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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended March 31, 1996
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 0-25874
-----------------------------------------
UUNET TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 54-1543611
--------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3060 WILLIAMS DRIVE, FAIRFAX, VIRGINIA 22031
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(Address of principal executive offices, including zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (703) 206-5600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
<TABLE>
<S> <C>
COMMON STOCK, $0.001 PAR VALUE 32,201,557 SHARES
- - ------------------------------ ---------------------------------
(CLASS) (OUTSTANDING AT MARCH 31, 1996)
</TABLE>
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UUNET TECHNOLOGIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1 - Condensed Interim Consolidated Financial Statements . . . . . . . . . 3
Condensed Consolidated Balance Sheets as of March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 . . . . . . . . . . . . . 5
Notes to Condensed Interim Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . 9
PART II. OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders . . . . . . 16
ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1 -- CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value amounts)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 45,413 $ 60,424
Accounts receivable, net of allowance of $1,540 and $1,647,
respectively, for doubtful accounts..................... 23,575 17,768
Inventories................................................ 1,436 1,251
Prepaid expenses and other current assets.................. 3,514 2,149
----------- -----------
TOTAL CURRENT ASSETS............................................ 73,938 81,592
Property and equipment, net..................................... 75,877 54,523
Investments in affiliates....................................... 6,297 1,321
Other assets.................................................... 166 174
----------- -----------
TOTAL ASSETS.................................................... $ 156,278 $ 137,610
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable........................... $ 6,813 $ 4,652
Accounts payable........................................... 17,824 10,580
Accrued expenses........................................... 26,486 24,604
Deferred revenues.......................................... 5,026 3,421
----------- -----------
TOTAL CURRENT LIABILITIES....................................... 56,149 43,257
Notes payable, net of current portion........................... 18,045 13,686
----------- -----------
TOTAL LIABILITIES............................................... 74,194 56,943
----------- -----------
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; 32,202 and 32,057 shares issued
and outstanding, respectively............................ 32 32
Additional paid-in capital................................. 109,328 108,071
Deferred compensation...................................... (154) (165)
Foreign currency translation adjustment.................... 198 282
Accumulated deficit........................................ (27,320) (27,553)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY...................................... 82,084 80,667
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................... $ 156,278 $ 137,610
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
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UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1995
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<S> <C> <C>
REVENUES:
Internet services....................................................... $ 39,004 $ 8,815
Software................................................................ 4,009 6,205
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Total revenues........................................................ 43,013 15,020
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COSTS AND EXPENSES:
Cost of revenues -
Internet services..................................................... 25,062 4,490
Software.............................................................. 2,391 3,557
Network operations and support.......................................... 5,265 2,315
Sales and marketing..................................................... 6,798 3,210
General and administrative.............................................. 3,126 1,839
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Total costs and expenses.............................................. 42,642 15,411
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INCOME (LOSS) FROM OPERATIONS............................................. 371 (391)
Interest income........................................................... 577 194
Interest expense.......................................................... (329) (83)
Equity in net loss of affiliates.......................................... (386) ---
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES......................................... 233 (280)
Benefit for income taxes.................................................. --- 17
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NET INCOME (LOSS)......................................................... $ 233 $ (263)
=========== ===========
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)................................ 33,436 25,774
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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UUNET TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................. $ 233 $ (263)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities --
Depreciation and amortization................................... 3,948 1,025
Stock option compensation....................................... 10 11
Equity in net loss of affiliates................................ 386 ---
Cash provided by (used in) changes in assets and
liabilities:
Accounts receivable, net...................................... (5,675) (2,679)
Inventories................................................... (202) (446)
Prepaid expenses and other current assets..................... (1,451) 42
Accounts payable.............................................. 7,330 4,650
Accrued expenses.............................................. 2,015 1,001
Deferred revenues............................................. 1,642 (963)
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Net cash provided by operating activities....................... 8,236 2,378
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (25,330) (7,363)
Investments in affiliates......................................... (4,398) ---
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Net cash used in investing activities........................... (29,728) (7,363)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable....................................... 7,316 2,957
Repayments of notes payable....................................... (840) (291)
Proceeds from sale of Preferred Stock, net........................ --- 3,849
Proceeds from sale of Common Stock, net........................... 101 38
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Net cash provided by financing activities....................... 6,577 6,553
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EFFECT OF FOREIGN CURRENCY EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS........................................ (96) 264
---------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................ (15,011) 1,832
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD...................... 60,424 10,493
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................ $ 45,413 $ 12,325
========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................................ $ 239 $ 56
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.
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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.
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3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
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<S> <C> <C>
Network and computer equipment . . . . . . $ 80,743 $ 58,244
Furniture and office equipment . . . . . . 8,720 6,899
Purchased software . . . . . . . . . . . . 2,727 1,908
Vehicles . . . . . . . . . . . . . . . . . 1,071 1,029
----------- ------------
Property and equipment, at cost . . . . 93,261 68,080
Less - Accumulated depreciation
and amortization . . . . . . . . . . . . (17,384) (13,557)
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$ 75,877 $ 54,523
=========== ============
</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 62 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"), 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 Unipalm. 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.
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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.
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ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
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, 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 Corporation ("Microsoft"). Software revenues consist primarily of
the sale of Internet-related packaged third party software.
The Company 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 the Company to accelerate the expansion of its network
infrastructure and internal operations over the ten quarters ended March 31,
1996. During this period, the Company 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 the Company's operating losses in 1993, 1994 and 1995.
The Company'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 the Company's control.
As of March 31, 1996, the Company had an accumulated deficit of approximately
$27.3 million. The Company 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 addition, the Company incurred
substantial costs in the quarter ended December 31, 1995 in connection with the
acquisition of Unipalm Group plc ("Unipalm").
RESULTS OF OPERATIONS
On November 15, 1995, UUNET acquired Unipalm in a transaction accounted for
as a pooling of interests (see Note 5 in Notes to Condensed Interim
Consolidated Financial Statements). Unipalm is the largest provider of
Internet services (access options, software, training and consulting services)
in the United Kingdom. As a result of the Unipalm acquisition, the
accompanying financial information for the three months ended March 31, 1995
have been restated to include the results of Unipalm.
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As an aid to understanding the Company's consolidated operating results,
the following table sets forth certain items from the Condensed Consolidated
Statements of Operations as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------------
1996 1995
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<S> <C> <C>
Revenues:
Internet services.............................. 91% 59%
Software....................................... 9% 41%
------- --------
Total revenues............................ 100% 100%
------- --------
Costs and expenses:
Cost of revenues............................... 64% 54%
Network operations and support................. 12% 16%
Sales and marketing............................ 16% 21%
General and administrative..................... 7% 12%
------- --------
Total costs and expenses.................. 99% 103%
------- --------
Income (loss) from operations....................... 1% (3)%
Interest income..................................... 1% 1%
Interest expense.................................... --- ---
Equity in net loss of affiliates.................... (1)% ---
------- --------
Income (loss) before income taxes................... 1% (2)%
Benefit for income taxes............................ --- ---
------- --------
Net income (loss)................................... 1% (2)%
======= ========
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
REVENUES
The Company 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 revenue is derived from the development, operation and maintenance of
the high speed dial-up network for Microsoft. Total revenues grew 186% to
$43.0 million in the first quarter of 1996 from $15.0 million in the first
quarter of 1995. The major components of this net increase are discussed
below.
Internet services revenues grew 342% to $39.0 million in the first quarter
of 1996 from $8.8 million in the first quarter of 1995, and represented 91% and
59%, respectively, of total revenues. This growth was primarily a result of
increases in the number of dedicated high speed connections sold by the Company
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 to 985 in
the first quarter of 1996 from 444 in the first quarter of 1995. UUNET
(excluding Unipalm) sold 805 and 330 of these connections in the first quarter
of 1996 and 1995,
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respectively. Upgrades to higher speed connections increased to 181 in the
first quarter of 1996 from 37 in the first quarter of 1995. UUNET (excluding
Unipalm) sold 167 and 30 upgrades in the first quarter of 1996 and 1995,
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 to $15.9 million in the
first quarter of 1996 from $0.2 million in the first quarter of 1995. 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 Unipalm, decreased 35% to $4.0 million in
the first quarter of 1996 from $6.2 million in the first quarter of 1995, and
represented 9% and 41%, 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 1996 and 1995.
COST OF REVENUES
Total cost of revenues increased 241% to $27.5 million in the first quarter
of 1996 from $8.0 million in the first quarter of 1995, representing 64% and
54%, 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% to $25.1 million in the first quarter of 1996 from $4.5 million in the
first quarter of 1995, and as a percentage of Internet services revenues were
64% and 51%, 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.
Cost of software revenues decreased 33% to $2.4 million in the first
quarter of 1996 from $3.6 million in the first quarter of 1995, and as a
percentage of software revenues were 60% and 57%, 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 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 127% to $5.3 million in the first quarter of
1996 from $2.3 million in the first quarter of 1995. These costs decreased as
a percentage of total revenues to 12% in the first quarter of 1996 from 16% in
the first quarter of 1995. Approximately $1.7 million of the increase was due
to the hiring of additional personnel.
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The Company 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 consist primarily of salaries and expenses of
sales and marketing personnel, advertising and other promotional activities,
and procurement and installation of local access circuits and customer
equipment. Sales and marketing costs rose 112% to $6.8 million in the first
quarter of 1996 from $3.2 million in the first quarter of 1995. These costs
decreased as a percentage of total revenues to 16% in the first quarter of 1996
from 21% in the first quarter of 1995. Approximately $1.7 million of the
increase was due to increased advertising and promotional costs directly
associated with the Company'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 the Company's expanding customer base and
the revenues from Microsoft.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of expenses associated
with the Company's management, accounting, finance and administrative
functions. General and administrative costs increased 70% to $3.1 million in
the first quarter of 1996 from $1.8 million in the first quarter of 1995.
These costs decreased as a percentage of revenues to 7% in the first quarter of
1996 from 12% in the first quarter of 1995. The increase in general and
administrative expenses was due primarily to the hiring of additional personnel
to support the Company'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 the Company's
expanding customer base and the revenues from Microsoft.
INTEREST INCOME AND EXPENSE
Interest income increased to $0.6 million in the first quarter of 1996 from
$0.2 million in the first quarter of 1995, while interest expense increased to
$0.3 million from $0.1 million in the respective periods. 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 the Company'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
Deutschland GmbH ("EUnet Germany") in the first quarter of 1996. EUnet Germany
is a provider of Internet access options, applications and consulting services
in Germany.
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INCOME TAXES
There was no provision for income taxes for the first quarter of 1996, as
the Company had sufficient U.S. net operating loss carryforwards ("NOLs") to
offset U.S. income. As of December 31, 1995, the Company had U.S. federal NOLs
of approximately $12.2 million, which expire in the years 2008 through 2010.
The amount of these NOLs that can be used in any given year may be limited in
the event of certain changes in the ownership of the Company. Management
believes that the prior ownership changes will not significantly limit the
Company's ability to use its NOLs. The Company also had foreign NOLs of
approximately $2.5 million as of December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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. Unipalm 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 the Company's network
infrastructure and internal operations, including purchases of capital
equipment and the hiring of additional personnel. In addition, Microsoft
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.
The Company generated positive cash flow from operating activities of $8.2
million and $2.4 million in the quarters ended March 31, 1996 and 1995,
respectively. 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 to $25.3 million in the first
quarter of 1996 from $7.4 million in the first quarter of 1995, primarily as a
result of purchases of equipment to support the expansion of the Company's
domestic and international network infrastructure, including the deployment of
the dial-up network for Microsoft.
As of March 31, 1996, the Company 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. The Company 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. The Company 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 Communications
Company, Inc. ("MFS") subsequent to the closing of the merger between MFS and
UUNET (see Note 4 in the accompanying Notes to Condensed Interim Consolidated
Financial Statements).
Page 13
<PAGE> 14
MFS AND UUNET MERGER AGREEMENT
On April 30, 1996, UUNET and MFS announced that the two companies had
executed 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 62 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 will provide a single source for a
full range of Internet, voice, data and video services through an international
network platform.
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, this entire Report on Form 10-Q, and the Company's
entire Annual Report on Form 10-K/A for the year ended December 31, 1995,
including the section entitled "Risk Factors."
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 the Company, including, but not
limited to, the availability and cost of such capacity; the ability of the
Company to enter into long-term leases, various alliances with carriers and
others, or a combination of these options; and the ability of the Company 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 Unipalm, decreased 35% to $4.0 million in
the first quarter of 1996 from $6.2 million in the first quarter of 1995, and
represented 9% and 41%, respectively, of total revenues. The Company 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 quarters of 1996
and 1995. However, competitive factors could have a material impact on future
revenue growth and profit margins.
Page 14
<PAGE> 15
The Company'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 the Company'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
the Company. Other factors which may cause quarterly fluctuations in operating
results include customer termination of service, new product introductions by
the Company and its competitors, market acceptance of new and enhanced versions
of the Company's products and services, changes in pricing policies by its
competitors and the Company's ability to obtain sufficient supplies of sole or
limited source components. As a result, there can be no assurance that the
Company will continue to be profitable on a consolidated basis in the future.
The Company believes that its cash and cash equivalents and available
borrowings will be sufficient to meet its anticipated working capital
requirements through 1996. However, the Company 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 the Company
will be able to obtain additional financing through increases in existing
credit facilities, new credit facilities and leasing arrangements, and advances
from MFS subsequent to the closing of the merger between MFS and UUNET. There
can be no assurance that additional financing will be available to the Company
when needed or on terms acceptable to the Company. If adequate funds are not
available, the Company has the flexibility to delay or modify its expansion
plans described above.
Page 15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) A Special Meeting of Stockholders of the Registrant
was held on January 31, 1996.
(c) At the special meeting the stockholders:
(i) approved an amendment to the Company's
Restated Certificate of Incorporation to
increase the number of authorized shares of
Common Stock from 50,000,000 to 175,000,000,
by the following vote:
<TABLE>
<S> <C>
Affirmative votes: 17,112,809
Negative votes: 1,340,499
Abstentions: 18,413
</TABLE>
(ii) approved an amendment to the Company's Equity
Incentive Plan to increase the number of
shares available for issuance from 2,669,514
to 6,669,514 by the following vote:
<TABLE>
<S> <C>
Affirmative votes: 17,134,287
Negative votes: 1,101,704
Abstentions: 30,704
Broker non-votes: 205,026
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
11 -- Computation of Net Income (Loss) per Common and
Equivalent Share.
(b) The Registrant filed a report on Form 8-K/A on
January 29, 1996, consisting of Unaudited Pro Forma
Condensed Combined Balance Sheet of UUNET
Technologies, Inc. and Unipalm Group plc as of
September 30, 1995, and Unaudited Pro Forma Condensed
Combined Statements of Operations for each of the
three years in the period ended December 31, 1994,
and the nine month periods ended September 30, 1994
and 1995.
Page 16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UUNET TECHNOLOGIES, INC.
/s/ John W. Sidgmore
-------------------------------------
Date: May 14, 1996 John W. Sidgmore
Director, President and Chief
Executive Officer (Principal
Executive Officer)
/s/ Jeffrey G. Hilber
-------------------------------------
Date: May 14, 1996 Jeffrey G. Hilber
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Page 17
<PAGE> 18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 Computation of Net Income (Loss)
per Common and Equivalent Share
Page 18
<PAGE> 1
EXHIBIT 11
UUNET TECHNOLOGIES, INC.
COMPUTATION OF NET INCOME (LOSS) PER COMMON AND EQUIVALENT SHARE
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
--------- -----------
<S> <C> <C>
Net income (loss) $233 ($263)
--------- -----------
Shares used in share computation -
Common Stock shares outstanding (weighted average) 32,146 10,650
Common Stock issuable upon conversion of
Preferred Stock (weighted average) --- 11,630
Treasury stock effect of stock options 1,290 ---
Treasury stock effect of Common Stock and
equivalents issued within one year of the public
offering at prices less than the public offering price --- 3,494
--------- -----------
Shares used in computation 33,436 25,774
--------- -----------
Net income (loss) per common and
equivalent share $0.01 ($0.01)
========= ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's quarterly report on form 10-Q for the three months ended March 31,
1996 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 45,413
<SECURITIES> 0
<RECEIVABLES> 25,115
<ALLOWANCES> (1,540)
<INVENTORY> 1,436
<CURRENT-ASSETS> 73,938
<PP&E> 93,261
<DEPRECIATION> (17,384)
<TOTAL-ASSETS> 156,278
<CURRENT-LIABILITIES> 56,149
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 82,052
<TOTAL-LIABILITY-AND-EQUITY> 156,278
<SALES> 43,013
<TOTAL-REVENUES> 43,013
<CGS> 27,453
<TOTAL-COSTS> 42,642
<OTHER-EXPENSES> 138
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 329
<INCOME-PRETAX> 233
<INCOME-TAX> 0
<INCOME-CONTINUING> 233
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 233
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
