proxy and to consummate the transactions contemplated hereby. This
Agreement has been duly executed and delivered by such Stockholder and,
assuming its due authorization, execution and delivery by the Company,
constitutes a legal, valid and binding obligation of such Stockholder,
enforceable against such Stockholder in accordance with its terms.
Section 2.2. No Conflicts, Required Filings and Consents.
(a) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this Agreement by such Stockholder will not,
(i) conflict with or violate any statute, law, ordinance, rule, regulation,
order, decree or judgment applicable to such Stockholder or by which it or
any of its properties is bound or affected, or (ii) result in any breach of
or constitute a default (with notice or lapse of time, or both) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any
of the property or assets of such Stockholder, including, without
limitation, the Shares, pursuant to, any indenture or other loan document
provision or other contract, license, franchise, permit or other instrument
or obligation to which such Stockholder is a party or by which such
Stockholder or any of its properties is bound or affected, except for any
such breaches, defaults or other occurrences that would not prevent or
delay the performance by such Stockholder of its obligations under this
Agreement.
(b) The execution and delivery of this Agreement by such Stockholder do
not, and the performance of this agreement by such Stockholder will not,
require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, domestic or
foreign, except where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would
not prevent or delay the performance by the Stockholder of its obligations
under this Agreement.
Section 2.3. Title to Shares. Such Stockholder is the record and beneficial
owner of the Shares set forth opposite such Stockholder's name on Exhibit A
hereto, free and clear of any pledge, lien, security interest, mortgage,
charge, claim, equity, option, proxy, voting restriction, right of first
refusal, limitation on disposition, adverse claim of ownership or use or
encumbrance of any kind ("Encumbrances"), other than pursuant to this
Agreement.
2
<PAGE>
ARTICLE III.
Representations and Warranties of the Company
The Company represents and warrants to each Stockholder as follows:
Section 3.1. Due Organization, Etc. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware. The Company has all requisite corporate power to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby by the Company has been duly authorized by
all necessary corporate action on the part of the Company. This Agreement has
been duly executed and delivered by the Company and, assuming its due
authorization, execution and delivery by each Stockholder, constitutes a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms.
ARTICLE IV.
Miscellaneous
Section 4.1. Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such costs and expenses.
Section 4.2. Notices. All notices or other communications under this
Agreement shall be in writing and shall be given (and shall be deemed to have
been duly given upon receipt) by delivery in person, by facsimile, cable,
telegram, telex or other standard form of telecommunications, or by registered
or certified mail, postage prepaid, return receipt requested, addressed as
follows (or such other address for a party as shall be specified in a notice
given in accordance with this Section 4.2):
If to a Stockholder:
Prior to May 18, 1996 c/o MFS Communications Company, Inc. 3555
Farnam Street, 2nd Floor Omaha, Nebraska 68131 Attention: General
Counsel Facsimile No.: (402) 977-5335
On or after May 18, 1996 c/o MFS Communications Company, Inc. 11808
Miracle Hills Drive Omaha, Nebraska 68154 Attention: General Counsel
Facsimile No.: (402) 231-3545
With a copy to:
Willkie Farr & Gallagher One Citicorp Center 153 East 53rd Street
New York, New York 10022 Attention: John S. D'Alimonte, Esq.
Facsimile No.: (212) 821-8111
3
<PAGE>
If to the Company:
UUNET Technologies, Inc. 3060 Williams Drive Fairfax, Virginia 94301
Attention: General Counsel Facsimile No.: (703) 206-5807
with a copy to:
Heller Ehrman White & McAuliffe 525 University Avenue Palo Alto,
California 94301 Attention: August J. Moretti, Esq. and
Richard Friedman, Esq.
Facsimile No.: (415) 324-0638
Section 4.3. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
Section 4.4. Entire Agreement. This Agreement and any documents delivered by
the parties in connection herewith constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
addition to or modification of any provision of this Agreement shall be
binding upon any party hereto unless made in writing and signed by all parties
hereto.
Section 4.5. Assignment, Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective heirs, successors, executors, administrators and
assigns. Notwithstanding anything contained in this Agreement to the contrary,
nothing in this Agreement, expressed or implied, is intended to confer on any
person other than the parties hereto or their respective successors and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
Section 4.6. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any Delaware Court, this being
in addition to any other remedy to which they are entitled at law or in
equity.
Section 4.7. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD
TO ITS RULES OF CONFLICT OF LAWS.
Section 4.8. Headings. Headings of the Articles and Sections of this
Agreement are for the convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
Section 4.9. Counterparts. This Agreement may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute one
and the same instrument. Each counterpart may consist of a number of copies
hereof each signed by less than all, but together signed by all of the parties
hereto.
4
<PAGE>
Section 4.10 Termination. This Agreement shall terminate and be of no
further force and effect, automatically and without any required action of the
parties hereto, at the time of the earlier to occur of (i) the Effective Date
or (ii) November 30, 1996.
In Witness Whereof, the Company has caused this Agreement to be executed by
its officer thereunto duly authorized and each Stockholder has executed this
Agreement, all as of the date first written above.
UUNET Technologies, Inc.
/s/ Martina W. Knee
By:__________________________________
Name:Martina W. Knee
Title:Vice President and General
Counsel
/s/ James Q. Crowe
___________________________________
James Q. Crowe
/s/ Howard Gimbel
___________________________________
Howard Gimbel
/s/ William Grewcock
___________________________________
William Grewcock
/s/ Royce J. Holland
___________________________________
Royce J. Holland
/s/ Richard R. Jaros
___________________________________
Richard R. Jaros
/s/ Robert E. Julian
___________________________________
Robert E. Julian
/s/ Ronald W. Roskens
___________________________________
Ronald W. Roskens
/s/ Walter Scott, Jr.
___________________________________
Walter Scott, Jr.
/s/ Kenneth E. Stinson
___________________________________
Kenneth E. Stinson
/s/ Michael B. Yanney
___________________________________
Michael B. Yanney
5
<PAGE>
EXHIBIT A
LIST OF STOCKHOLDERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
NAME OF STOCKHOLDER COMMON STOCK
------------------- ------------
<S> <C>
James Q. Crowe............................................. 467,140
Howard Gimbel.............................................. 159,918
William Grewcock........................................... 3,569,106
Royce J. Holland........................................... 61,468
Richard R. Jaros........................................... 355,760
Robert E. Julian........................................... 1,192,820
Ronald W. Roskens.......................................... 9,784
Walter Scott, Jr. ......................................... 9,423,826
Kenneth E. Stinson......................................... 139,406
Michael B. Yanney.......................................... 1,784
</TABLE>
<PAGE>
ANNEX E
[LETTERHEAD OF GLEACHER NATWEST]
April 29, 1996
Board of Directors MFS Communications Company, Inc. 3555 Farnam Street Omaha,
NE 68131
Gentlemen:
We understand that MFS Communications Company, Inc. ("MFS" or the "Company")
is contemplating entering into a definitive merger agreement with UUNet
Technologies, Inc. ("UUNet")pursuant to which a subsidiary of MFS ("MFS Sub")
shall be merged with and into UUNet, with UUNet as the surviving corporation.
We further understand that in the merger each share of UUNet capital stock
outstanding immediately prior to the effective time of the merger will be
converted into 1.777776 MFS shares (as adjusted for the MFS stock split
effective April 26, 1996), and each option to purchase a share of UUNet
capital stock will be converted into an option to acquire 1.777776 shares of
MFS capital stock at an exercise price for each underlying share equal to its
current exercise price divided by 1.777776.
You have asked for our opinion as to whether the exchange ratio offered by
MFS to UUNet stockholders is fair from a financial point of view to MFS and
its stockholders.
For the purposes of the opinion set forth herein, we have:
1. analyzed the historical publicly filed financial statements of UUNet and
MFS;
2. discussed the past and current operations, the financial condition and
the prospects of UUNet with the management of MFS and the management of
UUNet, and reviewed with the management of MFS its due diligence of
UUNet;
3. reviewed with the management of MFS certain business plans of MFS,
certain projections prepared by and pertaining to UUNet, certain
financial projections concerning UUNet prepared by the management of MFS
and certain estimates of financial synergies occurring from the business
combination resulting from the merger as prepared by MFS;
4. reviewed the historical market prices and reported trading volumes of
MFS Common Stock and UUNet Common Stock;
5. compared the financial performance of UUNet with, and reviewed the
prices and reported trading activity of the securities of, certain
publicly traded companies whose operating characteristics and/or
industry focus resemble those of UUNet;
6. reviewed the financial terms of selected precedent transactions of
publicly-traded companies with high projected growth rates;
7. performed a discounted cash flow analysis of UUNet based upon public
estimates and the financial information provided to us as referred to
above; and
8. reviewed such other information and performed such other analyses as we
have deemed appropriate.
We have assumed and relied upon, without assuming responsibility for
independent verification, the accuracy and completeness of the information
reviewed by us for purposes of this opinion. With respect to the financial
projections provided to us, we have assumed that they have been reasonably
prepared and reflect the best currently available estimates and judgments of
the senior management of MFS and UUNet as to the future
<PAGE>
financial performance of MFS and UUNet. We have also assumed based upon the
information which has been provided to us and without assuming responsibility
for independent verification thereof that no material undisclosed or
contingent liability exists with respect to MFS or UUNet. Our opinion is based
necessarily on the economic, market, and other conditions as in effect on, and
the information made available to us as of, the date hereof.
MFS acknowledges that the opinion and any advice or materials provided by
Gleacher NatWest in connection with its engagement hereunder is intended for
the benefit and use of the Board in considering the transaction to which the
opinion, advice or materials relate and the Company agrees that no such
opinion, advice or material shall be used for any other purpose or be
reproduced, disseminated, quoted or referred to at any time, in any manner or
for any purpose, nor shall any public references to Gleacher NatWest be made
by or on behalf of the Company, in each case without Gleacher NatWest's prior
written consent.
Based upon and subject to the foregoing, we are of the opinion that as of
the date hereof the exchange ratio offered by MFS to UUNet stockholders
pursuant to the Transaction is fair from a financial point of view to MFS and
is stockholders.
Very truly yours,
GLEACHER NATWEST INC.
/s/ James Goodwin
_____________________________________
James Goodwin Managing Director
2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or
agent in defending such action, provided that the director or officer
undertake to repay such amount if it shall ultimately be determined that he or
she is not entitled to be indemnified by the corporation. A corporation may
indemnify such person against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if he or she acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under
the same conditions, except that no indemnification is permitted without
judicial approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses (including attorneys' fees) which he
or she actually and reasonably incurred in connection therewith. The
indemnification provided is not deemed to be exclusive of any other rights to
which an officer or director may be entitled under any corporation's by-law,
agreement, vote or otherwise.
In accordance with Section 145 of the DGCL, Article 7 of MFS' Restated
Certificate of Incorporation (the "Restated Certificate") and MFS' By-laws
(the "By-laws") provide that MFS shall indemnify each person who is or was a
director, officer or employee of MFS (including the heirs, executors,
administrators or estate of such person) or is or was serving at the request
of MFS as director, officer or employee of another corporation, partnership,
joint venture, trust or other enterprise, to the fullest extent permitted
under subsections 145(a), (b), and (c) of the DGCL or any successor statute.
The indemnification provided by the Restated Certificate and the By-laws shall
not be deemed exclusive of any other rights to which any of those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in his or her official capacity and as to action in another
capacity while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person. Expenses
(including attorneys' fees) incurred in defending a civil, criminal,
administrative or investigative action, suit or proceeding upon receipt of an
undertaking by or on behalf of the indemnified person to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
MFS. Article 8 of the Restated Certificate provides that a director of MFS
shall not be personally liable to MFS or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to MFS or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for
any transaction from which the director derived an improper personal benefit.
If the DGCL is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of MFS shall be eliminated or limited to the fullest extent permitted by the
DGCL as so amended.
II-1
<PAGE>
Section 8.7 of the By-laws provides that MFS may purchase and maintain
insurance on behalf of its directors, officers, employees and agents against
any liabilities asserted against such persons arising out of such capacities.
ITEM 21. EXHIBITS
EXHIBIT NO.
2.1
Agreement and Plan of Merger, dated as of April 29, 1996 among MFS
Communications Company, Inc., MFS Global Internet Services, Inc. and
UUNET Technologies, Inc.(13)
3.1
Restated Certificate of Incorporation(1)
3.2
Amendment No. 1 to Restated Certificate of Incorporation(2)
3.3
Amendment No. 2 to Restated Certificate of Incorporation(3)
3.4
By-laws(4)
4.1
Specimen Common Stock Certificate
5.1
Opinion of Willkie Farr & Gallagher
5.2
Opinion of Skadden, Arps, Slate, Meagher & Flom
5.3
Opinion of Heller Ehrman White & McAuliffe
9.1
Stockholder Option, Voting and Proxy Agreement, dated as of April 29,
1996, among MFS Communications Company, Inc. MFS Global Internet
Services, Inc. and certain stockholders of UUNET Technologies,
Inc.(13)
9.2
Amendment to Stockholder Option, Voting and Proxy Agreement
10.1
Rights Agreement, Dated as of September 30, 1995, between MFS and
Continental Stock Transfer & Trust Company as Rights Agent, which
includes the Form of Certificate of Designation, Preferences and
Rights of Series C Junior Participating Preferred Stock of MFS, as
Exhibit A, the Form of Rights Certificate, as Exhibit B, and Summary
of Rights to Purchase Preferred Stock, as Exhibit C(5)
10.2
Credit Agreement, dated as of April 14, 1995, among MFS, the banks
listed on the signature page thereto, Chemical Bank as Administrative
Agent and Bankers Trust Company, as Documentation Agent(6)
10.3
Credit Agreement, dated as of April 14, 1995, among MFS Telecom, Inc.,
the banks listed on the signature page thereto, Chemical Bank as
Administrative Agent and Bankers Trust Company, as Documentation
Agent(7)
10.4
Registration Rights Agreement, dated as of September 28, 1995, among
MFS, William L. Grewcock and Walter Scott, Jr.(8)
10.5
The 1992 Stock Plan of MFS(9)
10.6
The 1993 Stock Plan of MFS, as amended and restated on July 24, 1995
and further amended and restated as of December 15, 1995(12)
10.7
The 1995 Deferred Stock Purchase Plan of MFS, as amended and restated
on August 28, 1995(12)
10.8
Instrument of Amendment to the 1995 Deferred Stock Purchase Plan of
MFS, as amended and restated on August 28, 1995(12)
10.9
The 1996 Employee Stock Bonus Plan of MFS(12)
10.10
MFS' 401(k) Plan(10)
10.11
Form of Indemnification Agreement between MFS and Kiewit Diversified
Group(11)
10.12
Indemnification Agreement between MFS and John W. Sidgmore
10.13
Indemnification Agreement between MFS and Richard L. Adams, Jr.
11 Statement computing consolidated net loss per share applicable to
common stockholders(12)
21 Subsidiaries of the Registrant(12)
23.1
Consent of Coopers & Lybrand L.L.P.
23.2
Consent of Arthur Andersen LLP
23.4
Consent of Willkie Farr & Gallagher (included in Exhibit 5.1)
II-2
<PAGE>
EXHIBIT NO.
23.5
Consent of John W. Sidgmore(13)
23.6
Consent of Richard L. Adams, Jr.(13)
23.7
Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibit
5.2)
23.8
Consent of Heller Ehrman White & McAuliffe (included in Exhibit 5.3)
24
Power of Attorney(13)
- --------
(1) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed
with the Securities and Exchange Commission on March 11, 1993.
(2) Incorporated herein by reference to Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994,
as filed with the Securities and Exchange Commission on March 31, 1995.
(3) Incorporated herein by reference to Exhibit 3.1 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
(4) Incorporated herein by reference to Exhibit 3.2 to the Registrant's
Current Report on Form 8-K, dated September 30, 1995.
(5) Incorporated by reference to Exhibit No. 1 to the Registrant's Current
Report on Form 8-K/A Amendment No. 1, dated November 21, 1995.
(6) Incorporated by reference to Exhibit No. 10.1 to the Registrant's Current
Report on Form 8-K, dated April 27, 1995.
(7) Incorporated by reference to Exhibit No. 10.2 to the Registrant's Current
Report on Form 8-K, dated April 27, 1995.
(8) Incorporated by reference to Exhibit No. 10.3 to the Registrant's Current
Report on Form 8-K, dated September 30, 1995.
(9) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed
with the Securities and Exchange Commission on March 11, 1993.
(10) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed
with the Securities and Exchange Commission on March 11, 1993.
(11) Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File no. 33-59358) as amended, originally filed
with the Securities and Exchange Commission on March 11, 1993.
(12) Incorporated herein by reference to the same exhibit number contained in
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
(13) Previously filed.
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes as follows:
(a) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form; and
(b) the registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (a) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is
II-3
<PAGE>
used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
The undersigned registrant hereby further undertakes that, for the purposes
of determining any liability under the Securities Act of 1933, each filing of
the registrant's annual report pursuant to section 13(a) or section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 of this
registration statement, or otherwise (other than insurance), the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person, in connection with
the Securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in such Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF OMAHA, STATE OF NEBRASKA, ON JUNE 30, 1996.
MFS Communications Company, Inc.
/s/ James Q. Crowe
By: _________________________________
James Q. Crowe
Chairman of the Board
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ James Q. Crowe Chairman of the Board June 30, 1996
______________________________________ and Chief Executive
James Q. Crowe Officer (Principal
Executive Officer)
/s/ R. Douglas Bradbury Chief Financial Officer June 30, 1996
______________________________________ Executive Vice
R. Douglas Bradbury President, (Principal
Financial Officer) and
Director
/s/ Robert J. Ludvik Vice President and June 30, 1996
______________________________________ Controller (Principal
Robert J. Ludvik Accounting Officer)
* Director June 30, 1996
______________________________________
Howard Gimbel
* Director June 30, 1996
______________________________________
Royce J. Holland
* Director June 30, 1996
______________________________________
William L. Grewcock
* Director June 30, 1996
______________________________________
Richard R. Jaros
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director June 30, 1996
______________________________________
Robert E. Julian
* Director June 30, 1996
______________________________________
David C. McCourt
* Director June 30, 1996
______________________________________
Ronald W. Roskens
* Director June 30, 1996
______________________________________
Walter Scott, Jr.
* Director June 30, 1996
______________________________________
Kenneth E. Stinson
* Director June 30, 1996
______________________________________
Michael B. Yanney
</TABLE>
/s/ James Q. Crowe
* __________________________
James Q. Crowe
Attorney-in-fact
II-6
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
[LOGO]
NUMBER SHARES
CUSIP 55272T 10 1
INCORPORATED UNDER THE LAWS SEE REVERSE
OF THE STATE OF DELAWARE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
is the registered holder of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
$.01 PAR VALUE, OF
MFS COMMUNICATIONS COMPANY, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this Certificate properly
endorsed. The Corporation will furnish without charge to each stockholder who
so requests, a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
MFS COMMUNICATIONS COMPANY, INC.
COUNTERSIGNED AND REGISTERED
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, NEW JERSEY)
TRANSFER AGENT
AND REGISTRAR
CORPORATE
SEAL
BY /s/ James Q. Crowe /s/ Terrence J. Ferguson
AUTHORIZED SIGNATURE CHAIRMAN AND SECRETARY
CHIEF EXECUTIVE
OFFICER
<PAGE>
MFS COMMUNICATIONS COMPANY, INC.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT --
TEN ENT -- as tenants by the ______Custodian_______
entireties (Cust) (Minor)
under Uniform Gifts to Minors
Act______________________
(State)
JT TEN -- as joint tenants with
right of survivorship
and not as tenants in
common
Additional abbreviations may also be used though not in the above list.
For value received, ___________ hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
___________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS,
INCLUDING POSTAL ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
___________________________________________________ shares of the capital stock
represented by the within Certificate, and do hereby irrevocably constitute and
appoint _______________________ Attorney to transfer the said stock on the books
of the within-named Corporation with full power of substitution in the premises.
Dated ___________________________
________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
Signature(s) Guaranteed:
________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
This certificate also evidences and entitles the holder hereof to certain Rights
as set forth in the Rights Agreement between MFS Communications Company, Inc.
(the "Company") and Continental Stock Transfer & Trust Company (the "Rights
Agent") dated as of September 30, 1995 (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy of which is on file
at the principal offices of the Company. Under certain circumstances, as set
forth in the Rights Agreement, such rights will be evidenced by separate
certificates and will no longer be evidenced by this certificate. The Company
will mail to the holder of this certificate a copy of the Rights Agreement, as
in effect on the date of mailing, without charge, promptly after receipt of a
written request therefor. Under certain circumstances set forth in the Rights
Agreement, Rights issued to, or held by, any Person who is, was or becomes an
Acquiring Person or any Affiliate or Associate thereof (as such terms are
defined in the Rights Agreement), whether currently held by or on behalf of such
Person or by any subsequent holder, may become null and void.
0135462.01
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILLKIE FARR & GALLAGHER]
June 24, 1996
MFS Communications Company, Inc.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Ladies and Gentlemen:
We have acted as counsel to MFS Communications Company, Inc. (the "Company"), a
corporation organized under the laws of the State of Delaware, in connection
with the preparation of a registration statement on Form S-4 (as amended, the
"Registration Statement") relating to the issuance by the Company of up to
59,440,187 shares (the "Shares") of common stock, par value $.01 per share, of
the Company (the "Common Stock") in connection with the proposed merger of MFS
Global Internet Services, Inc., a wholly owned subsidiary of the Company, with
and into UUNET Technologies, Inc.
We have examined copies of the certificate of incorporation and by-laws of the
Company, and the amendments thereto, the Registration Statement, all resolutions
adopted by the Company's Board of Directors and other records and documents that
we have deemed necessary for the purpose of this opinion. We have also examined
such other documents, papers, statutes and authorities as we have deemed
necessary to form a basis for the opinion hereinafter expressed. In our
examination, we have assumed the genuineness of all signatures and the
conformity to original documents of all copies submitted to us. As to various
questions of fact material to our opinion, we have relied on statements and
certificates of officers and representatives of the Company and public
officials.
Based on the foregoing, we are of the opinion that the Shares, when duly issued
in exchange for the shares of common stock, par value $.001 of UUNET
Technologies, Inc. as described in the Registration Statement, will be duly
authorized, validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us in the Joint Proxy Statement-
Prospectus included as part of the Registration Statement.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE>
EXHIBIT 5.2
[LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM]
June 28, 1996
MFS Communications Company, Inc.
11808 Miracle Hills Drive
Omaha, Nebraska 68154
Ladies and Gentlemen:
We have acted as counsel to MFS Communications Company, Inc., a Delaware
corporation ("MFS"), and MFS Global Internet Services, Inc., a Delaware
corporation and a wholly owned subsidiary of MFS ("Sub"), in connection with the
proposed merger (the "Merger") of Sub with and into UUNET Technologies, Inc., a
Delaware corporation ("UUNET"), pursuant to the Agreement and Plan of Merger,
dated as of April 29, 1996, by and among MFS, Sub and UUNET (the "Merger
Agreement"). The delivery of an opinion on the Effective Date, in substantially
the form hereof, is a condition to the obligations of MFS, Sub and UUNET
pursuant to Section 9.3(c) of the Merger Agreement.
In rendering our opinion, we have examined the Merger Agreement, the Joint
Proxy/Prospectus which is included in Amendment No. 1 to the Registration
Statement on Form S-4 (333-4115) (the "Registration Statement") filed on June
28, 1996 with the Securities and Exchange Commission under the Securities Act of
1933, as amended, and such other documents as we deem relevant for purposes of
this opinion.
In rendering our opinion, we have assumed that the Merger will be
consummated in accordance with the terms of the Merger Agreement and as
described in the Registration Statement and that none of the terms and
conditions contained therein will have been waived or modified in any respect
prior to the Effective Date. We have also assumed that the Registration
Statement reflects all the material facts of the Merger and those involving MFS,
Sub and UUNET. Our opinion is expressly conditioned on, among other things, the
assumption that, on or prior to the Effective Date, we will be provided
<PAGE>
with officers' certificates executed by executives of MFS, Sub and UUNET, in
form and substance satisfactory to us, setting forth representations as to
certain matters relating to MFS, Sub and UUNET and the Merger. In addition, our
opinion is expressly conditioned on, among other things, the accuracy as of the
date hereof, and the continuing accuracy, of all of such facts, information,
covenants, statements and representations through and as of the Effective Date.
Any material changes in the facts referred to, set forth or assumed herein, the
Registration Statement or the representations referred to above may affect the
conclusions stated herein.
We have assumed the genuineness of all signatures, the legal capacity of
all natural persons, the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified or photostatic copies and the authenticity of the originals of such
documents. We have also assumed that the Merger qualifies as a statutory merger
under the laws of the State of Delaware.
In rendering our opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
promulgated thereunder by the Treasury Department (the "Regulations"), pertinent
judicial authorities, rulings of the Internal Revenue Service (the "Service")
and such other authorities as we have considered relevant. It should be noted
that such laws, Code, Regulations, judicial decisions and administrative
interpretations are subject to change at any time and, in some circumstances,
with retroactive effect. A material change in any of the authorities upon which
our opinion is based could affect our conclusions herein.
Based solely upon and subject to the foregoing, we are of the opinion that
under present law for federal income tax purposes the Merger will constitute a
reorganization within the meaning of section 368(a) of the Code.
<PAGE>
Except as expressly set forth above, we express no other opinion. This
opinion is for your benefit and is not to be used, circulated, quoted or
otherwise referred to for any purpose except that we consent to the filing of
this opinion as Exhibit 5.2 of the Registration Statement and the reference to
Skadden, Arps, Slate, Meagher & Flom in the section of the Registration
Statement entitled "The Merger-- Certain Federal Income Tax Consequences." In
giving such consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
/s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM
<PAGE>
[LETTERHEAD OF HELLER EHRMAN WHITE & MCAULIFFE]
June 27, 1996
UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, Virginia 22031
Ladies and Gentlemen:
You have asked for our opinion to the effect that the proposed merger (the
"Merger") of MFS Global Internet Services, Inc. ("Sub"), a wholly owned
subsidiary of MFS Communications Company, Inc. ("MFS") with and into UUNET
Technologies, Inc. ("UUNET") will constitute a "reorganization" within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code").
We have acted as general counsel to UUNET in connection with the Merger and
in that capacity have examined the Agreement and Plan of Merger dated as of
April 29, 1996 among Sub, MFS, and UUNET (the "Merger Agreement") and the
exhibits and attachments thereto. Our opinion is based upon the understanding
that the material facts are as described in the Merger Agreement and appurtenant
documents, including the Joint Proxy/Prospectus that is included in Amendment
No. 1 to the Registration Statement on Form S-4 (the "Registration Statement"),
and in rendering our opinions, we have relied upon such documents without
undertaking independently to verify the accuracy and completeness of the matters
covered thereby. In addition, our opinion is expressly conditioned on our
receipt, on or before the Closing, of written representations, in form and
substance satisfactory to us, pertaining to the Merger signed by officers of MFS
and UUNET and by certain stockholders of UUNET. Except as otherwise noted,
capitalized terms used herein have the meanings given them in the Merger
Agreement.
Based upon the foregoing, it is our opinion that the Merger will constitute
a "reorganization" within the meaning of Section 368(a) of the Code.
<PAGE>
UUNET Technologies, Inc.
June 27, 1996 Page 2
We understand that our opinion is sought, and is delivered in order, to
satisfy a condition of UUNET to consummate the Merger set forth in Section
9.2(b) of the Merger Agreement. This opinion may not be relied upon by any
other person for any other purpose. Our opinion is limited to the federal
income tax consequences of the Merger to UUNET and does not address tax
consequences under the laws of the various state and local governments or under
the laws of any other jurisdiction. We express no opinion regarding any tax
aspect or ramification of the Merger to any person apart from the opinion
specifically set forth above.
An opinion of counsel does not bind the Internal Revenue Service or
preclude it or a court from taking a position contrary to the opinion. This
opinion is based upon the Code, the Treasury Regulations issued thereunder, and
judicial and administrative interpretations thereof, all as in effect on the
date of this opinion. All of such authority is subject to change, including
retroactive change. We disclaim any obligation to advise of any developments in
areas covered by this opinion that occur after the date of this opinion.
We consent to the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Heller Ehrman White & McAuliffe
<PAGE>
EXHIBIT 9.2
AMENDMENT TO
STOCKHOLDER OPTION, VOTING AND PROXY AGREEMENT
----------------------------------------------
This AMENDMENT (the "Amendment") to STOCKHOLDER OPTION, VOTING AND PROXY
---------
AGREEMENT dated as of April 29, 1996 (the "Agreement") among MFS COMMUNICATIONS
---------
COMPANY, INC., a Delaware corporation ("Parent"), MFS GLOBAL INTERNET SERVICES,
------
INC., a Delaware corporation and a wholly owned subsidiary of Parent ("Sub"),
---
and each other person and entity a signatory to the Agreement (each, a
"Stockholder") is entered into this _____ day of June 1996.
- ------------
WHEREAS, the parties to the Agreement desire to amend the Agreement;
The parties to the Agreement agree as follows:
1. Definitions. Capitalized terms used without definition in this
-----------
Amendment shall have the same meaning as set forth in the Agreement.
2. Amendment of Exhibit A. The parties to the Agreement agree to amend
----------------------
Exhibit A to the Agreement to read in its entirety as set forth on Exhibit A to
this Amendment.
3. Ratification. The parties to the Agreement hereby confirm and ratify
------------
the Agreement, as amended hereby, and acknowledge that the Agreement as so
amended shall remain in full force and effect in accordance with its terms.
IN WITNESS WHEREOF, Parent has caused this Amendment to be executed by
its officers thereunto duly authorized and each Stockholder has
<PAGE>
caused this Amendment to be executed, or duly executed by an authorized
signatory, all as of the date first written above.
MFS COMMUNICATIONS COMPANY, INC.
By: /s/ Terrence J. Ferguson
_______________________________
Title: Senior Vice President
_______________________________
MFS GLOBAL INTERNET SERVICES, INC.
By: /s/ Terrence J. Ferguson
_______________________________
Title: Vice President
_______________________________
/s/ Richard L. Adams, Jr.
_________________________________
Richard L. Adams, Jr.
Microsoft Corporation
/s/ Nathan Myhrvoid
By: ____________________________
Name: Nathan Myhrvoid
Title: Group Vice President
Menlo Ventures IV, L.P.
MV Management IV, L.P.,
By: ____________________________
its General Partner
/s/ John W. Jarve
By: ________________________
General Partner
Menlo Evergreen V, L.P.
MV Management IV, L.P.,
By: ____________________________
its General Partner
/s/ John W. Jarve
By: ________________________
General Partner
/s/ John W. Sidgmore
_________________________________
John W. Sidgmore
New Enterprise Associates V, Limited
Partnership
NEA Partners V, Limited
Partnership
By: ____________________________
its General Partner
/s/ Nancy Dorman
By: ________________________
General Partner
Accel Investors '93, L.P.
/s/ Arthur C. Patterson
By: ____________________________
General Partner
Accel IV L.P.
Accel IV Associates, L.P.
By: ____________________________
its General Partner
/s/ Arthur C. Patterson
By: ________________________
General Partner
/s/ Les B. Strauss
By: ____________________________
Les B. Strauss
/s/ Daniel C. Lynch
By: ____________________________
Daniel C. Lynch
-2-
<PAGE>
Exhibit A
---------
LIST OF STOCKHOLDERS
Name and address Number of Shares
of Stockholder of Common Stock
- ------------------------------ -------------------
[S] [C]
Richard L. Adams, Jr. 4,700,00(1)
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
Microsoft Corporation 4,164,000
1 Microsoft Way
Redmond, WA 98052
Attn: Robert Eschelman
Facsimile: (206) 869-1327
Menlo Ventures IV, L.P. 2,563,031
Menlo Evergreen V, L.P. 666,667
3000 Sand Hill Road
Building 4, Suite 100
Menlo Park, CA 94025
Attn: John W. Jarve
Facsimile: (415) 854-7059
John W. Sidgmore 1,136,643
c/o UUNET Technologies, Inc.
3060 Williams Drive
Fairfax, VA 22031
Facsimile: (703) 206-5805
New Enterprise Associates V, 3,229,698
Limited Partnership
1119 St. Paul Street
Baltimore, MD 21202
Attn: Peter J. Barris and
Nancy Dorman
Facsimile: (410) 752-7721
Accel IV L.P 2,958,403
Accel Investors O93 L.P 119,499
One Palmer Square
Princeton, NJ 08542
Attn: Carter Sednaoui
Facimile: (609) 683-0384
-3-
<PAGE>
Les B. Strauss 53,472
PictureTel
The Tower at Northwoods
222 Rosewood Drive
Danvers, MA 01923
Facsimile: (508) 762-5219
Daniel C. Lynch 34,500
25560 La Lanne Court
Los Altos Hills, CA 94022
Facsimile: (415) 948-0757 ____________
TOTAL 19,625,913
____________________________
(1) Of the 4,700,000 shares held by Mr. Adams, 325,000 shares may be sold,
gifted or otherwise transferred without restriction under this Agreement
prior to the Closing. In addition, 3,371 shares issuable upon exercise of
a stock option outstanding on the date of the Agreement may be gifted
without restriction under the Agreement prior to the Closing.
(2) Of the 1,136,643 shares held by Mr. Sidgmore, 355,458 of such shares are
subject to a right of repurchase by the Company if Mr. Sidgmore voluntarily
terminates his employment with the Company before June 27, 1996. In
addition, as of April 30, 1996, the Company has a right of repurchase with
respect to another 562,807 of such shares in the event that Mr. SidgmoreOs
employment with the Company is terminated and which right of repurchase
expires with respect to 14,810.70 shares on the last day of each calendar
month so long as Mr. Sidgmore remains employed by the Company; provided,
that such right of repurchase expires with respect to 50 percent of such
shares subject to a right of repurchase in the event of a Change in Control
or involuntary Termination Other Than For Cause (each, as defined in the
Nonstatutory Stock Option Agreement between the Company and Mr. Sidgmore
dated as of July 20, 1994). 45,188 of the shares held by Mr. Sidgmore are
held in a trust of which Mr. Sidgmore is the trustor and the sole trustee.
-4-
<PAGE>
EXHIBIT 10.12
INDEMNIFICATION AGREEMENT
-------------------------
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of
this 25th day of June 1996, by and between MFS Communications Company, Inc., a
Delaware Corporation (the "Company"), and John W. Sidgmore, ("Indemnitee").
THE PARTIES AGREE AS FOLLOWS:
1. Agreement to Indemnify. Indemnitee is identified in the Company's
----------------------
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission ("SEC") as a person who will become a director of the Company, and
the Indemnitee has executed a consent to be so identified in the S-3. The
Company desires to provide indemnification to the Indemnitee in the same
manner as if Indemnitee were a director of the Company for any loss, expense
damage or liability (including attorney fees) arising from or relating to the
offer and sale of securities pursuant to the S-3 ("Losses"). Accordingly,
from and after the effective date of the S-3, the Company shall hold
Indemnitee harmless and indemnify Indemnitee to the fullest extent permitted
by the provisions of the Delaware General Corporation Law ("DGCL") and
other applicable law, from and against all Losses. The Company and the
Indemnitee intend that this Agreement provide for indemnification for Losses to
the fullest extent permitted by statute, including, without limitation, any
indemnification provided by the Company's Certificate of
Incorporation or Bylaws, in each case, as if Indemnitee were a director of the
Company. In this regard, if the Company's Board of Directors authorizes
indemnification for any director of the Company with respect to any Losses, the
Board will authorize indemnification with respect to any Losses incurred by
the Indemnitee; provided that the Indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
This Agreement to indemnify shall terminate as to any Losses relating
to any period of time after Indemnitee becomes a Director of the Company.
2. Insurance. The Company shall use reasonable efforts to obtain a rider to
---------
its officer and director liability insurance policy to have the Indemnitee
become a named insured under such policy and to provide the Indemnitee with
the benefit of such insurance for any Losses.
3. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth in its first paragraph.
MFS COMMUNICATIONS COMPANY, INC.
By:
- --------------------------------------- -------------------------------
John W. Sidgmore Title:
---------------------------
<PAGE>
EXHIBIT 10.13
INDEMNIFICATION AGREEMENT
-------------------------
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of
this 25th day of June 1996, by and between MFS Communications Company, Inc., a
Delaware corporation (the "Company"), and Richard L. Adams, Jr., ("Indemnitee").
THE PARTIES AGREE AS FOLLOWS:
1. Agreement to Indemnify. Indemnitee is identified in the Company's
----------------------
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission ("SEC") as a person who will become a director of the Company, and
the Indemnitee has executed a consent to be so identified in the S-3. The
Company desires to provide indemnification to the Indemnitee in the same
manner as if Indemnitee were a director of the Company for any loss, expense
damage or liability (including attorney fees) arising from or relating to the
offer and sale of securities pursuant to the S-3 ("Losses"). Accordingly,
from and after the effective date of the S-3, the Company shall hold
Indemnitee harmless and indemnify Indemnitee to the fullest extent permitted
by the provisions of the Delaware General Corporation Law ("DGCL") and
other applicable law, from and against all Losses. The Company and the
Indemnitee intend that this Agreement provide for indemnification for Losses to
the fullest extent permitted by statute, including, without limitation, any
indemnification provided by the Company's Certificate of
Incorporation or Bylaws, in each case, as if Indemnitee were a director of the
Company. In this regard, if the Company's Board of Directors authorizes
indemnification for any director of the Company with respect to any Losses, the
Board will authorize indemnification with respect to any Losses incurred by
the Indemnitee; provided that the Indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Company and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
This Agreement to indemnify shall terminate as to any Losses relating
to any period of time after Indemnitee becomes a Director of the Company.
2. Insurance. The Company shall use reasonable efforts to obtain a rider to
---------
its officer and director liability insurance policy to have the Indemnitee
become a named insured under such policy and to provide the Indemnitee with
the benefit of such insurance for any Losses.
3. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date set forth in its first paragraph.
MFS COMMUNICATIONS COMPANY, INC.
By:
- --------------------------------------- -------------------------------
Richard L. Adams, Jr. Title:
---------------------------
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this registration statement on
Form S-4 of MFS Communications Company, Inc. of our report dated February 14,
1996, except for Note 20 as to which the date is April 16, 1996, on our audit of
the consolidated financial statements of MFS Communications Company, Inc. as of
December 31, 1995 and 1994, and for the three years in the period ended December
31, 1995 which report is included in MFS Communications Company, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1995. We also consent to the
reference to our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Omaha, Nebraska
July 1, 1996
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports on the consolidated financial statements of UUNET Technologies, Inc.
and to all references to our Firm included in or made a part of this
registration statement File No. 333-4115.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Washington, D.C.
June 27, 1996
