<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 15, 1996
REGISTRATION NO. 333-08265
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
XPEDITE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 22-2903158
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
</TABLE>
------------------------
ROY B. ANDERSEN, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
XPEDITE SYSTEMS, INC.
446 HIGHWAY 35
EATONTOWN, NEW JERSEY 07724
(908) 389-3900
(Name and address, including zip code, and telephone number, including area
code,
of registrant's principal executive offices and agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
NEIL A. TORPEY, ESQ. JEFFREY S. LOWENTHAL, ESQ.
PAUL, HASTINGS, JANOFSKY & WALKER LLP STROOCK & STROOCK & LAVAN
399 PARK AVENUE SEVEN HANOVER SQUARE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10004
(212) 318-6000 (212) 806-5400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest investment plans, check the following
box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please 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 WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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.
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 15, 1996
PROSPECTUS
Registration No. 333-08265
840,000 SHARES
XPEDITE SYSTEMS, INC.
COMMON STOCK
----------------
Of the 840,000 shares of common stock, par value $.01 per share (the "Common
Stock"), offered hereby (the "Offering"), 550,000 shares are being sold by
Xpedite Systems, Inc. (the "Company" or "Xpedite") and 290,000 shares are being
sold by certain stockholders of the Company (the "Selling Stockholders"). The
Company will not receive any of the proceeds from the sale of Common Stock by
the Selling Stockholders. See "Principal and Selling Stockholders."
The Common Stock is traded on the Nasdaq National Market under the symbol
"XPED." The closing sale price per share of the Common Stock on the Nasdaq
National Market on August 14, 1996 was $19.25. See "Price Range of Common Stock
and Dividend Policy."
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share....... $ $ $ $
Total(3)........ $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, payable by the Company, estimated at $500,000.
(3) The Company and the Selling Stockholders have granted the several
Underwriters 30-day options to purchase up to 126,000 additional shares of
Common Stock on the same terms and conditions as set forth above to cover
over-allotments, if any. If the Underwriters exercise these options in full,
the total Price to Public, total Underwriting Discounts and Commissions,
total Proceeds to Company and total Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
------------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the Common Stock will be made on or about , 1996 at the
offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167.
------------------------
BEAR, STEARNS & CO. INC. PRUDENTIAL SECURITIES INCORPORATED
THE DATE OF THIS PROSPECTUS IS AUGUST , 1996
<PAGE>
[Set forth at this point in the Prospectus is a diagram of the Xpedite
document distribution system and methods of customer access thereto.
At the left side of the diagram, five methods of customer access to the
Xpedite document distribution system are depicted: fax input, PC input,
mainframe or minicomputer input and local area network input, and fax input for
real-time service. These access methods are shown connecting to the Xpedite
system via inbound line controllers, the Internet and computer access
controllers, or, in the case of fax input for real-time service, via an
autodialer and fax pad.
In the center of the diagram, two boxes represent Xpedite's store and
forward messaging and real-time switching and routing options. Delivery of the
information to a recipient via fax machine, the Internet, telex, X.400 and
Mailgram and fax pad is also indicated. A balloon at the right side of the
diagram states: "Thousands of outbound fax lines, processing over a million
messages per day"]
THE COMPANY HAS DEVELOPED ITS DOCUMENT DISTRIBUTION SYSTEM TO PROVIDE HIGH
QUALITY FAX AND MESSAGING SERVICES WITH SUPERIOR CUSTOMER SUPPORT CAPABILITIES.
AS THE DIAGRAM ABOVE ILLUSTRATES, THE XPEDITE NETWORK CAN BE ACCESSED VIA FAX
INPUT AND INPUT FROM A SENDER'S PERSONAL COMPUTER, MAINFRAME, MINICOMPUTER OR
LOCAL AREA NETWORK. INPUT IS DELIVERED TO THE COMPANY'S SYSTEM VIA AN INBOUND
LINE CONTROLLER, COMPUTER ACCESS CONTROLLER OR THE INTERNET. THE INPUT IS THEN
PREPARED FOR DELIVERY TO A FAX ADDRESS OR ADDRESSES PROVIDED BY THE SENDER AND
IS TRANSMITTED VIA A FAX DELIVERY CONTROLLER AND AN OUTBOUND LINE CONTROLLER TO
THE LOCAL TELEPHONE COMPANY OR LONG DISTANCE CARRIER FOR DELIVERY TO THE
RECIPIENTS. ALTERNATIVELY, THE MESSAGE CAN BE DELIVERED VIA THE INTERNET OR
X.400 ELECTRONIC MAIL NETWORK, TO A TELEX MACHINE OR AS A MAILGRAM OR CABLEGRAM.
THE BOTTOM PORTION OF THE ABOVE DIAGRAM ILLUSTRATES THE COMPANY'S REAL-TIME
SERVICE, WHICH IS ACCESSED USING A FAX MACHINE WITH AN AUTODIALER THAT ROUTES
THE FAX TO THE COMPANY'S REAL-TIME SWITCHING AND ROUTING SYSTEM VIA A FAX PAD.
THE FAX IS IMMEDIATELY DELIVERED "REAL TIME" TO THE RECIPIENT VIA ANOTHER FAX
PAD.
--------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SEE "UNDERWRITING."
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048; and Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such reports and other
information may be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, on payment of prescribed
charges. In addition, such reports, proxy statements and other information may
be electronically accessed at the Commission's site on the World Wide Web
located at http://www.sec.gov. Such reports, proxy statements and other
information concerning the Company may also be inspected at the offices of the
Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3, of which this Prospectus forms a part (together with any amendments
thereto, the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Securities Act"), in respect of the Common Stock offered hereby.
As permitted by the rules and regulations of the Commission, this Prospectus
omits certain information, exhibits and undertakings contained in the
Registration Statement. Such additional information, exhibits and undertakings
may be inspected and obtained from the Commission's principal office in
Washington, D.C. 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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus (a) the
Company's Annual Report on Form 10-K for the year ended December 31, 1995; (b)
Amendment Nos. 1, 2, 3 and 4 on Form 8-K/A to the Company's Current Report on
Form 8-K filed on January 6, 1996, January 13, 1996, May 3, 1996 and June 28,
1996, respectively; (c) the Company's Quarterly Reports on Form 10-Q for the
periods ended March 31, and June 30, 1996; and (d) the description of the Common
Stock set forth in the Company's Registration Statement on Form 8-A, dated
February 9, 1994, all of which have been filed with the Commission pursuant to
the Exchange Act.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of this Offering shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such reports and documents. Any statement included or
incorporated herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of the other documents incorporated herein by reference, other
than exhibits to such documents unless they are specifically incorporated by
reference into such documents. Requests for such copies should be directed to
the Company's Secretary at the Company's principal executive offices, located at
446 Highway 35, Eatontown, New Jersey 07724, telephone (908) 389-3900.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS WILL NOT
BE EXERCISED. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO THE
"COMPANY" HEREIN REFER COLLECTIVELY TO XPEDITE SYSTEMS, INC. AND ITS
SUBSIDIARIES.
THE COMPANY
OVERVIEW
The Company is a leading worldwide provider of enhanced fax services
("Enhanced Fax Services"), and now also offers basic fax services ("Basic Fax
Services") via a worldwide network with points of presence in over 70 cities in
38 countries. Through internal growth and strategic acquisitions, the Company
has significantly increased its net revenues, its earnings before interest,
taxes, depreciation and amortization ("EBITDA") and its net income in recent
years. For the year ended December 31, 1995, net revenues increased 34.4% to
$55.7 million, EBITDA (before non-recurring charges) increased 51.9% to $12.0
million and net income (before non-recurring charges) increased 36.1% to $6.4
million, as compared to the year ended December 31, 1994. For the six months
ended June 30, 1996, net revenues increased 158.4% to $61.6 million, EBITDA
increased 162.9% to $14.1 million and net income increased 61.6% to $5.0
million, as compared to the six months ended June 30, 1995. After giving pro
forma effect to several acquisitions completed in November 1995, the Company's
net revenues for the year ended December 31, 1995, were $107.1 million. EBITDA
is a commonly used measure of financial performance in the telecommunications
industry, but it is not intended to be a substitute for or replacement of
operating income or reported net income. See "Business," "Pro Forma Condensed
Combined Statement of Operations" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The Company's Enhanced Fax Services consist primarily of its fax broadcast
("Fax Broadcast") and gateway messaging ("Gateway Messaging") services. The Fax
Broadcast service enables a customer to rapidly distribute the same document to
multiple recipients by sending a single transmission through the Company's
system to a list of fax addresses. For example, use of the Fax Broadcast service
allows a newsletter publisher to send its newsletter to all of its subscribers
in a matter of minutes by means of a single transmission to the Company. This
process may save significant amounts relative to the costs of printing and
mailing or managing the fax process and documenting the delivery of the fax
communication to each addressee. While the Company's typical Fax Broadcast is
transmitted to approximately 100 recipients, customers have sent a single fax
broadcast to as many as approximately 280,000 recipients. The Company believes
that Fax Broadcast service is the largest component of the Enhanced Fax Services
market. Gateway Messaging, the Company's other primary Enhanced Fax Service,
enables a customer to send information from the customer's computer through the
Company's system to a recipient's fax or telex machine, or to a recipient via
the Internet or X.400 electronic mail networks or other electronic media. The
Company's Gateway Messaging service typically involves the processing of a large
volume of individual communications, each of which is in the same format but
contains different information. See "Business--Products and Services--Enhanced
Fax Services."
The Company's Basic Fax Services consist of its store and forward ("Store
and Forward") and real-time ("Real-Time") services. The Company's Basic Fax
Services allow a customer to use an automatic dialing device attached to the
customer's fax machine to direct international faxes to the Company's document
distribution network for delivery to the recipient. The Company entered the
Basic Fax Services market as a result of the acquisition of Swift Global
Communications, Inc. ("Swift"), ViTel International Holding Company, Inc.
("ViTel") and Comwave Communications AG ("Comwave" and, collectively with Swift
and ViTel, the "SVC Companies") in November 1995. The Company's initial Basic
Fax Service was a Store and Forward service, in which the fax is stored in the
Company's system for subsequent delivery. In response to
4
<PAGE>
demand in the market for a basic fax service which would enable the sender to
obtain immediate confirmation that the fax had been delivered, the Company
launched its Real-Time service in 1996, the fax equivalent of "plain old
telephone service" or "POTS." In Real-Time service, the customer uses the same
automatic dialing device as is used in the Store and Forward service, but rather
than store the fax for subsequent delivery, the Company connects the sender's
fax machine directly to the recipient's fax machine, thereby delivering the fax
immediately (i.e., in "real time"). The Company is currently offering its Store
and Forward service in over 30 countries and its Real-Time service in Japan,
Korea, Hong Kong, Singapore, Switzerland and the United States, and plans to
offer this service in at least five additional countries by the end of 1996. See
"Business--Products and Services--Basic Fax Services."
In order to offer high quality Enhanced and Basic Fax Services cost
effectively, the Company has established a worldwide document distribution
network (the "Xpedite Network"). The Xpedite Network consists of the Company's
document distribution system, the systems of the SVC Companies which are
connected to the Company's system, the Company's "Nodal Partners" and the leased
telecommunications lines which connect all of these systems. "Nodal Partners"
are certain independent entities which have purchased an electronic document
distribution system from the Company and which sell Basic Fax Services. A "Node"
is an element of the Xpedite Network located at a geographically distinct point
of presence which allows access to or egress from the Xpedite Network via a
local telephone call. The Company's Nodes allow it to deliver a larger number of
faxes using inexpensive local calls rather than higher priced long distance or
international fax calls. The Company's leased telecommunications lines, which
connect the Nodes, provide secure, high quality connections and minimize
telecommunications expenses. In addition, the Company's leased
telecommunications lines provide the reliable, continuous, high-speed throughput
required for delivery of Real-Time services. See "Business--The Xpedite
Network."
The Company provides Enhanced and Basic Fax Services in North America and
overseas. The Company believes that the market for Enhanced Fax Services is
annually at least $300 million in North America and $800 million worldwide. The
target market for the Company's Basic Fax Services is the global fax
transmission market, which the Company believes is annually in excess of $3
billion in North America and $10 billion worldwide. The Company believes that
its markets will continue to grow, fueled by growth in international trade and
continued growth in the utilization of fax machines and computer fax devices.
See "Business--Markets."
The Company's business has grown as a result of, among other things, the
development of a highly-trained sales organization. The Company has increased
its sales force from 98 salespeople as of December 31, 1994 to 189 salespeople
as of June 30, 1996; of such 189 salespeople, 145 were operating in North
America and 44 were operating internationally. The Company believes that it has
the largest sales organization in North America focused on the Enhanced Fax
Services market. See "Business--Sales and Marketing."
In addition to growth resulting from expansion of its sales force, the
Company has expanded through strategic acquisitions and relationships. In
February 1993, the Company acquired certain enhanced fax and messaging services
assets from TRT/FTC Communications, Inc. ("TRT"). The Company has also entered
into affiliate relationships in Europe with Xpedite Systems GmbH ("Xpedite
Germany"), Xpedite Systems, S.A. ("Xpedite France") and Xpedite Systems Ltd.
("Xpedite UK" and, collectively with Xpedite Germany and Xpedite France, the
"European Affiliates"). In November 1995, the Company acquired the SVC
Companies, which significantly expanded the Company's North American and
international businesses. On a pro forma basis, the acquisition of the SVC
Companies approximately doubled the Company's net revenues for the year ended
December 31, 1995. See "Pro Forma Condensed Combined Statements of Operations,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business--Strategic Acquisitions and Relationships" and Note 2
of Notes to Consolidated Financial Statements.
5
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to expand from being primarily a provider of
Enhanced Fax Services in North America to become a provider of both Enhanced and
Basic Fax Services on a worldwide basis. The Company's strategic plan has the
following key components:
- EXPAND ENHANCED FAX SERVICES
The Company plans to leverage its proven experience in the Enhanced Fax
Services market by continuing to develop new applications for its Enhanced Fax
Services and by offering Enhanced Fax Services in geographic areas in which the
Company has not historically offered such services. Among its recent
innovations, the Company introduced its "Cash Management Reporting Service,"
which enables banks to send financial reports to their customers via fax at a
specified time each day, and has implemented the "XWEB" service, which allows
customers to access the Company's services via the Internet. In order to
establish a platform for expanding sales of its Enhanced Fax Services overseas,
the Company intends to have installed its document distribution system in at
least six additional locations overseas during 1996.
- LAUNCH BASIC FAX SERVICES
The Company intends to capitalize on the multi-billion dollar market for
Basic Fax Services by aggressively marketing both its Store and Forward and
Real-Time services through its direct sales force, sales agents, resellers and
Nodal Partners, and by installing the infrastructure required for the delivery
of such services on a worldwide basis. By utilizing the Xpedite Network to
minimize the cost of delivering fax documents, the Company is able to offer
Basic Fax Services at prices which are less than the cost which would be
incurred by a customer to deliver the fax using its regular telephone service.
The Company currently offers its Store and Forward service in over 30 countries
and its Real-Time service in six countries, and plans to add Real-Time service
in at least five additional countries by the end of 1996.
- INCREASE SALES FORCE
The Company believes that its highly-trained direct sales force is one of
the key elements of its success. The Company plans to expand its direct sales
force by adding 30 to 40 additional salespeople worldwide by the end of 1996.
The Company intends to use its existing sales and distribution organization to
market its Basic Fax Services, and plans to continue to aggressively expand its
direct sales group in the Pacific Rim, North America and Europe in order to
increase such sales. The Company also intends to continue expanding its Nodal
Partner and other third party distribution relationships.
- EXPAND THE XPEDITE NETWORK
In order to continue to lower its fax delivery costs, the Company seeks to
expand the Xpedite Network by adding new Nodes and leased telecommunications
lines. The number of Nodes in the Xpedite Network has increased from seven Nodes
in three countries as of December 31, 1994 to over 70 Nodes in 38 countries as
of the date of this Prospectus. The Company intends to leverage the Xpedite
Network by installing the Company's system in at least six additional locations
overseas during 1996. This will allow the Company to expand its Enhanced Fax
Services and launch its Basic Fax Services on a worldwide basis.
- PURSUE ADDITIONAL STRATEGIC ACQUISITIONS AND RELATIONSHIPS
The Company continuously seeks to acquire additional electronic document
distribution service companies in order to expand its geographic coverage,
leverage the Xpedite Network, and achieve economies of scale, operating
efficiencies and increased market share. The Company completed the acquisition
of the SVC Companies in November 1995, has executed an agreement to increase its
ownership interest in Xpedite France, is currently negotiating to increase its
ownership interest in Xpedite Germany and has executed a letter of intent to
purchase the assets of one of its Nodal Partners in Korea. The Company also
seeks strategic relationships which present opportunities for the Company to
leverage operating costs and the Xpedite Network, such as the Company's
50%-owned joint venture in Singapore.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company................................ 550,000 shares
The Selling Stockholders................... 290,000 shares
Total.................................... 840,000 shares(1)
Common Stock to be outstanding after the
Offering.................................... 8,674,745 shares(2)(3)
Use of Proceeds by the Company............... To repay certain outstanding indebtedness,
provide working capital and for other general
corporate purposes, including future
acquisitions. See "Use of Proceeds."
Nasdaq National Market Symbol................ XPED
</TABLE>
- ---------------
(1) Assumes the Underwriters' over-allotment options are not exercised. See
"Underwriting."
(2) Does not include 1,015,382 shares of Common Stock reserved for issuance
upon the exercise of outstanding stock options and warrants, of which
516,308 shares may be exercised within 60 days after this Offering. Also
does not include 72,000 shares held in treasury.
(3) Reflects prepayment of approximately $5.1 million of outstanding
indebtedness by delivery of 351,000 shares issued in June 1996; such shares
were placed in escrow pending approval by the Company's stockholders of
such prepayment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "--Liquidity and Capital
Resources."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following tables present certain summary consolidated financial and
operating data for the Company. This summary data should be read in conjunction
with the financial statements, related notes and other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993(1) 1994 1995(2) 1995 1996
--------- --------- ----------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Domestic service............................. $ 5,052 $ 9,400 $ 28,341 $ 39,523 $ 48,210 $ 21,973 $ 37,724
International service........................ -- -- -- -- 3,630 -- 20,291
System sales and other....................... 1,049 629 731 1,906 3,844 1,862 3,581
--------- --------- ----------- --------- --------- --------- ---------
Total net revenues......................... 6,101 10,029 29,072 41,429 55,684 23,835 61,596
Costs and expenses:
Cost of sales................................ 3,400 4,731 14,000 16,992 21,602 8,779 28,238
Selling and marketing........................ 1,738 3,284 7,680 11,180 15,059 6,632 13,305
General and administrative................... 628 982 1,942 2,746 3,964 1,612 4,015
Research and development..................... 645 569 1,695 2,834 3,415 1,596 2,483
Depreciation and amortization................ 344 428 975 1,432 2,723 1,037 3,498
Write-off of in-process research and
development costs (3)....................... -- -- -- -- 53,000 -- --
--------- --------- ----------- --------- --------- --------- ---------
Operating income (loss) (3).................... (654) 35 2,780 6,245 (44,079) 4,179 10,057
Interest income (expense)...................... (966) (523) (373) 433 233 411 (1,757)
Other income................................... -- -- -- -- 23 -- 130
Income tax expense............................. -- -- (712) (1,950) (2,741) (1,515) (3,461)
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) (3).......................... $ (1,620) $ (488) $ 1,695 $ 4,728 $ (46,564) $ 3,075 $ 4,969
--------- --------- ----------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) per common share (3)(4)...... -- $ (0.17) $ 0.34 $ 0.71 $ (6.67) $ 0.45 $ 0.61
Weighted average shares outstanding (4)........ -- 2,826 4,599 6,600 6,982 6,882 8,204
OTHER DATA:
EBITDA (5)..................................... $ (298) $ 467 $ 3,967 $ 7,919 $ 12,030 $ 5,367 $ 14,111
Average minutes of fax transmission
delivered per business day................... 45 98 273 463 667 579 1,221
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------------
ACTUAL(6) AS ADJUSTED(7)(8)
----------- -----------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 4,528 $ 11,428
Total assets......................................................................... 76,698 83,598
Long-term debt, excluding current maturities......................................... 33,425 30,819
Stockholders' equity................................................................. 9,239 18,745
</TABLE>
- ---------------
(1) The Company acquired certain assets from TRT on February 1, 1993. See
"Business--Strategic Acquisitions and Relationships" and Note 2 of Notes to
Consolidated Financial Statements.
(2) Includes results of operations of the SVC Companies from the date of
acquisition--November 20, 1995. See "Business--Strategic Acquisitions and
Relationships" and Note 2 of Notes to Consolidated Financial Statements.
(3) In connection with the acquisitions of the SVC Companies in November 1995,
the Company wrote off $53.0 million of in-process research and development
costs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements.
(4) Amounts for 1992 and 1993 give pro forma effect to the issuance of shares
of Common Stock upon the assumed conversion in each period of shares of the
Company's previously outstanding 8% Redeemable Preferred Stock (the
"Preferred Stock") at a conversion price equal to $15.00 (the public
offering price for the Common Stock in the Company's initial public
offering in February 1994).
(5) EBITDA consists of operating income plus depreciation and amortization, a
portion of which is included in cost of sales. For 1995, EBITDA was
computed excluding the non-recurring charge resulting from the write-off of
in-process research and development costs. EBITDA is a commonly used
measure of financial performance in the telecommunications industry, but is
not intended to be a substitute for or replacement of operating income or
reported net income.
(6) Reflects prepayment of approximately $5.1 million of outstanding
indebtedness by delivery of 351,000 shares issued in June 1996; such shares
were placed into escrow pending approval by the Company's stockholders of
such prepayment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "--Liquidity and Capital
Resources."
(7) Adjusted to give effect to the sale of the 550,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $19.25
per share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(8) Assumes the Company uses approximately $2.6 million of the net proceeds
from the Offering to repay indebtedness under the term loan portion of the
Company's credit facility. In the event the Company's lenders do not
approve the use of net proceeds for working capital and general corporate
purposes, all net proceeds will be used to repay indebtedness under the
term loan portion of the credit facility, in which event "Cash and cash
equivalents" would be $4,528, "Total assets" would be $76,698 and "Long-
term debt, excluding current maturities" would be $23,919. See "Use of
Proceeds."
8
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING
RISK FACTORS, AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, IN
CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
BUSINESS EXPANSION. The Company's principal objective is the achievement of
accelerated growth throughout the world, by expansion of existing facilities and
acquisition of entities engaged in the Company's businesses. There can be no
assurance that the Company will be able to expand its ability to provide fax
services at a rate or in a manner satisfactory to meet the demands of existing
or future customers, including, but not limited to, increasing the capacity of
the Company's system to process increasing amounts of fax traffic, increasing
the capability of the Company's system to perform tasks required by the
Company's customers, or identifying and establishing alliances with new Nodal
Partners in order to enable the Company to expand the Xpedite Network in new
geographic regions. Such inability may adversely affect customer relationships
and perceptions of the Company in the markets in which it provides its fax
services, which could have an adverse effect on the Company's business. In
addition, such growth will involve substantial investments of capital,
management and other resources. The Company may be required to raise additional
capital through private or public equity or debt financings, or to increase the
available credit under the Company's existing $45.0 million credit facility (the
"Credit Facility"), in order to execute its growth strategy. There can be no
assurance that the Company will generate sufficient cash for future growth
through earnings or external financings, or that such financing will be
available on terms acceptable to the Company, or that the Company will be able
to employ any such resources in a manner which will result in accelerated
growth. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business-- Business Strategy" and "--Strategic
Acquisitions and Relationships."
INTEGRATION OF ACQUISITIONS. An element of the Company's expansion strategy
has been the acquisition by the Company of entities engaged in the electronic
document distribution services business worldwide, primarily in international
markets. The success of the Company's acquisitions will be dependent upon its
ability to manage and integrate effectively the operations of entities it
acquires. The process of integrating acquired businesses worldwide may involve
unforeseen difficulties and may require a disproportionate amount of management
resources. There can be no assurance that the Company will be able to
successfully integrate the operations of any businesses it acquires or that the
Company will not experience additional losses as a result of such acquisitions
and integration. See "Business--Overview," "--Business Strategy" and
"--Strategic Acquisitions and Relationships."
TECHNOLOGICAL CHANGE. The telecommunications industry is characterized by
continuous technological change. Future technological advances in the
telecommunications industry may result in the availability of new services,
products or methods of electronic document delivery (such as the Internet) that
could compete with the electronic document distribution services currently
provided by the Company or decreases in the cost of existing products or
services that could enable the Company's established or potential customers to
fulfill their own needs for electronic document distribution services more cost
efficiently than through the use of the Company's services. There can be no
assurance that the Company will not be adversely affected in the event of such
technological change, or that changes in technology will not enable additional
companies to offer services which could replace some or all of the services
presently offered by the Company. See "Business--Products and Services" and
"--Competition."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Many aspects of the
Company's international operations and business expansion plans are subject to
foreign government regulations, currency fluctuations, political uncertainties
and differences in business practices. There can be no assurance that foreign
governments will not adopt regulations or take other actions that would have a
direct or indirect adverse impact on the business or market opportunities of the
Company within such governments' countries. Furthermore, there
9
<PAGE>
can be no assurance that the political, cultural and economic climate outside
the United States will be favorable to the Company's operations and growth
strategy. See "Business--Business Strategy," "--Sales and Marketing" and
"--Strategic Acquisitions and Relationships."
The Company has been informed that two foreign individuals, who may be
beneficial owners of certain of the entities (the "Former SVC Shareholders")
from which the Company acquired the SVC Companies, are the subjects of a
criminal investigation in Thailand relating to the alleged embezzlement of funds
from the Bangkok Bank of Commerce; and that certain of such funds may have been
used by the Former SVC Shareholders to purchase interests in the SVC Companies
prior to the sale of the SVC Companies to the Company. The Company has been
informed that such individuals maintain their innocence with regard to all such
charges. The Company does not believe that such investigation will have any
material adverse effect on the Company.
COMPETITION. The Company faces a high degree of competition in each of its
businesses. Many of the Company's competitors, which include AT&T Corp.
("AT&T"), MCI Communications Corp. ("MCI"), Sprint Corp. ("Sprint") and numerous
national post, telephone and telegraph companies ("PTTs") around the world, and
potential competitors such as the regional Bell operating companies ("RBOCs"),
possess significantly greater financial, marketing, technological and other
resources than the Company. Each of AT&T, MCI and Sprint, and many of the PTTs,
offer enhanced and/or basic fax communications services similar to those offered
by the Company. The Company cannot predict whether AT&T, MCI, Sprint, any PTT or
any other competitor will expand its enhanced and/or basic fax communications
services business, and there can be no assurance that these or other competitors
will not commence or expand their businesses. Moreover, the Company's receiving,
queuing, routing and other systems logic and architecture are not proprietary to
the Company and as a result, there can be no assurance that such information
will not be acquired or duplicated by the Company's existing and potential
competitors. Generally, the Company does not typically have long-term
contractual agreements with its customers and there can be no assurance that its
customers will continue to transact business with the Company in the future. In
addition, even if there is continued growth in the use of enhanced and/or basic
fax services, there can be no assurance that potential customers will not elect
to use their own equipment to fulfill their needs for enhanced and/or basic fax
communications services. There also can be no assurance that customers will not
elect to use alternatives to the Company's fax communications services,
including the Internet, to carry such customers' communications or that
companies offering such alternatives will not develop product features or
pricing policies which are more attractive to customers than those offered by
the Company. See "Business--Competition."
REGULATION OF TELECOMMUNICATIONS INDUSTRY. The Company is subject to
regulation by the Federal Communications Commission (the "FCC"), which adopts
and implements regulations and policies that directly or indirectly affect the
ownership and operation of telecommunications service providers, and has the
power to impose penalties for violations of relevant statutes and FCC
regulations. In February 1996, President Clinton signed the Telecommunications
Act of 1996 (the "Telecommunications Act"), which substantially amends existing
law applicable to the telecommunications industry. Although the
Telecommunications Act may substantially lessen regulatory burdens, certain
provisions of the Telecommunications Act could materially affect the growth and
operation of the Company's business and subject the Company to additional
competition. Moreover, the impact of the Telecommunications Act is difficult to
predict at this time, because of the uncertainty surrounding future rulemaking
by the FCC to interpret its provisions, the delayed effectiveness of other
provisions of the Telecommunications Act and the outcome of pending and
potential judicial challenges.
CONTROL BY CURRENT STOCKHOLDERS. The Company's directors, executive officers
and their affiliates control approximately 36.4% of the outstanding shares of
Common Stock. After giving effect to the sale of Common Stock offered hereby
(assuming the Underwriters' over-allotment options are not exercised), the
Company's directors, executive officers and their affiliates will control
approximately 34.5% of the outstanding shares of Common Stock. Accordingly,
those stockholders will continue to have the ability, if acting in concert, to
10
<PAGE>
influence the outcome of elections of the Company's Board of Directors and votes
on matters presented for approval by the stockholders of the Company. Such
concentration of ownership may have the effect of preventing a change in control
of the Company. See "Principal and Selling Stockholders."
In connection with the acquisitions of the SVC Companies in November 1995,
the Company and certain stockholders of the Company (the "New Stockholders")
entered into a Shareholders Agreement, dated November 20, 1995 (the
"Shareholders Agreement"). Under the Shareholders Agreement, as amended to date,
the New Stockholders have agreed to suspend their right to designate a nominee
to serve as a member of the Board of Directors of the Company until such time as
the Board of Directors determines, in good faith, that the investigation in
Thailand discussed above under "--Risks Associated with International
Operations" is no longer pending.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends on its ability to
attract, motivate and retain highly skilled and qualified management, sales and
technical personnel. In the event the Company is unable to continue to do so,
its operations and growth prospects could be adversely affected. In addition, in
implementing its strategy, the Company is dependent on the services of certain
key employees, some of whom have executed employment agreements with the
Company. The Company may be adversely affected if these individuals do not
continue to participate in corporate management. Roy B. Andersen, Jr., the
President and Chief Executive Officer of the Company, was diagnosed in 1993 as
having a form of leukemia. Mr. Andersen received treatment in 1993 for his
condition, has maintained his full work schedule since such diagnosis and
treatment and has informed the Company that he intends to maintain his full work
schedule. However, there can be no assurance that Mr. Andersen will not need to
curtail his activities on behalf of the Company. See "Management."
POSSIBLE VOLATILITY OF STOCK PRICE. There has been volatility in the market
prices of securities of telecommunications companies, including in the market
price of the Common Stock. Future announcements concerning the Company or its
competitors, including quarterly financial operating results, developments in
the fax communications services business or the telecommunications industry or
other developments may have a significant effect on the market price of the
Common Stock. In addition, broad market fluctuations and general economic or
political conditions may adversely affect the market price of the Common Stock,
regardless of the Company's actual performance. See "Price Range of Common Stock
and Dividend Policy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SHARES ELIGIBLE FOR FUTURE SALE. Future sales of substantial amounts of
Common Stock in the public market after the date hereof could adversely affect
the market price of the Common Stock. As of August 12, 1996, the Company had
8,124,745 shares of Common Stock issued and outstanding. Immediately following
completion of the Offering, 8,674,745 shares of Common Stock will be issued and
outstanding, substantially all of which will be freely tradeable (including the
840,000 shares sold in this Offering and 1,510,000 shares the resale of which is
covered by a Registration Statement filed by the Company on July 17, 1996 in
connection with the acquisitions of the SVC Companies and which are not included
in this Offering). However, the Company and holders of not less than 3,678,443
shares of Common Stock (which includes 372,713 shares issuable upon exercise of
currently exercisable stock options and warrants to purchase Common Stock),
including each of the Company's officers and directors, the Selling Stockholder
and certain other stockholders, have agreed that they will not, directly or
indirectly, offer, pledge, sell, offer to sell, contract to sell or grant any
option to purchase or otherwise sell or dispose (or announce any offer, pledge,
sale, offer of sale, contract of sale, grant of any option to purchase or other
sale or disposition), of any shares of Common Stock or other capital stock or
securities exchangeable or exercisable for, or convertible into, shares of
Common Stock or other capital stock for a period of 90 days after the date of
this Prospectus, except (i) for shares of Common Stock offered hereby, (ii) with
the prior written consent of Bear, Stearns & Co. Inc., on behalf of the
Underwriters, and (iii) in the case of the Company, for issuances under the
terms of the Plans (as defined below). See "Principal and Selling Stockholders"
and "Underwriting."
11
<PAGE>
As of the date of this Prospectus, the Company has outstanding 326,342
options to purchase shares of Common Stock pursuant to the 1992 Incentive Stock
Option Plan (the "1992 Plan"), 412,347 options to purchase shares of Common
Stock pursuant to the 1993 Incentive Stock Option Plan (the "1993 Plan") and
256,527 options to purchase shares of Common Stock pursuant to the Company's
1996 Incentive Stock Option Plan (the "1996 Plan" and, collectively with the
1992 Plan and the 1993 Plan, the "Plans"). The Company has filed a Registration
Statement on Form S-8 to register the Common Stock issued or reserved for
issuance upon exercise of options granted under the 1992 Plan and the 1993 Plan.
The Company has reserved an additional 750,000 shares of Common Stock for
issuance pursuant to options under the 1996 Plan, which was approved by the
Company's stockholders in January 1996. The Company expects to file a
registration statement on Form S-8 with the Commission with respect to the
shares of Common Stock issuable under the 1996 Plan as soon as practicable.
Shares issued upon exercise of options granted under the Plans generally will be
freely tradeable after the effective date of a registration statement covering
such shares without restriction or further registration under the Securities
Act.
In addition to the Plans, the Company has issued warrants to certain current
and former non-employee directors and founders of the Company to purchase an
aggregate of 138,500 shares of Common Stock at exercise prices ranging from
$0.50 to $17.50 per share. The Company has also reserved 200,000 shares of
Common Stock for issuance pursuant to options granted in April 1996 to certain
executive officers of the Company which will vest upon the achievement by the
Company of certain performance targets based upon the price per share of the
Common Stock. See "Management." Sales of substantial amounts of Common Stock in
the public market could adversely affect prevailing market prices for the Common
Stock.
CERTAIN PROVISIONS RELATING TO CHANGES IN CONTROL. The Company's Amended and
Restated Certificate of Incorporation and By-laws contain provisions which may
have the effect of delaying or preventing a change in control of the Company.
Such provisions include a classified Board of Directors, blank check preferred
stock (the terms of which may be fixed by the Board of Directors without
stockholder approval) and limitations on stockholder action. See "Management."
------------------------
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, STATEMENTS UNDER "RISK FACTORS,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS" REGARDING THE COMPANY'S FINANCIAL POSITION, BUSINESS
STRATEGY AND PLANS AND OBJECTIVES OF MANAGEMENT OF THE COMPANY FOR FUTURE
OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT
THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED UNDER "RISK
FACTORS" AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION IN
CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS. ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR
ENTIRETY BY THE CAUTIONARY STATEMENTS.
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company (net of underwriting discounts and
commissions and estimated Offering expenses) from the sale of the 550,000 shares
of Common Stock offered by the Company hereby at an assumed public offering
price of $19.25 per share are estimated to be $9.5 million ($11.0 million if the
Underwriters' over-allotment options are exercised in full).
The Company intends to use approximately $2.6 million of the net proceeds
from the Offering to repay a portion of outstanding indebtedness under the term
loan portion of the Credit Facility. The terms of the Credit Facility require
the Company to use the entire net proceeds from the Offering to repay the term
loan portion of the Credit Facility; however, the Company is currently seeking
approval of its lenders to use all but $2.6 million of the net proceeds for
working capital and general corporate purposes as described in the next
paragraph. The term loan portion presently accrues interest at a floating rate
(8.375% as of July 1, 1996) based upon the London Interbank Offered Rate
("LIBOR") plus 2.75% per annum and matures in November 2001. Borrowings under
the Credit Facility were used to consummate the acquisitions of the SVC
Companies. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Subject to the approval described above, the balance of the net proceeds
will be used for working capital and general corporate purposes, including the
completion by the Company of its acquisition of an increased ownership interest
in Xpedite France, other future acquisitions and the launch of the Company's
Real-Time service. The Company considers acquisition opportunities from time to
time and is currently negotiating to increase its ownership interest in Xpedite
Germany and has executed a letter of intent to purchase the assets of one of its
Nodal Partners in Korea. There can be no assurance that any of such transactions
will be completed. The increased interests in Xpedite France and Xpedite Germany
are not pursuant to the "put" and "call" arrangements with the European
Affiliates. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Pending the above uses, the net proceeds to the Company will be invested in
United States government securities or other short-term investment grade
securities.
The Company will not receive any of the proceeds from the sale of the
290,000 shares of Common Stock offered by the Selling Stockholders hereby. See
"Principal and Selling Stockholders."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the Nasdaq National Market under the symbol
"XPED." The table below sets forth for the periods indicated commencing on
February 14, 1994, the date that the Common Stock was first offered to the
public, the high and low sale prices for the Common Stock as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Year ended December 31, 1994
First Quarter (from February 14, 1994)................................... $ 18.75 $ 13.00
Second Quarter........................................................... 18.00 12.00
Third Quarter............................................................ 22.50 13.75
Fourth Quarter........................................................... 22.75 15.50
Year ended December 31, 1995
First Quarter............................................................ 20.75 16.25
Second Quarter........................................................... 23.50 13.25
Third Quarter............................................................ 18.75 13.50
Fourth Quarter........................................................... 17.88 12.50
Year ending December 31, 1996
First Quarter............................................................ 18.25 14.25
Second Quarter........................................................... 28.25 16.25
Third Quarter (to August 14, 1996)....................................... 27.75 18.75
</TABLE>
13
<PAGE>
On August 14, 1996, the last sale price reported on the Nasdaq National
Market for the Common Stock was $19.25 per share. On the same date, there were
approximately 180 holders of record of the Common Stock.
The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to retain earnings for use in the operation and expansion of
its business and therefore does not anticipate declaring or paying any cash
dividends in the foreseeable future. In addition, the Credit Facility contains
certain restrictions on the payment of cash dividends.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996, on an actual basis and as adjusted to give effect to the sale of the
550,000 shares of Common Stock offered by the Company hereby at an assumed
public offering price of $19.25 per share and the application of the estimated
net proceeds therefrom, after deducting the underwriting discounts and
commissions and estimated Offering expenses payable by the Company.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------
ACTUAL(2) AS ADJUSTED(3)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt(1).................................................................... $ 6,578 $ 6,578
---------- --------------
---------- --------------
Long-term debt, excluding current maturities.......................................... $ 33,425 $ 30,819
Stockholders' equity:
Common stock, $0.01 par value per share; 15,000,000 shares authorized; 8,195,163
shares issued and outstanding; as adjusted, 8,745,163 shares issued and outstanding
(4)................................................................................ 82 87
Additional paid-in capital.......................................................... 54,250 63,751
Accumulated deficit................................................................. (44,877) (44,877)
Less: Treasury stock: 72,000 shares at cost......................................... (216) (216)
---------- --------------
Total stockholders' equity...................................................... 9,239 18,745
---------- --------------
Total capitalization............................................................ $ 42,664 $ 49,564
---------- --------------
---------- --------------
</TABLE>
- ---------------
(1) Includes current maturities of long-term debt and capital lease
obligations.
(2) Reflects prepayment of approximately $5.1 million of outstanding
indebtedness by delivery of 351,000 shares issued in June 1996; such shares
were placed into escrow pending approval by the Company's stockholders of
such prepayment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "--Liquidity and Capital
Resources."
(3) Assumes the Company uses approximately $2.6 million of the net proceeds
from the Offering to repay indebtedness under the term loan portion of the
Credit Facility. In the event the Company's lenders do not approve the use
of net proceeds for working capital and general corporate purposes, all net
proceeds will be used to repay indebtedness under the term loan portion of
the Credit Facility, in which event "Long-term debt, excluding current
maturities" would be $23,919 and "Total Capitalization" would be $42,664.
See "Use of Proceeds."
(4) Does not include 944,188 shares of Common Stock issuable as of June 30,
1996 upon the exercise of outstanding stock options, of which 1,582 shares
were issued upon exercise subsequent to June 30, 1996.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated Statement of Operations Data and Balance Sheet
Data set forth below at and for the years ended December 31, 1991, 1992, 1993,
1994 and 1995 are derived from the audited consolidated financial statements of
the Company. The selected consolidated Statement of Operations Data and Balance
Sheet Data set forth below at and for the six-month periods ended June 30, 1995
and 1996 are derived from the unaudited consolidated financial statements. The
unaudited consolidated financial data include all adjustments, consisting of
normal, recurring accruals, which management considers necessary for a fair
presentation of the consolidated financial position and consolidated results of
operations for these periods. Operating results for the six-month period ended
June 30, 1996 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1996. The information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements,
together with the related notes thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------------- --------------------
1991 1992 1993(1) 1994 1995(2) 1995 1996
--------- --------- ----------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Domestic service............................. $ 5,052 $ 9,400 $ 28,341 $ 39,523 $ 48,210 $ 21,973 $ 37,724
International service........................ -- -- -- -- 3,630 -- 20,291
System sales and other....................... 1,049 629 731 1,906 3,844 1,862 3,581
--------- --------- ----------- --------- --------- --------- ---------
Total net revenues......................... 6,101 10,029 29,072 41,429 55,684 23,835 61,596
Costs and expenses:
Cost of sales................................ 3,400 4,731 14,000 16,992 21,602 8,779 28,238
Selling and marketing........................ 1,738 3,284 7,680 11,180 15,059 6,632 13,305
General and administrative................... 628 982 1,942 2,746 3,964 1,612 4,015
Research and development..................... 645 569 1,695 2,834 3,415 1,596 2,483
Depreciation and amortization................ 344 428 975 1,432 2,723 1,037 3,498
Write-off of in-process research and
development costs (3)...................... -- -- -- -- 53,000 -- --
--------- --------- ----------- --------- --------- --------- ---------
Operating income (loss) (3).................... (654) 35 2,780 6,245 (44,079) 4,179 10,057
Interest income (expense)...................... (966) (523) (373) 433 233 411 (1,757)
Other income................................... -- -- -- -- 23 -- 130
Income tax expense............................. -- -- (712) (1,950) (2,741) (1,515) (3,461)
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) (3).......................... $ (1,620) $ (488) $ 1,695 $ 4,728 $ (46,564) $ 3,075 $ 4,969
--------- --------- ----------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) per common share (3) (4)..... -- $ (0.17) $ 0.34 $ 0.71 $ (6.67) $ 0.45 $ 0.61
Weighted average shares outstanding (4)........ -- 2,826 4,599 6,600 6,982 6,882 8,204
OTHER DATA:
EBITDA (5)..................................... $ (298) $ 467 $ 3,967 $ 7,919 $ 12,030 $ 5,367 $ 14,111
Average minutes of fax transmission delivered
per business day............................. 45 98 273 463 667 579 1,221
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------------------------------- -----------
1991 1992 1993(1) 1994 1995(2) 1996(6)
--------- --------- ----------- --------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........ $ 76 $ 1,906 $ 472 $ 16,139 $ 9,076 $ 4,528
Total assets............................................. 2,004 5,019 13,962 34,352 72,883 76,698
Long-term debt, excluding current maturities............. 1,330 4,201 3,098 13 36,323 33,425
Preferred Stock.......................................... -- 6,663 7,262 -- -- --
Stockholders' equity (deficit)........................... (8,339) (7,502) (6,599) 27,085 (1,116) 9,239
</TABLE>
15
<PAGE>
- ---------------
(1) The Company acquired certain assets from TRT on February 1, 1993. See
"Business--Strategic Acquisitions and Relationships" and Note 2 of Notes to
Consolidated Financial Statements.
(2) Includes results of operations of the SVC Companies from the date of
acquisition--November 20, 1995. See "Business--Strategic Acquisitions and
Relationships" and Note 2 of Notes to Consolidated Financial Statements.
(3) In connection with the acquisitions of the SVC Companies in November 1995,
the Company wrote off $53.0 million of in-process research and development
costs. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to Consolidated Financial
Statements.
(4) Amounts for 1992 and 1993 give pro forma effect to the issuance of shares
of Common Stock upon the assumed conversion in each period of shares of
Preferred Stock at a conversion price equal to $15.00 (the public offering
price for the Common Stock in the Company's initial public offering in
February 1994).
(5) EBITDA consists of operating income plus depreciation and amortization, a
portion of which is included in cost of sales. For 1995, EBITDA was
computed excluding the non-recurring charge resulting from the write-off of
in-process research and development costs. EBITDA is a commonly-used
measure of financial performance in the telecommunications industry, but is
not intended to be a substitute for or replacement of operating income or
reported net income.
(6) Reflects prepayment of approximately $5.1 million of outstanding
indebtedness by delivery of 351,000 shares issued in June 1996; such shares
were placed into escrow pending approval by the Company's stockholders of
such prepayment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "--Liquidity and Capital
Resources."
16
<PAGE>
PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
(UNAUDITED)
The following unaudited pro forma condensed combined statement of operations
of the Company for the year ended December 31, 1995 gives effect to the
acquisitions of the SVC Companies, which were consummated on November 20, 1995,
as if they had occurred on January 1, 1995.
The historical results for each of the SVC Companies represent the actual
results of operations for each of such companies for the period from January 1,
1995 through November 20, 1995, the date of the acquisitions of the SVC
Companies. No adjustments were made to the historical results of operations for
any of the SVC Companies in order to present the results of operations on a
December 31 fiscal year.
This information should be read in conjunction with the Company's
Consolidated Financial Statements, together with the notes thereto, and the
financial statements of each of the SVC Companies included elsewhere in this
Prospectus. The following unaudited pro forma condensed combined statement of
operations does not purport to represent what the results of operations actually
would have been had the acquisitions of the SVC Companies occurred on January 1,
1995, or to project the Company's results of operations for any future period or
date. The pro forma adjustments are based upon certain assumptions and estimates
that management of the Company believes are reasonable. The Company believes
that all adjustments considered necessary for a fair presentation have been
included in the unaudited pro forma condensed combined statement of operations.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THROUGH NOVEMBER 20, 1995
HISTORICAL --------------------------------- PRO FORMA
XPEDITE VITEL SWIFT COMWAVE ADJUSTMENTS PRO FORMA
----------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues......................... $ 55,684 $ 26,977 $ 17,200 $ 7,265 $ 107,126
Cost of sales........................ 21,602 14,953 10,776 3,902 51,233
----------- --------- --------- ----------- -----------
Gross margin......................... 34,082 12,024 6,424 3,363 55,893
Operating expenses, excluding
depreciation and amortization....... 22,438 11,455 6,342 2,218 42,453
Depreciation and amortization........ 2,723 1,825 666 482 369 6,065
----------- --------- --------- ----------- ----------- -----------
Operating income(d).................. 8,921 (1,256) (584) 663 (369) 7,375
Interest and other (income)
expense............................. (256) (38) (34) 192 4,651(b) 4,515
----------- --------- --------- ----------- ----------- -----------
Income before income taxes and
non-recurring charge................ 9,177 (1,218) (550) 471 (5,020) 2,860
Income tax expense (benefit)......... 2,741 170 (1,777)(c) 1,134
----------- --------- --------- ----------- ----------- -----------
Net income before non-recurring
charge.............................. $ 6,436 $ (1,218) $ (550) $ 301 $ (3,243) $ 1,726(e)
----------- --------- --------- ----------- ----------- -----------
----------- --------- --------- ----------- ----------- -----------
Net income before non-recurring
charge per common share............. $ 0.92 $ 0.21
----------- -----------
----------- -----------
Weighted average shares
outstanding......................... 6,982 1,249 8,231
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes (a)-(e) to this unaudited pro forma statement of
operations.
17
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(UNAUDITED)
SUMMARY OF TRANSACTIONS
On November 20, 1995, the Company purchased all of the outstanding capital
stock of ViTel, Swift and Comwave. The purchase prices for the acquisitions,
including $2.4 million of transaction costs, were approximately $41.5 million,
$23.2 million and $11.4 million, respectively, totaling $76.1 million. The
purchase prices were paid through the issuance of 1,249,000 shares of Common
Stock valued at $18.3 million, subordinated notes payable to the sellers of
ViTel with a carrying value of $4.9 million (the "ViTel Notes") and $50.5
million in cash. The transactions are accounted for as purchases, and
accordingly, the purchase prices were allocated to the net assets acquired based
upon the estimated fair values as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Tangible net assets.............................................................. $ 7.2
In-process research and development costs........................................ 53.0
Customer lists................................................................... 5.6
Purchased software............................................................... 2.7
Costs in excess of fair value of net assets acquired............................. 7.6
-----
$ 76.1
-----
-----
</TABLE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS
(a) To reflect amortization of identifiable intangible assets and costs in
excess of fair value of net assets acquired. Amortization periods are as
follows:
<TABLE>
<S> <C>
Customer lists.................................................... 8 years
Purchased software................................................ 5 years
Costs in excess of fair value of net assets acquired.............. 10 years
</TABLE>
Amounts also include a reduction of $1.4 million for depreciation and
amortization expense previously recognized on assets acquired for which the
amounts were adjusted to fair value.
(b) To reflect the following:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
<S> <C>
Additional interest expense on term loan....................................... $ 3,500
Additional interest expense on ViTel Notes..................................... 394
Interest expense on liabilities not assumed.................................... (58)
Interest income from cash and investments used to finance a portion of the
acquisition price............................................................ 610
Debt issue cost amortization................................................... 205
------
$ 4,651
------
------
</TABLE>
At the Company's option, the $40 million term loan portion of the Credit
Facility bears interest at either (a) the bank's Base Rate, defined as the
higher of (i) 0.5% ("Base Margin") in excess of the Federal Funds rate or
(ii) the bank's prime rate plus 1.5% per annum; or (b) a rate equal to the
LIBOR rate plus 2.75% per annum. An interest rate of 10% has been assumed in
the calculation of the additional interest expense on this debt for pro
forma purposes. If the assumed rate were increased or decreased by 0.125%,
the effect on pro forma results of operations would be $50,000.
18
<PAGE>
The ViTel Notes did not accrue interest until May 20, 1996. Beginning on May
20, 1996, the ViTel Notes began to accrue interest at the rate of 17.0% per
annum until November 20, 1996, and thereafter at the rate of 12.0% per annum
until maturity on January 1, 2002. The ViTel Notes were recorded at fair
value using a 9.0% effective interest rate.
(c) To adjust federal and state income taxes for the effect of the pro forma
adjustments.
(d) The write-off of in-process research and development costs is excluded from
the pro forma calculation of operating income as it is a non-recurring item.
See Note (3) of "Summary Consolidated Financial and Operating Data."
(e) Included in the historical results of the SVC Companies and in the pro forma
results are certain one-time expenses, including (i) $2.7 million of stock
acquisition expenses relating to the acquisition of ViTel by certain of the
Former SVC Shareholders and (ii) $0.3 million of severance costs, "stay"
bonuses and consulting fees.
The Company is in the process of implementing cost savings measures relating
to the integration of the SVC Companies. To date, the Company has
implemented cost savings measures which, if implemented as of January 1,
1995, management believes would have resulted in approximately $0.8 million
of operations costs savings in 1995 (including cost reductions resulting
from renegotiation of long distance rates and from re-routing ViTel long
distance traffic to lower-cost carriers).
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the three years ended December 31, 1993, 1994 and
1995 and the six month periods ended June 30, 1995 and 1996. It should be read
in conjunction with the Company's Consolidated Financial Statements, the related
notes thereto and other financial and operating information included elsewhere
and incorporated by reference in this Prospectus.
OVERVIEW
The Company derives a substantial majority of all of its revenues from
charges for the provision of Basic and Enhanced Fax Services. Customers are
charged based primarily upon the telephone connection time used to make the
delivery of a fax communication to each recipient. Although the Company
generally does not have long-term contractual service agreements with its
customers, the Company's customers tend to continue to use the Company's fax
communications services once they have begun to use such services and, as a
result, the Company's operating results benefit from the recurring monthly
revenue stream from such customers. The Company also receives revenues from the
provision of other messaging services, such as telex and electronic mail.
In addition to service revenues from electronic document distribution
services, the Company generates system sales, royalty and other revenues by
selling electronic document distribution systems and components and licensing
the Company's software to other fax communications services providers. System
sales generally have been structured to generate royalty income from the
purchasers of such systems, based on the revenues received by the purchaser from
such systems.
On November 20, 1995, the Company acquired all of the outstanding capital
stock of each of the SVC Companies (the "SVC Acquisitions"). The SVC Companies
provide Enhanced and Basic Fax Services worldwide. The purchase prices for the
SVC Acquisitions, including transaction costs, were approximately $23.2 million
for Swift, $41.5 million for ViTel, and $11.3 million for Comwave, respectively,
which includes a total of $2.0 million held in escrow to secure the
indemnification obligations of certain of the sellers. A portion of the
aggregate purchase price was paid through the issuance of an aggregate of
1,249,000 shares of Common Stock valued at $18.3 million, and subordinated notes
payable to the sellers of ViTel of approximately $5.1 million (the "ViTel
Notes"). The Company expects the ViTel Notes to be prepaid by the issuance to
the holders of such notes of 351,000 shares of Common Stock (subject to the
pending receipt of approval of such prepayment by the Company's stockholders).
The SVC Acquisitions were accounted for as purchases. Accordingly, the assets
acquired and liabilities assumed through these purchases have been recorded at
their estimated fair market values at the date of acquisition. Identifiable
intangible assets acquired included $53.0 million of in-process research and
development costs, customer lists of $5.6 million and purchased software of $2.7
million. Since the technological feasibility of the in-process research and
development costs had not yet been established and the technology being
developed had no alternative future use at the acquisition date, the in-process
research and development costs were immediately written-off and included in the
Company's results of operations as a non-recurring charge for the year ended
December 31, 1995. The results of the SVC Companies are included in the
Company's results of operations from the date of the SVC Acquisitions.
Until the acquisitions of the SVC Companies, substantially all of the
Company's revenues were generated in North America. Net revenues and results of
operations for the SVC Companies are included in those of the Company for the
six months ended June 30, 1996. As a result of the SVC Acquisitions, the Company
is classifying net service revenue as either "international" or "domestic." The
Company defines "domestic" service revenues as those generated by the Company's
United States and Canadian sales forces. All other service revenues are defined
by the Company as "international" service revenues.
20
<PAGE>
As a result of the SVC Acquisitions and internal growth, the Company's
service revenues for the six months ended June 30, 1996 were $37.7 million in
North America and $20.3 million internationally. Revenues and EBITDA (before
non-recurring charges) for the year ended December 31, 1995, after giving pro
forma effect to the acquisitions of the SVC Companies by the Company as if such
acquisitions had occurred on January 1, 1995, were $107.1 million and $13.8
million, respectively.
Subsequent to the SVC Acquisitions, the Company has made and will continue
to make significant development efforts to integrate the systems of the SVC
Companies into the Xpedite Network. In addition, the Company intends to
integrate certain development efforts which had been commenced by the SVC
Companies, which address features which are complementary to the Company's
system and are intended to minimize the need to have several systems. The
efforts to integrate and interconnect the acquired systems with the Company's
existing systems are substantial.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating
data as a percentage of net revenues:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- --------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues:
Domestic service..................................... 97.5% 95.4% 86.6% 92.2% 61.2%
International service................................ -- -- 6.5 -- 33.0
System sales and other............................... 2.5 4.6 6.9 7.8 5.8
----- ----- ----- ----- -----
Total net revenues................................. 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of sales........................................ 48.1 41.0 38.8 36.8 45.9
Selling and marketing................................ 26.4 27.0 27.0 27.8 21.6
General and administrative........................... 6.7 6.6 7.1 6.8 6.5
Research and development............................. 5.8 6.8 6.2 6.7 4.0
Depreciation and amortization........................ 3.4 3.5 4.9 4.4 5.7
Write off of in-process research and development
costs............................................... -- -- 95.2 -- --
----- ----- ----- ----- -----
Operating income (loss)................................ 9.6 15.1 (79.2) 17.5 16.3
Interest income (expense)............................ (1.3) 1.0 0.5 1.7 (2.8)
Other income......................................... -- -- -- -- 0.2
Income tax expense................................... (2.5) (4.7) (4.9) (6.3) (5.6)
----- ----- ----- ----- -----
Net income (loss)...................................... 5.8% 11.4% (83.6)% 12.9% 8.1%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
OTHER DATA:
EBITDA (1)........................................... 13.6% 19.1% 21.6% 22.5% 22.9%
</TABLE>
- ------------
(1) EBITDA for the year ended December 31, 1995 was calculated excluding the
non-recurring charge of $53 million related to the acquisitions of the SVC
Companies.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
For the six months ended June 30, 1996, net revenues increased by 158.4% to
$61.6 million, as compared to the same period in 1995. Net service revenues
increased by 164.0% to $58.0 million for the six months ended June 30, 1996, as
compared to the six months ended June 30, 1995. The SVC Acquisitions contributed
approximately $28.3 million in net service revenues for the six months ended
June 30, 1996;
21
<PAGE>
$8.0 million in domestic service revenue and $20.3 million in international
service revenue. Prior to the SVC Acquisitions, the Company had minimal
international service revenues. The remaining increase in domestic net service
revenues resulted primarily from the efforts of the Company's sales force in
penetrating new markets and selling new applications in existing markets. As a
result of the SVC Acquisitions and internal growth, fax minutes increased to
approximately 154.5 million minutes in the six months ended June 30, 1996, from
approximately 73.3 million minutes in the six months ended June 30, 1995.
System sales and other net revenues increased by 92.3% to $3.6 million for
the six months ended June 30, 1996, as compared to the same period in 1995. The
increase was primarily the result of an increased volume of sales of system
upgrades and expansion equipment, and related royalty revenue.
The Company's gross margins were 54.2% and 63.2% for the six months ended
June 30, 1996 and 1995, respectively. Service margin rates decreased to 54.0%
for the first six months of 1996, as compared to 63.5% for the same period in
1995. The decline in service margins resulted primarily from the SVC
Acquisitions' international service revenues, which are sold at a lower gross
margin but typically generate a higher retained revenue per page. Partially
offsetting the impact of the lower international gross margin were lower long
distance rates resulting from favorable negotiations with the Company's primary
telecommunications service providers, completion of additional direct
interconnections with local exchange carriers and the interconnection of the
Company's systems with those acquired in connection with the SVC Acquisitions.
Domestic service margins were also impacted by a reduction of approximately 15%
in the average price charged per minute to customers to deliver a fax page, as
compared with the first six months of the prior year. This reduction was in
response to competition in the markets in which the Company operates. The
Company expects further domestic price reductions of approximately 10% over the
next year in response to competitive pressures, and the Company believes that
any future reduction in pricing will be partially offset by further reductions
in fax delivery costs. In addition, the Company believes that an increase in the
volume of revenues and increased operating efficiencies will also mitigate the
impact of declining prices on domestic margins. Margin rates on system sales and
other revenues also decreased slightly to 56.4% for the six months ended June
30, 1996, as compared to 59.2% for the same period in 1995, primarily as a
result of changes in the proportions of the Company's net revenue accounted for
by various of the Company's products.
Selling and marketing expenses increased by 100.6% to $13.3 million for the
six months ended June 30, 1996, as compared to the same period in 1995. Expenses
relating to the operations of the SVC Companies accounted for $5.2 million of
this increase. The remainder of this increase is attributable primarily to the
expansion of the Company's domestic direct sales force and customer care and
sales support functions, in response to the increase in the Company's net
revenues. Selling and marketing expenses as a percentage of net revenues
decreased to 21.6% for the six months ended June 30, 1996, as compared to 27.8%
for the six months ended June 30, 1995. As of June 30, 1996, the Company
employed 189 direct sales employees domestically and internationally, as
compared with 120 domestically and none internationally at June 30, 1995.
General and administrative expenses increased by 149.2% to $4.0 million for
the six months ended June 30, 1996, as compared to the same period in 1995. The
operations of the SVC Companies accounted for $2.0 million of this increase,
with the remainder primarily resulting from additional administrative overhead
costs relating to the Company's growth in net revenues. General and
administrative expenses as a percentage of net revenues were 6.5% and 6.8% for
the six months ended June 30, 1996 and the six months ended June 30, 1995,
respectively.
Research and development expenses increased by 55.6% to $2.5 million for the
six months ended June 30, 1996, as compared to the same period in 1995. The
operations of the SVC Companies accounted for $0.6 million of this increase. The
remaining increase was primarily due to costs for developing product
enhancements and new services and features, and integration of the systems of
the SVC Companies into the Xpedite Network. Research and development expenses as
a percentage of net revenues decreased to 4.0% for the six months ended June 30,
1996, as compared to 6.7% for the six months ended June 30, 1995.
22
<PAGE>
Depreciation and amortization increased by 237.6% to $3.5 million for the
six months ended June 30, 1996, as compared to the same period in 1995. This
increase is attributable to the purchase of additional capital equipment for
expansion of the Company's systems to support the growth in the Company's net
revenues, combined with depreciation and amortization of tangible and intangible
assets related to the SVC Acquisitions.
Operating income increased by 140.7% to $10.1 million for the six months
ended June 30, 1996, as compared with the same period in 1995, resulting
primarily from increased net service revenues. Operating income as a percentage
of net revenues decreased to 16.3% for the six months ended June 30, 1996, as
compared with 17.5% for the six months ended June 30, 1995.
Interest income decreased to $0.2 million for the six months ended June 30,
1996, as compared with $0.4 million for the six months ended June 30, 1995, as a
result of the Company utilizing available cash in connection with the SVC
Acquisitions. For the six months ended June 30, 1996, the Company also incurred
interest expense of $2.0 million, primarily related to the Credit Facility
entered into to finance the SVC Acquisitions.
Income tax expense for the six months ended June 30, 1996 was $3.5 million,
or 41.0% of income before income taxes, as compared to 33.0% for the same period
in 1995. The Company's effective income tax rate for the six months ended June
30, 1996, exclusive of amortization of costs in excess of fair value relating to
the SVC Acquisitions (a non-deductible item), was 39.0%.
As a result of the factors discussed above, the Company's net income
increased by 61.6% to $5.0 million for the six months ended June 30, 1996, as
compared with $3.1 million for the same period in 1995. Net income per share of
Common Stock increased by 35.6% to $0.61 for the six months ended June 30, 1996,
as compared to $0.45 for the six months ended June 30, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net revenues increased by 34.4% to $55.7 million in 1995 from $41.4 million
in 1994. Net service revenues for 1995 were $51.8 million compared to $39.5
million in 1994, an increase of 31.2%. Of this increase in net service revenues,
the SVC Companies contributed net service revenues of $6.1 million during the
period from November 20, 1995 through December 31, 1995. The remaining increase
resulted primarily from the efforts of the Company's expanded direct sales force
both in penetrating new markets and selling new applications in existing
markets. As a result of the SVC Acquisitions and internal growth, fax minutes
increased by 43.0% to approximately 166.4 million minutes in 1995, as compared
to approximately 116.4 million in 1994. The increase in net service revenues and
minutes was partially offset by a reduction in the average price charged per
minute by the Company to deliver a fax page.
System sales and other net revenues were $3.8 million in 1995, as compared
to $1.9 million in 1994. This increase was the result of increased sales of
system upgrades and expansion equipment, and related royalty revenue.
The Company's gross margins were 61.2% in 1995, as compared to 59.0% in
1994. Service margin rates increased to 61.1% in 1995, as compared to 59.5% in
1994. Service margins were positively impacted by lower long distance rates
resulting from favorable negotiations with the Company's primary
telecommunications service providers, and completion of additional direct
interconnections with local exchange carriers. The positive impact of lower
transmission costs on service margins was partially offset by a reduction of
approximately 14.0% in the average price charged per minute to customers to
deliver a fax page, in response to competition in the Company's markets. In
addition, the Company expects that an increase in net revenues and increased
operating efficiencies will also mitigate the impact on margins of declining
prices. Margin rates on system sales increased to 62.1% in 1995, as compared to
49.3% in 1994, primarily as a result of an increase in royalty revenue of
approximately $0.7 million.
23
<PAGE>
Selling and marketing expenses increased by 34.7% to $15.1 million in 1995
from $11.2 million in 1994. Selling and marketing expenses as a percentage of
net revenues remained at 27.0% in 1995 and 1994. The Company continued to expand
its sales and marketing organization in 1995, increasing its sales force by 67
salespeople to a total of 165 at December 31, 1995, including 47 salespeople
added as a result of the SVC Acquisitions. The Company also expanded its
customer care, sales support, marketing and product management functions by 26
individuals to a total of 70 at December 31, 1995, to support the increase in
the Company's revenues.
General and administrative expenses increased by 44.4% to $4.0 million in
1995 from $2.7 million in 1994, primarily as a result of additional
administrative overhead costs related to the increased number of personnel
employed by the Company. General and administrative expenses as a percentage of
net revenues increased to 7.1% in 1995 from 6.6% in 1994.
Research and development expenses increased by 20.5% to $3.4 million in 1995
from $2.8 million in 1994. This increase was primarily due to costs for
developing enhancements and new services and features on the Company's systems.
Research and development expenses as a percentage of net revenues decreased to
6.2% in 1995 from 6.8% in 1994.
EBITDA, excluding the write-off of $53.0 million of in-process research and
development costs in 1995, increased by 51.9% to $12.0 million in 1995 from $7.9
million in 1994. EBITDA, excluding such write-off of in-process research and
development costs, as a percentage of net revenues increased to 21.6% in 1995
from 19.1% in 1994. EBITDA is a commonly used measure of financial performance
in the telecommunications industry, but is not intended to be a substitute for
or replacement of operating income or reported net income. These increases were
primarily attributable to increased gross margins resulting from decreased
telecommunications line charges and improved operating efficiencies.
Depreciation and amortization increased to $2.7 million in 1995 from $1.4
million in 1994, as a result of additional capital equipment purchased during
1995 and 1994 to support the growth in the Company's net revenues.
The Company incurred an operating loss of $44.1 million in 1995, as compared
to operating income of $6.2 million in 1994, as a result of the write-off of
$53.0 million of in-process research and development costs in connection with
the SVC Acquisitions.
Interest income, net of interest expense, was $0.2 million in 1995, as
compared to net interest income of $0.4 million in 1994. Interest expense was
$0.5 million in 1995, related to debt under the Credit Facility and the Vitel
Notes issued to finance the acquisition of the SVC Companies.
Income tax expense in 1995 was $2.7 million or 6.3% of the Company's loss
before income taxes as compared to 29.2% in 1994. The Company's effective tax
rate in 1995, exclusive of the write-off of in-process research and development
costs in connection with the SVC Acquisitions (a non-deductible item), was
30.0%. See Note 6 of the Notes to the Consolidated Financial Statements.
As a result of the factors discussed above, the Company's net loss for 1995
was $46.6 million, as compared with net income of $4.7 million in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Net revenues increased by 42.5% to $41.4 million in 1994 from $29.1 million
in 1993. Fax Broadcast net revenues increased by 67.5% to $31.0 million in 1994
from $18.5 million in 1993. In addition, fax minutes increased by 70.2% to
approximately 116.4 million minutes in 1994 from approximately 68.4 million
minutes in 1993. This increase in Fax Broadcast net revenues resulted primarily
from the expansion of the Company's direct sales force to 98 salespersons as of
December 31, 1994 from 73 salespersons as of December 31, 1993, and the
penetration of additional vertical markets by the Company's direct sales force.
The increases in Fax Broadcast net revenues and fax minutes were partially
offset by a reduction of approximately 6.5% in the price charged per minute by
the Company to deliver a fax page. Net revenues from the Gateway Messaging
24
<PAGE>
service decreased to $8.5 million in 1994 from $9.8 million in 1993. This
decrease resulted from a significant decline in revenues from telex service,
which decreased by 41.7% to $2.1 million in 1994, as compared to $3.6 million in
1993. The Company's telex revenues were derived primarily from the customers and
assets acquired from TRT in February 1993. The Company anticipated the decline
in telex revenues, both as a consequence of the TRT acquisition, and due to the
fact that the Company had not traditionally been a telex carrier.
Cost of sales increased by 21.4% to $17.0 million in 1994 from $14.0 million
in 1993. Cost of sales as a percentage of net revenues decreased to 41.0% in
1994 from 48.1% in 1993, primarily as a result of decreased telecommunications
line charges and operating efficiencies. The Company lowered its per minute
telecommunications rates partly through negotiation with carriers (reflecting
the increasing volume of telecommunications transmission time being purchased by
the Company), and through the elimination of the higher costs per minute that
had been charged to the Company by TRT prior to the acquisition of the TRT
assets by the Company. The integration of the TRT assets into the Company's
systems also allowed the Company to eliminate certain duplicative operations
support functions.
Selling and marketing expenses increased by 45.6% to $11.2 million in 1994
from $7.7 million in 1993. Selling and marketing expenses as a percentage of net
revenues increased to 27.0% in 1994 from 26.4% in 1993. The Company continued to
expand its sales and marketing organization in 1994, increasing its sales force
by 25 salespeople to a total of 98 at December 31, 1994. The Company also
expanded its customer care, sales support, marketing, and product management
functions by 12 individuals to a total of 44 at December 31, 1994, to support
the Company's increase in net revenues.
General and administrative expenses increased by 41.4% to $2.7 million in
1994 from $1.9 million in 1993, primarily as a result of the additional
administrative overhead costs related to the increased number of personnel
employed by the Company. General and administrative expenses as a percentage of
net revenues decreased to 6.6% in 1994 from 6.7% in 1993, resulting from
increased net revenues and greater operating efficiencies.
Research and development expenses increased by 67.3% to $2.8 million in 1994
from $1.7 million in 1993. Research and development expenses as a percentage of
net revenues increased to 6.8% in 1994 from 5.8% in 1993. These increases were
partly due to costs incurred to fully integrate the assets acquired from TRT
into the Company's systems, as well as costs to develop new services and
features.
EBITDA increased by 99.6% to $7.9 million in 1994 from $4.0 million in 1993.
EBITDA as a percentage of net revenues increased to 19.1% in 1994 from 13.6% in
1993. EBITDA is a commonly used measure of financial performance in the
telecommunications industry, but is not intended to be a substitute for or
replacement of operating income or reported net income. These increases were
primarily attributable to increased gross margins resulting from decreased
telecommunications line charges and improved operating efficiencies.
Depreciation and amortization increased to $1.4 million in 1994 from $1.0
million in 1993, as a result of the purchase by the Company of additional
capital equipment during 1994 to support the growth in the Company's net
revenues.
Operating income increased to $6.2 million in 1994 from $2.8 million in
1993. Operating income as a percentage of net revenues increased to 15.1% in
1994 from 9.6% in 1993. These increases were primarily attributable to the
increase in Fax Broadcast revenues, and increased gross margins.
Interest income, net of interest expense, was $0.4 million in 1994. The
Company incurred net interest expense of $0.4 million in 1993. This change
resulted from the use of a portion of the net proceeds from the Company's
initial public offering in February 1994 to repay all outstanding debt during
the first quarter of 1994 (except for capital lease obligations), and the
investment of the balance of such net proceeds.
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<PAGE>
As a result of the factors discussed above, the Company's net income
increased to $4.7 million in 1994 from $1.7 million in 1993.
SELECTED QUARTERLY FINANCIAL DATA
The following table shows certain unaudited financial data of the Company
for each of the six most recent fiscal quarters. The selected quarterly
financial data are unaudited and have been prepared from the books and records
of the Company in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all adjustments
(including only normal, recurring adjustments) considered necessary for a fair
presentation have been included. Interim results for the three month periods
ended March 31, and June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPT. 30 DEC. 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
----------- --------- --------- ---------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Domestic service........................................ $ 10,979 $ 10,994 $ 11,418 $ 14,819 $ 18,382 $ 19,342
International service................................... -- -- -- 3,630 9,877 10,414
System sales and other.................................. 954 908 731 1,251 1,825 1,756
----------- --------- --------- ---------- ---------- ---------
Total net revenues.................................... 11,933 11,902 12,149 19,700 30,084 31,512
Operating income (loss) (1)............................... 2,129 2,050 2,170 (50,428) 4,880 5,177
Other Data:
EBITDA (2).............................................. 2,701 2,666 2,830 3,833 6,879 7,232
</TABLE>
- ---------------
(1) Operating income (loss) for the quarter ended December 31, 1995 was
calculated including a non-recurring charge of $53.0 million, relating to
the acquisitions of the SVC Companies.
(2) EBITDA for the quarter ended December 31, 1995, was calculated excluding
the non-recurring charge of $53.0 million related to the acquisitions of
the SVC Companies.
Total net revenues increased to $30.1 million and $31.5 million in the
quarters ending March 31, and June 30, 1996, respectively, reflecting an
increase of 52.7% and 4.7% over the preceding quarter, respectively. EBITDA
increased to $6.9 million and $7.2 million in the quarters ended March 31, and
June 30, 1996, respectively, reflecting an increase of 79.5% and 5.1% over the
preceding quarter, respectively. The increases for the quarter ended March 31,
1996 are attributable primarily to the effect of the SVC Acquisitions in
November 1995. The increases for the quarter ended June 30, 1996 reflect
internal growth.
LIQUIDITY AND CAPITAL RESOURCES
The Company entered into the Credit Facility on November 20, 1995, in
connection with the SVC Acquisitions. The Credit Facility provides for a term
loan and a revolving loan. As of June 30, 1996, there was an outstanding balance
of $0.7 million on the revolving loan portion of the Credit Facility and $37.5
million outstanding under the term loan portion of the Credit Facility. The term
loan is payable in quarterly installments of $1.25 million increasing
periodically to $2.25 million with a final payment in November 2001. The Company
intends to use approximately $2.6 million of the net proceeds from the Offering
to repay a portion of the outstanding indebtedness under the term loan portion
of the Credit Facility, subject to the approval by its lenders of the use of
proceeds for working capital and general corporate purposes. See "Use of
Proceeds." In connection with the SVC Acquisitions, the ViTel Notes were issued
to the sellers of ViTel. The ViTel Notes did not accrue interest until May 1996,
at which time they began to accrue interest at 17.0% per annum until November
1996, and thereafter at the rate of 12.0% per annum until maturity in January
2002. Interest on the ViTel Notes is payable annually by the issuance of
additional notes in principal amount equal to the interest payment. In the event
that all unpaid principal and accrued interest is not paid in full on or prior
to November 20, 1996, the aggregate principal amount of the ViTel Notes will
increase to
26
<PAGE>
approximately $7.4 million. In June 1996, the Company issued 351,000 shares of
Common Stock to the holders of the ViTel Notes in prepayment of the outstanding
principal amount thereof. Such shares were placed in escrow pending approval by
the Company's stockholders of such prepayment.
At June 30, 1996, the Company had $4.5 million in cash and cash equivalents.
At June 30, 1996, the Company had working capital of $2.9 million. The Company
generated $6.3 million in cash from operations in 1995, as compared to $5.0
million and $3.5 million in 1994 and 1993, respectively. For the six month
period ended June 30, 1996, the Company generated $4.6 million in cash from
operations. For the comparable period ended June 30, 1995, the Company generated
$1.6 million in cash from operations.
The Company performs ongoing credit evaluations of its customers. Reserves
are maintained for potential credit losses and allowances issued to customers as
a result of adjustments by the Company in the prices charged to customers. Such
losses and allowances have been within management's expectations. Provisions for
allowances and doubtful accounts as a percentage of net revenue were 2.9%, 3.3%,
and 2.2% in 1995, 1994 and 1993, respectively. The increase from 1993 to 1994
was primarily a result of the customers acquired from TRT in 1993.
Statement of Financial Accounting Standards ("SFAS") No. 109 requires that a
valuation allowance be recorded for deferred tax assets if it is more likely
than not that some or all of a company's deferred tax assets will not be
realized. The ultimate realization of the deferred tax assets depends upon the
existence of future taxable income. Prior to 1995, the Company recorded a tax
valuation allowance in accordance with SFAS No. 109. As a result of its recent
history of carryforward utilization and projected future taxable income, the
Company reduced its tax valuation allowance by $2.3 million in 1995.
Included in the net deferred tax assets recorded at December 31, 1995 is a
deferred tax asset of $2.4 million reflecting the benefit of $6.0 million in
loss carryforwards, which expire in varying amounts between 2004 and 2007. As a
result of certain transactions involving the Company's stock, an "ownership
change" as defined in Section 382 of the Internal Revenue Code occurred in 1992.
Consequently, future utilization of the Company's federal net operating loss
carryforwards are subject to an annual limitation of approximately $640,000.
Net cash provided by investing activities in 1995, exclusive of $46.2
million in cash used to acquire the SVC Companies, was $0.3 million. During the
years ended December 31, 1995, 1994 and 1993, the Company made capital
expenditures of $3.7 million, $4.3 million and $2.3 million, respectively. The
Company's primary capital expenditures consist of investments in computer
systems and equipment, and telecommunications systems. The Company has currently
budgeted approximately $6.5 million for capital expenditures in 1996, but has
requested an increase from its lenders for capital expenditures of approximately
$9.0 million in 1996. The Company made additional loans to Xpedite Germany in
1995 of $1.6 million, and has made aggregate loans to Xpedite Germany of $3.3
million as of June 30, 1996. The Company has agreed to provide up to an
additional $0.6 million (converted at the current rate of exchange), in such
loans over the next three years. The proceeds of the net sales of
held-to-maturity securities of $5.8 million were used to partially finance the
acquisitions of the SVC Companies. These securities were sold at their maturity
dates during 1995.
The Company has "put" and "call" arrangements relating to each of the
European Affiliates. The purchase prices payable in connection with the exercise
of such "put" or "call" options is based on, among other things, the achievement
of certain financial results as set forth in the agreements relating to such
"puts" and "calls." Due to the uncertainties as to the ability of each of the
European Affiliates to achieve such financial results and as to whether the
conditions set forth in such agreements will be met, the Company does not
consider the exercise of these options to be probable during the next twelve
months. If exercised, however, the purchase price payable in connection with the
"put" and "call" options is payable in cash or any negotiable security, Common
Stock, or a combination of cash, Common Stock, or any negotiable security, at
the Company's option. See "Business--Strategic Acquisitions and Relationships."
27
<PAGE>
The Company believes that its sources of capital, including internally
generated funds, and cash available pursuant to the Credit Facility will be
adequate to satisfy its debt requirements and anticipated capital needs for the
next twelve months. However, the Company may elect to finance its future capital
requirements through additional equity or debt financing.
HEDGING TRANSACTIONS
The Company is holding forward contracts for 3.4 million German marks, and
160 million Japanese yen, in order to hedge its loans to Xpedite Germany and
amounts due from its subsidiaries at June 30, 1996, reducing its risk to
fluctuations in foreign exchange rates.
Contracts for German marks have maturity dates ranging from 1997 through
1999. The Company's contracts for Japanese yen have maturity dates during 1996.
The fair value of such contracts at June 30, 1996, based upon current market
quotes for contracts with similar terms, approximated the carrying value of such
contracts.
In the event of non-performance of contract terms by the banks, the Company
would be required to sell German marks and Japanese yen at the prevailing
exchange rates.
EFFECT OF INFLATION
Inflation is not a material factor affecting the Company's business. In
recent years, telecommunications costs have declined significantly as volumes of
traffic carried by the Company have grown. However, general operating expenses
such as salaries, employee benefits and occupancy costs are subject to normal
inflationary pressures.
28
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading worldwide provider of enhanced fax services
("Enhanced Fax Services"), and now also offers basic fax services ("Basic Fax
Services") via a worldwide network with points of presence in over 70 cities in
38 countries. Through internal growth and strategic acquisitions, the Company
has significantly increased its net revenues, EBITDA and net income in recent
years. For the year ended December 31, 1995, net revenues increased 34.4% to
$55.7 million, EBITDA (before non-recurring charges) increased 51.9% to $12.0
million and net income (before non-recurring charges) increased 36.1% to $6.4
million, as compared to the year ended December 31, 1994. For the six months
ended June 30, 1996, net revenues increased 158.4% to $61.6 million, EBITDA
increased 162.9% to $14.1 million and net income increased 61.6% to $5.0
million, as compared to the six months ended June 30, 1995. EBITDA is a commonly
used measure of financial performance in the telecommunications industry, but it
is not intended to be a substitute for or replacement of operating income or
reported net income.
The Company's Enhanced Fax Services consist primarily of its Fax Broadcast
and Gateway Messaging services. The Fax Broadcast service enables a customer to
rapidly distribute the same document to multiple recipients by sending a single
transmission through the Company's system to a list of fax addresses. For
example, use of the Fax Broadcast service allows a newsletter publisher to send
its newsletter to all of its subscribers in a matter of minutes by means of a
single transmission to the Company. This process may save significant amounts
relative to the costs of printing and mailing or managing the fax process and
documenting the delivery of the fax communication to each addressee. While the
Company's typical Fax Broadcast is transmitted to approximately 100 recipients,
customers have sent a single fax broadcast to as many as approximately 280,000
recipients. The Company believes that Fax Broadcast service is the largest
component of the Enhanced Fax Services market. Gateway Messaging, the Company's
other primary Enhanced Fax Services, enables a customer to send information from
the customer's computer through the Company's system to a recipient's fax or
telex machine, or to a recipient via the Internet or X.400 electronic mail
networks or other electronic media. The Company's Gateway Messaging service
typically involves the processing of a large volume of individual
communications, each of which is in the same format but contains different
information.
The Company's Basic Fax Services consist of its Store and Forward and
Real-Time services. The Company's Basic Fax Services allow a customer to use an
automatic dialing device attached to the customer's fax machine to direct
international faxes to the Company's document distribution network for delivery
to the recipient. The Company entered the Basic Fax Services market as a result
of the acquisition of the SVC Companies in November 1995. The Company's initial
Basic Fax Service was a Store and Forward service, in which the fax is stored in
the Company's system for subsequent delivery. In response to demand in the
market for a basic fax service which would enable the sender to obtain immediate
confirmation that the fax had been delivered, the Company launched its Real-Time
service in 1996, the fax equivalent of POTS. In Real-Time service, the customer
uses the same automatic dialing device as is used in the Store and Forward
service, but rather than store the fax for subsequent delivery, the Company
connects the sender's fax machine directly to the recipient's fax machine,
thereby delivering the fax immediately (i.e., in "real time"). The Company is
currently offering its Store and Forward service in over 30 countries and its
Real-Time service in Japan, Korea, Hong Kong, Singapore, Switzerland and the
United States, and plans to offer this service in at least five additional
countries by the end of 1996.
In order to offer high quality Enhanced and Basic Fax Services cost
effectively, the Company has established the Xpedite Network, which consists of
the Company's document distribution system, the systems of the SVC Companies
which are connected to the Company's system, the Company's Nodal Partners and
the leased telecommunications lines which connect all of these systems. "Nodal
Partners" are certain independent entities which have purchased an electronic
document distribution system from the Company and which sell Basic Fax Services.
A "Node" is an element of the Xpedite Network located at a
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<PAGE>
geographically distinct point of presence which allows access to or egress from
the Xpedite Network via a local telephone call. The Company's Nodes allow it to
deliver a larger number of faxes using inexpensive local calls rather than
higher priced long distance or international fax calls. The Company's leased
telecommunications lines, which connect the Nodes, provide secure, high quality
connections and minimize telecommunications expenses. In addition, the Company's
leased telecommunications lines provide the reliable, continuous, high-speed
throughput required for delivery of Real-Time services.
The Company provides Enhanced and Basic Fax Services in North America and
overseas. The Company believes that the market for Enhanced Fax Services is
annually at least $300 million in North America and $800 million worldwide. The
target market for the Company's Basic Fax Services is the global fax
transmission market, which the Company believes is annually in excess of $3
billion in North America and $10 billion worldwide. The Company believes that
its markets will continue to grow, fueled by growth in international trade and
continued growth in the utilization of fax machines and computer fax devices.
The Company's business has grown as a result of, among other things, the
development of a highly-trained sales organization. The Company has increased
its sales force from 98 salespeople as of December 31, 1994 to 189 salespeople
as of June 30, 1996; of such 189 salespeople, 145 were operating in North
America and 44 were operating internationally. The Company believes that it has
the largest sales organization in North America focused on the Enhanced Fax
Services market.
In addition to growth resulting from expansion of its sales force, the
Company has expanded through strategic acquisitions and relationships. In
February 1993, the Company acquired certain enhanced fax and messaging services
assets from TRT. The Company has also entered into affiliate relationships in
Europe with its European Affiliates. In November 1995, the Company acquired the
SVC Companies, which significantly expanded the Company's North American and
international businesses. On a pro forma basis, the acquisition of the SVC
Companies would have approximately doubled the Company's net revenues for the
year ended December 31, 1995. See "Pro Forma Condensed Combined Statement of
Operations."
BUSINESS STRATEGY
The Company's strategy is to expand from being primarily a provider of
Enhanced Fax Services in North America to become a provider of both Enhanced and
Basic Fax Services on a worldwide basis. The Company's strategic plan has the
following key components:
- EXPAND ENHANCED FAX SERVICES
The Company plans to leverage its proven experience in the Enhanced Fax
Services market by continuing to develop new applications for its Enhanced Fax
Services and by offering Enhanced Fax Services in geographic areas in which the
Company has not historically offered such services. Among its recent
innovations, the Company introduced its Cash Management Reporting Service, which
enables banks to send financial reports to their customers via fax at a
specified time each day, and has implemented the XWEB service, which allows
customers to access the Company's services via the Internet. In order to
establish a platform for expanding sales of its Enhanced Fax Services overseas,
the Company intends to have installed its document distribution system in at
least six additional locations overseas during 1996.
- LAUNCH BASIC FAX SERVICES
The Company intends to capitalize on the multi-billion dollar market for
Basic Fax Services by aggressively marketing both its Store and Forward and
Real-Time services through its direct sales force, sales agents, resellers and
Nodal Partners, and by installing the infrastructure required for the delivery
of such services on a worldwide basis. By utilizing the Xpedite Network to
minimize the cost of delivering fax documents, the Company is able to offer
Basic Fax Services at prices which are less than the cost which would be
incurred by a customer to deliver the fax using its regular telephone service.
The Company currently offers its Store and Forward service in over 30 countries
and its Real-Time service in six countries, and plans to add Real-Time service
in at least five additional countries by the end of 1996.
30
<PAGE>
- INCREASE SALES FORCE
The Company believes that its highly-trained direct sales force is one of
the key elements of its success. The Company plans to expand its direct sales
force by adding 30 to 40 additional salespeople worldwide by the end of 1996.
The Company intends to use its existing sales and distribution organization to
market its Basic Fax Services, and plans to continue to aggressively expand its
direct sales group in the Pacific Rim, North America and Europe in order to
increase such sales. The Company also intends to continue expanding its Nodal
Partner and other third party distribution relationships.
- EXPAND THE XPEDITE NETWORK
In order to continue to lower its fax delivery costs, the Company seeks to
expand the Xpedite Network by adding new Nodes and leased telecommunications
lines. The number of Nodes in the Xpedite Network has increased from seven Nodes
in three countries as of December 31, 1994 to over 70 Nodes in 38 countries as
of the date of this Prospectus. The Company intends to leverage the Xpedite
Network by installing the Company's system in at least six additional locations
overseas during 1996. This will allow the Company to expand its Enhanced Fax
Services and launch its Basic Fax Services on a worldwide basis.
- PURSUE ADDITIONAL STRATEGIC ACQUISITIONS AND RELATIONSHIPS
The Company continuously seeks to acquire additional electronic document
distribution service companies in order to expand its geographic coverage,
leverage the Xpedite Network, and achieve economies of scale, operating
efficiencies and increased market share. The Company completed the acquisition
of the SVC Companies in November 1995, has executed an agreement to increase its
ownership interest in Xpedite France, is currently negotiating to increase its
ownership interest in Xpedite Germany and has executed a letter of intent to
purchase the assets of one of its Nodal Partners in Korea. The Company also
seeks strategic relationships which present opportunities for the Company to
leverage operating costs and the Xpedite Network, such as the Company's
50%-owned joint venture in Singapore.
PRODUCTS AND SERVICES
The Company currently provides a wide range of Enhanced and Basic Fax
Services, focused primarily on reliable electronic document distribution at
affordable rates.
ENHANCED FAX SERVICES
The Company continues to focus on the development of its Fax Broadcast
service, which enables a customer to rapidly distribute the same document to
multiple recipients by sending a single transmission through the Company's
system to a list of fax addresses. For example, use of the Fax Broadcast service
allows a newsletter publisher to send its newsletter to all of its subscribers
in a matter of minutes by means of a single transmission of such newsletter to
the Company. This process may save significant amounts relative to the costs of
printing and mailing or managing the fax process and documenting the delivery of
the fax communication to addressees. Customers of the Fax Broadcast service
include financial services organizations, which use the service to disseminate
research reports; cruise lines, which use the service to send notices to travel
agents regarding fares and availability; political groups, which use the service
to transmit campaign information; trade associations, which use the service to
disseminate information to their members; and public relations firms and
investor relations groups, which use the service to disseminate press releases
and earnings reports. While the Company's typical Fax Broadcast is transmitted
to approximately 100 recipients, customers have sent a single fax broadcast to
as many as approximately 280,000 recipients. The Company believes that fax
broadcast service is the largest component of the enhanced fax services market.
Gateway Messaging, the Company's other primary Enhanced Fax Service, enables
a customer to send information from the customer's computer through the
Company's system to a recipient's fax or telex machine, or to a recipient via
the Internet or X.400 electronic mail networks or other electronic media. In
contrast to a fax broadcast (in which the same document is typically transmitted
to numerous recipients using a previously stored list of fax addresses), the
Gateway Messaging service (which is sometimes referred to in the
telecommunications industry as "text-to-fax" or "e-mail-to-fax") typically
involves the transmission of a
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<PAGE>
single document to a single recipient. The Company's Gateway Messaging service
tends to involve the processing of a large volume of individual communications,
each of which is in the same format but contains different information. For
example, using Gateway Messaging, a manufacturing company could have an employee
enter information regarding individual orders of its products into the
manufacturer's mainframe computer, then forward such information to the Company,
along with the fax, telex or electronic mail address for the recipient. Using
such information, the Company prepares individual invoices, and stores the form
in the Company's system. Such invoices are faxed by the Company to the
manufacturing company's customers which placed the related orders. Customers of
the Gateway Messaging service range from hotel chains, airlines and cruise
lines, which use the service to deliver confirmations of reservations, to
manufacturing and shipping companies, which rely on this service to deliver
invoices, purchase orders and shipping documents.
BASIC FAX SERVICES
The Company's Basic Fax Services consist of Store and Forward and Real-Time
services. The Company's Basic Fax Services allow a customer to use an automatic
dialing device attached to the customer's fax machine to direct international
fax calls to the Xpedite Network. The Company entered the Basic Fax Services
market as a result of the acquisition of the SVC Companies in November 1995. The
Company's initial Basic Fax Service was a Store and Forward service, in which
the fax is stored in the Company's system for subsequent delivery. In response
to demand in the market for a basic fax service which would enable the sender to
obtain immediate confirmation that its fax had been delivered, the Company
launched its Real-Time service in 1996, the fax equivalent of POTS. In the
Real-Time service, the customer uses the same automatic dialing device as is
used in the Store and Forward service, but rather than storing the fax for
subsequent delivery, the Xpedite Network connects the sender's fax machine
directly to the recipient's fax machine thereby delivering the fax immediately
(i.e., in "real time"). The Company is currently offering its Real-Time service
in Japan, Korea, Hong Kong, Singapore, Switzerland and the United States, and
plans to offer this service in at least five additional countries by the end of
1996.
CUSTOMER ACCESS
A key feature of both Enhanced and Basic Fax Services is the variety of
methods available to the Company's customers to access its services and retrieve
customer service information. The Xpedite Network can be accessed via fax input
or input from a sender's personal computer, mainframe, minicomputer or local
area network ("LAN"). In addition, the Company recently implemented its XWEB
service to allow customers with Internet access to subscribe to and use the
Company's fax and messaging services. The XWEB capability enables a customer to
use existing Web browser software to send fax, telex or electronic messages, and
to retrieve customer service related information, such as whether or not all of
such customer's faxes have been delivered. The Company believes the combination
of its multiple access options, proprietary software and sophisticated customer
support for all forms of computer access to the Xpedite Network will enhance its
ability to differentiate itself from its competitors in its markets.
MARKETS
The Company provides Enhanced and Basic Fax Services on a worldwide basis.
ENHANCED FAX SERVICES
The Company presently sells its Enhanced Fax Services, including its Fax
Broadcast and Gateway Messaging services, to a wide range of businesses, trade
and professional associations, political organizations and other enterprises.
The Company believes that the market for Enhanced Fax Services is annually at
least $300 million in North America and $800 million worldwide.
Since its inception, the Company has sought to meet the demands of its
customers in the North American market by developing Enhanced Fax Services in
response to specific needs. The Company believes that the market for Enhanced
Fax Services is customer- and applications-driven. Expansion in the Enhanced
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Fax Services market is expected to be derived from the continued development by
the Company of various new applications for such services within particular
industries ("vertical markets") and the development of individual applications
which may be used in several different industries ("horizontal markets").
BASIC FAX SERVICES
The target market for the Company's Basic Fax Services, including its Store
and Forward and Real-Time services, is the global fax transmission market, which
the Company believes is annually in excess of $3 billion in North America and
$10 billion worldwide. The Company believes that this market will continue to
grow, fueled by growth in international trade and continued growth in the
utilization of fax machines and computer fax devices. Published sources have
projected the growth of the global utilization of fax machines and computer fax
devices, as follows:
WORLDWIDE COMBINED FAX MACHINE AND COMPUTER-BASED FAX
DEVICE PLACEMENTS, 1994-98
(IN THOUSANDS)
[BAR GRAPH ILLUSTRATING WORLDWIDE COMBINED FAX MACHINE AND COMPUTER-
BASED FAX DEVICE PLACEMENTS, 1994-98]
The Basic Fax Services market has historically been dominated by PTTs, which
furnish telecommunications services in this market at regulated rates which may
be significantly greater than the underlying cost of the transmission. The
Company believes that, using the Xpedite Network, it can offer high quality
service to customers in these markets at rates lower than those which are
available from such other carriers.
THE XPEDITE NETWORK
The Xpedite Network consists of the Company's document distribution system,
the systems of the SVC Companies which are connected to the Company's system,
the Company's Nodal Partners and the leased telecommunications lines which
connect all of these systems. A Node is an element of the Xpedite Network
located at a geographically distinct point of presence which allows access to or
egress from the Xpedite Network via a local telephone call. The Xpedite Network
presently includes Nodes in over 70 cities in 38 countries worldwide.
The Xpedite Network is critical to the Company's ability to offer Basic Fax
Services at a cost which is attractive to customers. By utilizing its Nodes, the
Company is able to deliver a larger number of faxes using inexpensive local
calls rather than higher priced long distance or international fax calls. The
Company's
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leased telecommunications lines connect the Nodes, providing secure, high
quality connections while minimizing telecommunications expenses. In addition,
the Company's leased telecommunications lines provide the reliable, continuous,
high-speed throughput which is required for the delivery of Real-Time services.
Certain data networks which could be used in services offered as an alternative
to the Company's, such as the Internet or public X.25 packet networks, do not
provide throughput with these requisite characteristics. In addition, the
Company believes that by offering both Enhanced and Basic Fax Services which are
carried on the Xpedite Network, the Company will be able to develop a greater
volume of fax traffic and justify the cost of adding additional Nodes and leased
telecommunications lines to the Xpedite Network in additional cities worldwide.
The Company's system is designed to make efficient use of the Xpedite
Network by applying sophisticated queuing, compression, routing and distribution
algorithms. As a result, the Company is able to transmit fax communications
among diverse locations more efficiently than the basic long distance service of
a PTT, and thereby furnish a wider variety of fax services at a lower cost to
customers. In addition, the components of the Company's system used in
delivering its services are designed to optimize utilization of the Company's
leased telecommunications lines. The fax pads used in the Real-Time service
derive 16 simultaneous fax channels from a standard 64 kilobits per second trunk
line.
The Company is in the process of interconnecting the systems acquired from
the SVC Companies with the Xpedite Network, to provide cost-efficient routing
for its customers' faxes. At the same time, the Company plans to install its
system in certain of the overseas operating locations of the SVC Companies and
use such system as the growth platform for its services in these locations.
As a result of the acquisition of the SVC Companies, the Xpedite Network now
reaches over 70 cities in 38 countries, as illustrated by the following chart.
THE XPEDITE NETWORK
<TABLE>
<CAPTION>
CITIES WITH CITIES WITH CITIES WITH
COUNTRY NETWORK NODES COUNTRY NETWORK NODES COUNTRY NETWORK NODES
- ------------------------ --------------- ------------------------ --------------- ------------------------ -------------
<S> <C> <C> <C> <C> <C>
Argentina 1 Indonesia 1 Philippines 1
Australia 2 Israel 1 Poland 1
Azerbaijan 1 Italy 1 Russia 1
Brazil 1 Japan 2 Singapore 1
Canada 2 Kenya 2 South Africa 1
China 1 Korea 2 Spain 1
Costa Rica 1 Lebanon 1 Sri Lanka 1
Cyprus 1 Luxembourg 1 Switzerland 5
Denmark 1 Malaysia 1 Taiwan 1
Dominican Republic 1 Mexico 1 Uganda 1
France 5 Netherlands 1 United Kingdom 3
Germany 8 New Zealand 2 United States 14
Hong Kong 1 Peru 1
</TABLE>
As of June 30, 1996, the Company had over 8,000 outbound fax telephone
lines. The Company is able to add fax lines in varying increments and expects to
be able to add additional fax lines in order to meet the growth in demand for
its services. The Company maintains adequate capacity to accommodate fax
communications transmissions during the peak hours of usage of its system. The
Company's equipment has significant capacity for future growth and has been
designed for rapid expansion. The Company also believes that it will have excess
capacity during "off-peak" hours. As the volume of its international fax
transmissions has grown, the Company has observed that the concentration of peak
hour traffic is reduced.
34
<PAGE>
The Company has standardized its equipment specifications and limited the
number of its suppliers to achieve cost efficiencies. Substantially all of the
Company's computing equipment is readily available from large, well-known
suppliers such as Sun Microsystems, Inc. The Company continually evaluates new
developments in electronic document distribution technology in connection with
the design and enhancement of its system and development of services to be
offered to customers. As the Company installs its system in various of its
locations worldwide, the Company's ongoing efforts to develop its system are
expected to result in the development of service enhancements which may be
supported by a larger revenue base.
The Company has developed safeguards to minimize the impact of power outages
and other operational problems. The Company has installed generators at its
headquarters in Eatontown, New Jersey and at its Glen Head, New York
international switching center to provide an uninterrupted power supply in the
event of a disruption in service provided by the local utility. In addition, the
Company uses a variety of carriers to transmit its telecommunications traffic,
and employs a variety of telecommunications routing technologies, including a
fiber optic "ring" connection with Bell Atlantic Corporation, which allows
immediate re-routing of traffic in the event of a line interruption. The Company
has further developed its safeguards by establishing an additional "back-up"
operations center in Piscataway, New Jersey, which the Company believes can
become fully operational within 24 hours. The Company also maintains business
interruption insurance providing coverage of up to $7.0 million. The Company has
not suffered any material interruption in its business.
SALES AND MARKETING
Selling Enhanced Fax Services, including Fax Broadcast and Gateway Messaging
services, requires a thorough understanding of the application of the Company's
services to a particular customer's business, a focus on the identified market
opportunities and the ability to overcome potential customers' objections to
using a third party service provider to fulfill its electronic document
distribution service needs. The Company's sales personnel are taught to
understand and use the terminology of participants in the targeted industry and
to direct their selling efforts to the executive who benefits from the
electronic document distribution service. The Company believes that this
emphasis on targeted applications differs from the sales focus of competitors
such as AT&T, MCI and Sprint, which the Company believes tend to concentrate on
administrative groups responsible for telecommunications or information systems
within a customer's organization and whose presentations generally focus on
product capabilities and/or price across a broad industry base. The sales
process for Enhanced Fax Services in overseas markets is similar to that used in
North America.
The Company intends to use its existing sales and distribution organization
to market its Basic Fax Services, and plans to continue to aggressively expand
its direct sales group in the Pacific Rim, North America and Europe in order to
increase such sales. Sales and marketing of Basic Fax Services is expected to
focus on industries with substantial international trade activity such as
shipping, import/export, freight forwarders, manufacturing and financial
services. As with its Enhanced Fax Services, the Company believes that a direct
field sales organization is the most effective distribution channel in
addressing the Basic Fax Services market. The Company believes that the success
of companies such as MCI, Sprint and LDDS Metromedia confirm the importance of
having a direct sales organization to address a basic telecommunications market
in the business sector.
The Company's marketing department is primarily responsible for identifying
new markets and developing sales strategies and sales materials to support a
focused sales effort in each new market. The Company's marketing materials
typically include direct response advertising and public relations focused on
the trade periodicals relevant to the vertical markets and horizontal markets
targeted by the Company and trade show participation.
DIRECT SALES. Direct sales by the Company's sales personnel accounted for
approximately 77.0% of the Company's net revenues in both 1995 and 1994. As of
June 30, 1996, the sales force had grown to 145
35
<PAGE>
salespeople in North America and 44 salespeople operating overseas, as compared
to a sales force of 98 salespeople operating in North America as of December 31,
1994. The Company expects that a majority of its sales growth will continue to
be generated by its direct sales force.
SALES AGENTS. In addition to the direct sales force, sales agents, who are
not employees of the Company, act as representatives of the Company. The Company
provides customer service and billing to the customers of its sales agents.
Sales agents typically receive only a sales commission equal to a percentage of
gross domestic and international sales. Sales agents accounted for approximately
12.0% of the Company's net revenues in 1995, and approximately 11.0% in 1994.
RESELLERS. In order to supplement its direct sales force and sales agents,
the Company has contracted with various resellers. A reseller "purchases" the
Company's fax communications services at a discount from the Company's regular
prices and resells such services under its own brand name. The reseller directly
manages its customer billing and acts as the primary customer service interface.
The use of resellers enables the Company to expand its presence in its markets.
Resellers accounted for approximately 11.0% of the Company's net revenues in
1995, and 12.0% in 1994.
NODAL PARTNERS. The Company also markets Basic Fax Services through its
network of Nodal Partners in over 30 countries. A Nodal Partner acts as an
international reseller operating independently of the Company, and in this
capacity purchases an electronic document distribution system from the Company
and operates the necessary computer system in its assigned territory (usually
the Nodal Partner's home country). The Nodal Partner typically sells Basic Fax
Services to customers located in its territory. For fax documents destined to
points outside of the Nodal Partner's territory, the Nodal Partner utilizes the
Xpedite Network to forward faxes. The Company and such Nodal Partner share the
cost of delivering the fax; the Company receives a portion of the revenue
generated from such delivery. Each Nodal Partner provides its own billing and
customer support. The Company intends to continue to support its Nodal Partners
where the Nodal Partner has performed its contractual obligations to the
Company.
STRATEGIC ACQUISITIONS AND RELATIONSHIPS
The Company has used and will continue using strategic acquisitions and its
relationships with overseas affiliates and Nodal Partners as a means of
continued growth and expansion.
In February 1993, the Company acquired from TRT certain assets used in the
enhanced fax and messaging businesses. In 1993, such assets were operated to
generate revenues of approximately $9.5 million which, together with internal
growth, enabled the Company to almost triple its 1992 revenues.
As of January 29, 1993, December 15, 1993, and June 24, 1994, respectively,
the Company entered into agreements with Xpedite UK, Xpedite France and Xpedite
Germany, respectively. The Company's agreements with each of the European
Affiliates provide for the sale by the Company of the Company's document
distribution system, a license of the Company's software (for which the European
Affiliate pays royalties equal to approximately 8.0% of its net revenues), joint
marketing efforts, and "put" and "call" rights which would enable or require the
Company to purchase interests in the relevant European Affiliate.
In January 1995, the Company established Xpedite Systems Canada, Inc.
("Xpedite Canada"), a wholly-owned subsidiary incorporated in New Brunswick,
Canada, and located in Toronto. Xpedite Canada's focus has been to market the
Company's services throughout Canada.
In November 1995, the Company acquired the SVC Companies. Approximately
two-thirds of the combined revenues of these companies have been derived from
customers outside of North America. ViTel has operating centers in Tokyo, Hong
Kong, Australia, the United States and London, and Nodes in seven other
countries. Over 50% of ViTel's revenues have been derived from sales in the
Pacific Rim and Europe. Swift has derived revenues from both United States
customers and from its network of Nodal Partners. Swift utilizes systems in the
United States, Hong Kong and London, as well as those of its Nodal Partners, to
carry
36
<PAGE>
its fax traffic. Comwave has focused primarily on the sale of fax broadcast
services to customers in Switzerland, Germany and the United Kingdom. The
Company is continuing the process of interconnecting the Xpedite Network with
the systems acquired in the SVC Acquisitions.
The Company has executed an agreement to increase its ownership interest in
Xpedite France and is currently negotiating to increase its ownership interest
in Xpedite Germany. Such increases are not pursuant to the "put" and "call"
arrangements with the European Affiliates. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources." In addition, the Company has executed a letter of intent to purchase
the assets of one of its Nodal Partners in Korea, for a purchase price of
approximately $2.5 million. Subject to the negotiation and execution of a
purchase agreement between the parties, such acquisition is expected to close
during the third quarter of 1996. However, there can be no assurance that any of
such transactions will be completed.
The Company intends to continue to develop operations elsewhere throughout
North America, Europe, the Pacific Rim and other developed nations, either
directly or through arrangements with companies located in these areas. Where
such operations are developed, the Company intends to link these systems
together with the Company's own systems to form an integrated international
telecommunications network, which the Company believes will enable it to offer a
portfolio of fax communications services more cost-effectively than its
competitors. The Company is actively seeking partners in other countries to
launch additional affiliates.
COMPETITION
The Company competes based on a number of factors, such as customer service
and support, service features and price. Of these factors, the Company believes
that service and support are the most important for Enhanced Fax Services, while
price is the critical competitive component with respect to Basic Fax Services
in developed countries with high quality long distance networks. In a service
industry in which a broad range of optional features are offered, the Company's
competitive strategy emphasizes a sales and support network that is well-versed
in the capabilities of the services offered to customers. The Company believes
that, while it continues to expand its development activity in order to add a
broad range of features to its services, it is the focus of its sales and
support organizations on customers' needs that enables the Company to compete
effectively.
AT&T, MCI and Sprint, as well as other long distance carriers and national
PTTs, provide certain enhanced fax communications services in competition with
the Company. The Company believes it can compete effectively with its
competitors because of its focus on the enhanced fax communications services
market, its broad array of service features and its cost-effective worldwide
Xpedite Network. The Company believes that, while AT&T and Sprint have begun to
expand the number of international Nodes employed by them, they have not
committed to the direct deployment of targeted sales personnel to focus on the
international fax markets, and that AT&T and Sprint currently are relying
primarily on worldwide partners and agents in marketing their enhanced fax
services outside of the United States.
In addition to the long distance carriers and PTTs, the Company competes
with a number of service bureaus based on the factors described above. Many
service bureaus face considerable obstacles in developing a business competitive
with the Company's. While it may be easy to begin service with a small personal
computer-based system, considerable system development expenditures are required
to enable such a system to grow to support the volumes and features needed to be
an effective competitor in the marketplace. Further, a small service bureau
typically will not have a sufficient volume of traffic to develop the economic
leverage necessary to obtain telecommunications services at rates enabling it to
compete cost-effectively with the Company. In addition, considerable investment
in a sales and marketing organization is required to develop a substantial
business base. As a result of the Company's investment in its sales and
marketing organization, the Company believes that the size of its sales force
significantly exceeds that of any service bureau in the United States, and the
Company knows of no other service bureau with as many sales personnel and Nodes
in as many countries as the Company.
37
<PAGE>
Immediately prior to the acquisition of the SVC Companies, the Company had
approximately 5,000 telecommunication lines dedicated to fax transmission, which
the Company believes was more than twice as many dedicated lines as its nearest
competitor. Since such acquisition, the Company has added approximately 3,000
lines as a result of the acquisition of the SVC Companies and through internal
expansion, and the Company intends to continue to add dedicated lines as its
volume of fax transmissions makes the installation of such lines cost effective
to support the growth of the Company's business.
The Company believes that its major advantages in addressing the
international markets is that it is offering both Basic and Enhanced Fax
Services and already has operating centers and full time sales personnel in the
major telecommunications centers around the world, and that its network of Nodal
Partners extends this presence beyond such major centers. Another major
advantage is that the Company's Basic Fax Services include both Real-Time and
Store and Forward options, while the Company's competitors may only offer one of
such options.
Another alternative to using the Company's services is for a potential
customer to fulfill its own needs for fax communications services. The "home
grown" solution may simply be an individual at a fax machine or may involve the
customer acquiring its own computerized fax communications system (sometimes
known as "customer premise equipment" or "CPE"). The Company believes that the
CPE solution is suitable in some applications, but is generally not feasible for
the Company's customers, who require the capacity to effect a significant volume
of electronic document deliveries in a short period of time. The Company
believes that the CPE solution for a fax broadcast application would require the
customer to obtain and maintain a large number of telephone transmission lines
which would remain idle for significant periods of time. Further, for
international fax traffic, the customer would be required to set up a worldwide
nodal network; the Company believes that this is only practical for large
multinational firms and even these firms would be unlikely to develop a network
which would reach as many countries as the Xpedite Network. As a fax
communications services provider with many customers, the Company is able to
spread the costs of operating the Xpedite Network over a large number of users.
In addition to being concerned with the irregular nature of demand, a customer
selecting a CPE solution must consider the total cost of system acquisition,
ongoing technical support, reliability, technological obsolescence and
accountability. Based on the foregoing, the Company believes that a substantial
percentage of customers in the market for fax communications services will elect
a service provider rather than CPE. In fact, as the Company's prices have fallen
over time in the United States, a number of customers who tried to implement CPE
solutions have returned as service customers.
Similarly, electronic transmission of information via the Internet provides
an alternative to the Company's fax services. However, Internet transmission
does not offer prompt confirmation of receipt of information in "real time" and
has the additional risks of limited security and confidentiality of information
transmitted over a worldwide network easily accessed by third parties. Finally,
while a fax transmission alerts the recipient that information has been
delivered, information transmitted via e-mail often relies on the recipient
inquiring whether information has been delivered. Transmission by the Internet
cannot be an alternative if a sender or recipient of information does not have
access to the Internet.
ADDITIONAL INFORMATION
EMPLOYEES. The Company considers its relationship with its employees to be
satisfactory. The Company employed 530 persons as of June 30, 1996,
substantially all of whom were full-time employees, and none of whom was covered
by a collective bargaining arrangement. Of these employees, 225 were engaged in
sales and marketing; 200 in operations and customer support; 50 in research and
development; and 55 in general and administrative activities. Approximately 30%
of the Company's employees are located in the Company's Eatontown, New Jersey
headquarters; none of the Company's remaining offices employs more than 10% of
the Company's employees.
PATENTS AND PROPRIETARY INFORMATION. The Company regards certain of its
computer software as proprietary and seeks to protect such software with common
law copyrights, trade secret laws and internal non-disclosure agreements and
safeguards. The Company currently holds no United States or foreign patents, but
has several United States patent applications pending. The Company does not
believe that patent protection of any of its intellectual property is material
to its business.
38
<PAGE>
On July 31, 1996, the Company received a letter from counsel for AudioFAX IP
LLC ("AudioFAX"), which informed the Company that AudioFAX is the owner of
certain United States and Canadian patents in the fax processing business
entitled "Facsimile Telecommunications Systems and Method" (the "Patents"), and
inquired as to the Company's interest in obtaining a license of the Patents. The
Company is in the process of reviewing the Patents. The Company cannot predict
whether AudioFAX will continue to pursue the licensing of the Patents to the
Company, or whether the Company will determine that it is advisable to obtain a
license of the Patents.
INSURANCE. The Company has insurance covering risks incurred in the ordinary
course of business, including general liability, special and business property
coverage (including coverage of electronic data processing equipment and media),
and business interruption insurance. The Company believes its insurance coverage
is adequate.
PROPERTIES. The Company's headquarters facility, which includes its
principal administrative, sales, marketing, management information systems and
product development offices and its operations center, is located in
approximately 28,000 square feet of leased space in Eatontown, New Jersey. The
lease on this facility terminates September 30, 1998 (excluding a five-year
renewal option exercisable by the Company). The Company also maintains a
development facility, located in approximately 3,500 square feet of leased
space, in Ft. Lauderdale, Florida. The lease on this facility expired by its
terms on February 1, 1994 and the Company continues to occupy this facility on a
month-to-month basis. The Company owns an office building located in London,
consisting of approximately 4,000 square feet of office space.
The Company also maintains approximately 20,000 square feet of leased space
for the principal administrative, sales and management information systems
offices and operations center of its international division in Glen Head, New
York. The lease covering approximately 75% of this space expires on December 30,
1999, and the lease covering the remaining space expires on September 30, 2001,
subject, in each case, to extension or earlier termination in certain
circumstances.
During 1994, the Company leased approximately 4,900 square feet of space in
a Piscataway, New Jersey facility, where the Company has established an
additional operations center which is substantially identical, in terms of
capability, to its current operations center at its headquarters in Eatontown,
New Jersey. This facility provides the Company with another level of protection
in its operational systems, and is expected to enable the Company to continue
its operations in the event of a disaster at either facility. The lease on this
facility terminates on February 28, 2001. The additional facility is designed to
enable the Company to more easily expand its systems, will provide additional
processing and transmission capacity and will be linked with the Company's
facilities at its headquarters. As of June 30, 1996, the Company has invested
approximately $0.9 million acquiring and equipping this facility.
The Company leases an additional 38 sales and support offices across the
United States and Canada, consisting of approximately 36,000 square feet in the
aggregate, pursuant to the terms of various short-term lease agreements. The
Company also leases 14 sales and support offices in other countries around the
world, consisting of approximately 22,000 square feet in the aggregate, pursuant
to the terms of various short-term lease agreements. The Company believes that
its existing facilities are adequate to meet current requirements and that
suitable additional space in close proximity to its existing headquarters will
be available as needed to accommodate growth of its operations and additional
sales and support offices through the foreseeable future. For the six months
ended June 30, 1996, the Company incurred approximately $1.2 million for
facilities rental expense.
LEGAL PROCEEDINGS. The Company is involved from time to time in routine
legal matters incidental to its business. Management believes that the
resolution of such matters will not have a material adverse effect on the
Company's financial position or results of operations.
39
<PAGE>
MANAGEMENT
The current Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --------- -----------------------------------------------------------
<S> <C> <C>
Roy B. Andersen, Jr................ 48 President, Chief Executive Officer and Director
Robert S. Vaters................... 36 Executive Vice President, Finance, Chief Financial Officer
and Secretary
Dennis Schmaltz.................... 48 Vice President, Operations and Engineering
Max A. Slifer...................... 48 Executive Vice President, North American Operations
George Abi Zeid.................... 42 Executive Vice President, International Operations
John C. Baker(1)................... 46 Director
Philip A. Campbell(1).............. 59 Director
Robert Chefitz(2).................. 36 Director
David Epstein(2)................... 62 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
The Board of Directors is divided into three classes, with each class
holding office for staggered three-year terms. The terms of Class 1 Directors
Robert Chefitz and Philip A. Campbell expire in 1997, the term of Class 2
Director Roy B. Andersen, Jr. expires in 1998, and the terms of Class 3
Directors John C. Baker and David Epstein expire in 1996. All executive officers
of the Company are chosen by the Board of Directors and serve at the Board's
discretion. There are no family relationships among the Company's officers and
Directors.
ROY B. ANDERSEN, JR. is the Company's Chief Executive Officer and has been
President and a Director of the Company since its formation in July 1988. From
February 1987 until July 1988, Mr. Andersen served as Executive Vice President
and Chief Operating Officer of Electronic Courier Systems, Inc. From 1980 to
1987, Mr. Andersen was employed by Western Union, where he helped develop its
EasyLink electronic mail service. At Western Union, Mr. Andersen served as Vice
President of Telex and EasyLink marketing, from 1986 to 1987. Mr. Andersen also
served as the Vice Chairman of the Electronic Mail Association of America, a
professional electronic mail association, from 1985 to 1987.
ROBERT S. VATERS has served as Executive Vice President, Finance, Chief
Financial Officer and Secretary since June 1996. From April 1993 until June
1996, Mr. Vaters was employed by Young & Rubicam, Inc. where he served as a
Senior Vice President and Treasurer. From 1989 to 1993, Mr. Vaters served as
Vice President and Treasurer of Sequa Capital Corporation. Prior to 1989, Mr.
Vaters spent seven years as a commercial banker. Mr. Vaters is a director of
Rockford Industries.
DENNIS SCHMALTZ has served as Vice President, Operations and Engineering,
since the inception of the Company. Prior to joining the Company he was employed
by Telentry Systems, Inc. in 1985 and as director of development of Electronic
Courier Systems, Inc. from March 1986 to July 1988. Prior to joining Telentry
Systems, Inc., Mr. Schmaltz was employed by Onetix, Inc., which was involved in
the development of the original technology utilized by the Company to convert
word processing documents to fax documents.
MAX A. SLIFER has served as Executive Vice President of North American
Operations of the Company since June 1994. From 1989 to 1994, Mr. Slifer was the
Company's Vice President of Sales and Marketing.
40
<PAGE>
Prior to joining the Company, he served in various sales management positions
with Western Union. From 1987 to 1988, he served as Western Union's Vice
President of sales and distribution and prior to that was Western Union's
national Vice President of cellular telephone sales and regional Vice President
of sales. Mr. Slifer joined Western Union in 1974.
GEORGE ABI ZEID has served as the Company's Executive Vice President of
International Operations since November 1995. Mr. Abi Zeid founded Swift in
1980, and was its President and Chief Executive Officer from its formation until
November 1995. Mr. Abi Zeid also served as the President and Chief Operating
Officer of each of ViTel, from January 1995, and Comwave, from November 1994,
until they were acquired by the Company in November 1995.
JOHN C. BAKER has served as a director of the Company since June 1992. In
September 1995, Mr. Baker founded Baker Capital Corp., a private equity
investment management firm, and serves as its President. From 1981 to 1995, Mr.
Baker was employed by Patricof & Co. Ventures, Inc., a multinational venture
capital company, most recently as Senior Vice President. Mr. Baker is a director
of American Mobile Satellite Corporation, Intermedia Communications, Inc.,
Resource Bancshares Mortgage Group, Inc., FORE Systems, Inc. and of several
private companies, including AirNet Communications, Inc.
PHILIP A. CAMPBELL has served as a director of the Company since April 1996.
Mr. Campbell has served since April 1995 as Chairman of Tele-Resources
International, Inc., a telecommunications consulting and investment firm. Mr.
Campbell was engaged in private consulting from May 1994 to April 1995. From
July 1991 to May 1994, Mr. Campbell served as Chairman of CDC Communications,
Inc., a telecommunications consulting firm. From January 1988 to January 1991,
Mr. Campbell served as a Director, Vice Chairman and Chief Financial Officer of
Bell Atlantic Corporation. From February 1959 to January 1988, Mr. Campbell
served in a variety of positions with Bell Atlantic Corporation (including
service as a Director of Bell Atlantic Corporation and as President of Bell
Atlantic Network Services Inc. from July 1983 to January 1988), New Jersey Bell
Telephone Company, Indiana Bell Telephone Company, Illinois Bell Telephone
Company and AT&T.
ROBERT CHEFITZ has served as a director of the Company since June 1992. Mr.
Chefitz joined Patricof & Co. Ventures, Inc., a multinational venture capital
company, in 1987. He has been a Vice President of Patricof & Co. Ventures, Inc.
since 1991. Previously, Mr. Chefitz was a Senior Associate with Golder, Thoma &
Cressey, an investment firm. Mr. Chefitz is a director of Langer BioMechanics,
Inc., as well as several private companies.
DAVID EPSTEIN has served as a director of the Company since June 1992. Mr.
Epstein has specialized in the commercial real estate industry since 1963. Mr.
Epstein is currently President and the controlling shareholder of Clarion
Capital Corp., a corporation engaged in the acquisition and syndication of
commercial real estate properties. Mr. Epstein is also a principal shareholder
of First Registry, Inc., a corporation engaged in the acquisition and
syndication of commercial real estate properties, as well as a general partner
in numerous limited partnerships. Mr. Epstein has acted as an advisor to
nationwide retail chains with respect to commercial real estate. Mr. Epstein
owns several shopping centers in Connecticut, New York and Michigan, in addition
to industrial properties.
In April 1996, the Company issued warrants to each of Messrs. Baker,
Campbell, Chefitz and Epstein to purchase 25,000 shares of Common Stock, for an
aggregate of 100,000 shares of Common Stock, at an exercise price of $17.50 per
share (fair value at date of grant). In addition, the Company has reserved
200,000 shares of Common Stock for issuance pursuant to options which may be
granted to certain executive officers of the Company which will be awarded upon
the achievement by the Company of certain performance targets based upon the
price per share of the Common Stock (the "Performance Options"). Specifically,
such executives will be awarded an aggregate of 100,000 Performance Options, or
half of the total number of Performance Options, if the average price per share
of the Company's Common Stock during a 90-day
41
<PAGE>
period commencing prior to December 31, 1996 is greater than $22.50, or if the
Company completes a public offering of its Common Stock prior to December 31,
1996 at a price per share greater than or equal to $22.50. Such executives will
be awarded an aggregate of 100,000 Performance Options, or the remainder of the
total number of Performance Options, if the average price per share of the
Company's Common Stock during a 90-day period commencing prior to December 31,
1997 is greater than $30.00. Performance Options, if granted, vest over a
four-year period from the date of award. There is no exercise price for the
Performance Options, and therefore such options will result in a compensation
charge over the vesting period.
42
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of August 12, 1996, and as adjusted to reflect
the sale of the shares of Common Stock offered by this Prospectus, by (a) all
persons known by the Company to own beneficially more than 5% of the Common
Stock, (b) the Selling Stockholder, (c) each officer and director of the Company
and (d) all officers and directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)(2)
---------------------------- SHARES ----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- ------------------------------------------- --------------- ----------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Robert Chefitz(3)(4)....................... 1,774,171 21.4% -- 1,774,171 20.4%
APA Excelsior III, L.P.(5)................. 1,121,882(6) 13.8 -- 1,121,882 12.9
Finance Management Ltd.(7)................. 598,379 7.4 -- 598,379 6.9
David Epstein(3)(8)........................ 545,895 6.7 -- 545,895 6.3
Stuart Epstein(8)(9)....................... 463,363 5.7 200,000 263,363 3.0
Coutts & Co. (Jersey), Ltd., Custodian for
APA Excelsior III/ Offshore, L.P.(5)..... 427,634(10) 5.3 -- 427,634 4.9
Roy B. Andersen, Jr.(11)................... 257,450 3.1 -- 257,450 2.9
George Abi Zeid(7)......................... 223,150 2.7 -- 223,150 2.6
Gold Chalet Overseas Ltd.(7)............... 146,907 1.8 90,000 56,907 *
Max A. Slifer(11).......................... 142,775 1.8 -- 142,775 1.6
Dennis Schmaltz(11)........................ 142,020 1.7 -- 142,020 1.6
John C. Baker(3)........................... 25,000 * -- 25,000 *
Philip A. Campbell(3)...................... 8,333 * -- 8,333 *
Robert S. Vaters........................... 0 * -- 0 *
All officers and directors as a group (9
persons)(12)............................. 3,118,794 36.4% -- 3,118,794 34.5%
</TABLE>
- ---------------
* Less than one percent (1%).
(1) Includes shares subject to stock options and warrants which are exercisable
within 60 days of the date of this Prospectus.
(2) Assumes that the Underwriters' over-allotment options are not exercised.
(3) Includes shares issuable upon exercise of warrants, as follows: Robert
Chefitz--25,000 shares; David Epstein--25,000 shares; John C. Baker--25,000
shares; and Philip A. Campbell--8,333 shares.
(4) Includes 1,121,882 shares owned by APA Excelsior III, L.P., 427,634 shares
owned by Coutts & Co. (Jersey), Ltd., Custodian for APA Excelsior
III/Offshore, L.P., 142,417 shares owned by APA/Fostin Pennsylvania Venture
Capital Fund, L.P. and 57,238 shares owned by CIN Venture Nominees, Ltd.
(the foregoing, collectively, the "Capital Funds"), as to which Mr. Chefitz
disclaims beneficial ownership. Mr. Chefitz, a director of the Company, is
a general partner of APA Excelsior III, L.P., APA Excelsior III/ Offshore,
L.P. and APA/Fostin Pennsylvania Venture Capital Fund, L.P. and a vice
president of Patricof & Co., the investment manager for CIN Venture
Nominees, Ltd.
(5) Robert Chefitz, a director of the Company, is a general partner of, or an
officer of the general partner of, such entity.
(6) Does not include any shares owned by any of the other Capital Funds. APA
Excelsior III, L.P. is an affiliate of Patricof & Co.
(7) Includes shares registered for resale pursuant to a Registration Statement
on Form S-3 filed with the Commission on July 17, 1996 in connection with
the SVC Acquisitions, as follows: Finance Management Ltd.--598,379 shares;
George Abi Zeid--223,150 shares; and Gold Chalet Overseas Ltd.-- 56,907
shares.
(8) David Epstein and Stuart Epstein have been significant stockholders of the
Company since its formation in 1988. David Epstein is a director of the
Company. All of the shares of Common Stock being offered by Stuart Epstein
were borrowed from David Epstein. Stuart Epstein will be obligated to repay
this loan by delivering that number of shares of Common Stock equal to the
number of shares borrowed. Stuart Epstein will pledge an equivalent number
of shares of Common Stock as security for the loan from David Epstein.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
43
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
(9) Includes 50,000 shares held in trust for the benefit of Mr. Epstein's
children, as to which he disclaims beneficial ownership.
(10) Does not include any shares owned by any of the other Capital Funds. Coutts
& Co. (Jersey), Ltd., custodian for APA Excelsior III/Offshore, L.P., is an
affiliate of Patricof & Co.
(11) Includes shares issuable upon exercise of stock options, as follows: Roy B.
Andersen, Jr.--161,200 shares; Max A. Slifer--34,475 shares; and Dennis
Schmaltz--93,705 shares.
(12) Includes 1,749,171 shares of Common Stock owned by the Capital Funds, as to
which Mr. Chefitz disclaims beneficial ownership. Also includes 372,713
shares of Common Stock issuable upon the exercise of stock options and
warrants.
44
<PAGE>
UNDERWRITING
The underwriters of the Offering of the Common Stock (the "Underwriters"),
for whom Bear, Stearns & Co. Inc. and Prudential Securities Incorporated are
acting as representatives (the "Representatives"), have severally agreed,
subject to the terms and conditions of the Underwriting Agreement (the form of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part), to purchase from the Company and the Selling Stockholders
the aggregate number of shares of Common Stock set forth opposite their name
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Bear, Stearns & Co. Inc..........................................................
Prudential Securities Incorporated...............................................
----------
Total........................................................................ 840,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that, if any of the foregoing
shares of Common Stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares must be so purchased. The Company and
the Selling Stockholders have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the Underwriters may be required to make in respect
thereof.
The Company and the Selling Stockholders have been advised that the
Underwriters propose to offer the shares of Common Stock to the public initially
at the public offering price set forth on the cover of this Prospectus and to
certain selected dealers (who may include the Underwriters) at such public
offering price less a concession not to exceed $ per share. The selected
dealers may reallow a concession to certain other dealers not to exceed $ per
share. After the initial offering to the public, the public offering price, the
concession to selected dealers and the reallowance to other dealers may be
changed by the Representatives.
In connection with the Offering, certain Underwriters and selling group
members, if any, or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market making
on the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange
Act during the two business day period before the commencement of offers or
sales of the Common Stock. The passive market making must comply with applicable
volume and price limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.
The Company and the Selling Stockholders each have granted the Underwriters
options to purchase up to 82,500 and 43,500 additional shares of Common Stock,
respectively, at the public offering price less underwriting discounts and
commissions set forth on the cover page of this Prospectus, solely to cover
over-
45
<PAGE>
allotments, if any. Such options may be exercised at any time until 30 days
after the date of this Prospectus. To the extent the Underwriters exercise such
options, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the
preceding table.
In connection with the Offering, the Company, each of its officers and
directors, the Selling Stockholders and certain other stockholders have agreed
that they will not, directly or indirectly, offer, pledge, sell, offer to sell,
contract to sell or grant any option to purchase or otherwise sell or dispose
(or announce any offer, pledge, sale, offer of sale, contract of sale, grant of
any option to purchase or other sale or disposition) of any shares of Common
Stock or other capital stock or securities exchangeable or exercisable for, or
convertible into, shares of Common Stock or other capital stock for a period of
90 days after the date of this Prospectus, except (i) for shares of Common Stock
offered hereby, (ii) with the prior written consent of Bear, Stearns & Co. Inc.,
on behalf of the Underwriters, and (iii) in the case of the Company, for
issuances under the terms of the Plans.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company and the Selling Stockholders by Paul,
Hastings, Janofsky & Walker LLP, New York, New York. Certain legal matters will
be passed upon for the Underwriters by Stroock & Stroock & Lavan, New York, New
York.
EXPERTS
The consolidated financial statements of Xpedite Systems, Inc. as of
December 31, 1994 and 1995, and for each of the three years in the period ended
December 31, 1995, appearing in this Prospectus and in the Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the Registration
Statement. The consolidated financial statements of Xpedite Systems, Inc.
appearing in Xpedite Systems, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon incorporated herein by
reference. Such consolidated financial statements have been included and
incorporated by reference herein in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
The consolidated balance sheets of Swift and its subsidiaries as of August
31, 1994 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the two years in the period
ended August 31, 1995, included and incorporated by reference in this Prospectus
and elsewhere in the Registration Statement of which this Prospectus is a part,
have been incorporated by reference herein in reliance on the report of David
Berdon & Co. LLP, certified public accountants, given upon the authority of such
firm as experts in accounting and auditing.
The consolidated balance sheets of Swift and its subsidiaries as of August
31, 1992 and 1993, and the related consolidated statements of income and
retained earnings, and cash flows for each of the two years in the period ended
August 31, 1993, incorporated by reference in this Prospectus and elsewhere in
the Registration Statement of which this Prospectus is a part, have been
incorporated by reference herein in reliance on the report of Merdinger,
Fruchter, Rosen & Corso, P.C., certified public accountants, given upon the
authority of such firm as experts in accounting and auditing.
The consolidated balance sheets of ViTel and its subsidiaries as of June 30,
1994 and 1995, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 1995, included and incorporated by reference in this Prospectus
and elsewhere in the Registration Statement of which this Prospectus is a part,
have been incorporated by reference herein in reliance on the report of BDO
Seidman, LLP, certified public accountants, given upon the authority of such
firm as experts in accounting and auditing.
46
<PAGE>
The consolidated report and financial statements of Comwave and its
subsidiaries in Swiss francs at and as of the year ended December 31, 1994 and
at and as of the nine-month period ended September 30, 1995, included and
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement of which this Prospectus is a part, have been incorporated by
reference herein in reliance on the report of Visura Treuhand-Gesellschaft,
given upon the authority of such firm as experts in accounting and auditing.
47
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-----------
<S> <C>
XPEDITE SYSTEMS, INC.
Report of Independent Auditors.......................................................................... F-2
Consolidated Balance Sheets, December 31, 1994, 1995 and June 30, 1996.................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for the
six months ended June 30, 1995 and 1996............................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1996....................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the
six months ended June 30, 1995 and 1996............................................................... F-6
Notes to Consolidated Financial Statements.............................................................. F-8
SWIFT GLOBAL COMMUNICATIONS, INC.
Independent Auditors' Report............................................................................ F-21
Consolidated Balance Sheets, August 31, 1994 and 1995................................................... F-22
Consolidated Statements of Income for the years ended August 31, 1994 and 1995.......................... F-23
Consolidated Statements of Shareholders' Equity for the years ended August 31, 1994
and 1995.............................................................................................. F-24
Consolidated Statements of Cash Flows for the years ended August 31, 1994 and 1995...................... F-25
Notes to Consolidated Financial Statements.............................................................. F-26
VITEL INTERNATIONAL HOLDING COMPANY, INC.
Independent Auditors' Report............................................................................ F-33
Consolidated Balance Sheets, June 30, 1994 and 1995..................................................... F-34
Consolidated Statements of Operations for the years ended June 30, 1993, 1994 and 1995.................. F-35
Consolidated Statements of Changes in Stockholders' Equity for the years ended June 30, 1993, 1994 and
1995.................................................................................................. F-36
Consolidated Statements of Cash Flows for the years ended June 30, 1993, 1994 and 1995.................. F-37
Summary of Accounting Policies.......................................................................... F-38
Notes to Consolidated Financial Statements.............................................................. F-40
COMWAVE COMMUNICATIONS AG, CH-BASEL
Audit Report on the Consolidated Accounts............................................................... F-47
Consolidated Statement of Profit/Loss for the nine months ended September 30, 1994 and 1995 and for the
year ended December 31, 1994.......................................................................... F-48
Consolidated Balance Sheet, December 31, 1994 and September 30, 1995.................................... F-49
Consolidated Statement of Deficit for the nine months ended September 30, 1994 and 1995 and for the year
ended December 31, 1994............................................................................... F-50
Consolidated Cash Flow Statement for the nine months ended September 30, 1994 and 1995 and for the year
ended December 31, 1994............................................................................... F-51
Notes Forming Part of the Consolidated Financial Statements............................................. F-52
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Xpedite Systems, Inc.
We have audited the accompanying consolidated balance sheets of Xpedite
Systems, Inc. as of December 31, 1994 and 1995, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the three years in the period ended December 31, 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Xpedite
Systems, Inc. at December 31, 1994 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
March 22, 1996
F-2
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------ JUNE 30,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents........................................... $ 10,320,933 $ 9,076,250 $ 4,528,300
Investments in held-to-maturity securities.......................... 5,818,012 -- --
Accounts receivable, net of reserve for allowances and doubtful
accounts of $549,000, $993,000 and $1,213,000 for 1994, 1995 and
1996, respectively................................................ 6,887,425 16,567,118 20,233,510
Deferred income taxes............................................... 16,000 2,406,663 2,406,663
Other current assets................................................ 670,485 2,324,129 4,079,687
------------ ------------ ------------
Total current assets............................................ 23,712,855 30,374,160 31,248,160
Property, plant and equipment, net.................................... 6,369,068 16,235,393 18,580,061
Customer lists, net of accumulated amortization of $535,000, $897,000
and $1,440,000 for 1994, 1995 and 1996, respectively................ 1,697,587 6,935,206 7,667,919
Purchased software, net of accumulated amortization of $489,000,
$886,000 and $1,483,000 for 1994, 1995 and 1996, respectively....... 1,036,845 3,591,852 3,304,384
Costs in excess of fair value of net assets acquired, net of
accumulated amortization of $78,000 and $494,000 for 1995 and 1996,
respectively........................................................ -- 8,226,593 7,810,655
Investments in affiliates, at cost.................................... 339,700 510,390 493,557
Loans to affiliate.................................................... 902,589 2,525,102 3,285,777
Deferred income taxes................................................. 100,000 1,815,237 1,815,237
Other assets.......................................................... 193,232 2,668,838 2,492,434
------------ ------------ ------------
Total........................................................... $ 34,351,876 $ 72,882,771 $ 76,698,184
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................................................... $ 2,303,222 $ 10,712,562 $ 11,082,553
Accrued expenses.................................................... 4,095,789 7,127,162 6,770,545
Current portion of long-term debt................................... -- 10,652,747 6,286,833
Current portion of capital lease obligations........................ 30,511 307,232 291,375
Income taxes payable................................................ 274,306 3,254,114 3,805,578
Other current liabilities........................................... 550,000 588,115 110,003
------------ ------------ ------------
Total current liabilities....................................... 7,253,828 32,641,932 28,346,887
Long-term debt........................................................ -- 35,763,421 32,956,050
Long-term portion of capital lease obligations........................ 13,037 559,257 468,819
Deferred income taxes................................................. -- 4,786,300 4,785,022
Other liabilities..................................................... -- 247,809 902,058
Commitments and contingencies......................................... -- -- --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, authorized 1,000,000 shares; none
issued and outstanding in 1994, 1995 and 1996..................... -- -- --
Common Stock, $.01 par value, authorized 15,000,000; issued and
outstanding 6,480,562, 7,773,399 and 8,195,163 shares at 1994,
1995 and 1996, respectively....................................... 64,805 77,734 81,952
Additional paid-in capital.......................................... 30,541,797 48,921,115 54,250,143
Accumulated deficit................................................. (3,296,591) (49,898,797) (44,876,747)
Less: Treasury stock; 75,000 shares at 1994 and 72,000 shares at
1995 and 1996; at cost............................................ (225,000) (216,000) (216,000)
------------ ------------ ------------
Total stockholders' equity (deficit)............................ 27,085,011 (1,115,948) 9,239,348
------------ ------------ ------------
Total........................................................... $ 34,351,876 $ 72,882,771 $ 76,698,184
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1995 1996
------------ ------------ ------------- ------------ ------------
(UNAUDITED)
Net revenues:
Service revenues..................... $ 28,340,866 $ 39,523,569 $ 51,840,379 $ 21,973,506 $ 58,015,436
System sales and other............... 731,326 1,905,766 3,843,583 1,861,675 3,580,555
------------ ------------ ------------- ------------ ------------
Total net revenues............... 29,072,192 41,429,335 55,683,962 23,835,181 61,595,991
Cost of sales:
Operations, line charges and support
engineering........................ 13,655,152 16,025,855 20,144,082 8,020,868 26,677,926
Cost of sales of systems............. 344,472 965,746 1,458,238 757,951 1,559,618
------------ ------------ ------------- ------------ ------------
Total cost of sales.............. 13,999,624 16,991,601 21,602,320 8,778,819 28,237,544
------------ ------------ ------------- ------------ ------------
Gross margin........................... 15,072,568 24,437,734 34,081,642 15,056,362 33,358,447
Operating expenses:
Selling and marketing................ 7,680,497 11,180,076 15,059,118 6,632,342 13,304,888
General and administrative........... 1,942,194 2,746,325 3,964,401 1,611,773 4,014,502
Research and development............. 1,694,632 2,834,681 3,414,577 1,596,391 2,483,396
Depreciation and amortization........ 975,458 1,432,079 2,722,930 1,036,729 3,498,304
Write-off of in-process research and
development costs.................. -- -- 53,000,000 -- --
------------ ------------ ------------- ------------ ------------
Total operating expenses......... 12,292,781 18,193,161 78,161,026 10,877,235 23,301,090
------------ ------------ ------------- ------------ ------------
Operating income (loss)................ 2,779,787 6,244,573 (44,079,384) 4,179,127 10,057,357
Interest income........................ 17,191 516,948 769,341 410,737 245,431
Interest expense....................... (389,940) (83,563) (535,889) -- (2,002,891)
Other income........................... -- -- 22,878 -- 130,061
------------ ------------ ------------- ------------ ------------
Income (loss) before income taxes...... 2,407,038 6,677,958 (43,823,054) 4,589,864 8,429,958
Income tax expense..................... 712,000 1,950,400 2,740,890 1,514,700 3,460,817
------------ ------------ ------------- ------------ ------------
Net income (loss)...................... $ 1,695,038 $ 4,727,558 $ (46,563,944) $ 3,075,164 $ 4,969,141
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Net income (loss) per Common Share..... $ 0.71 $ (6.67) $ 0.45 $ 0.61
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Pro forma net income per Common
Share................................ $ 0.34
------------
------------
Weighted average shares outstanding.... 4,598,500 6,600,000 6,982,200 6,882,000 8,204,000
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
---------------------- PAID-IN ACCUMULATED --------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
--------- ----------- ---------- ------------ --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993..................... 4,056,482 $ 40,565 $2,176,680 $(9,719,187) -- $ -- $(7,501,942)
Exercise of stock options.................... 104,208 1,042 51,062 -- -- -- 52,104
8% Redeemable Preferred Stock dividends...... -- -- (575,944) -- -- -- (575,944)
Accretion of 8% Redeemable Preferred Stock... -- -- (43,416) -- -- -- (43,416)
Treasury stock acquired...................... -- -- -- -- (75,000) (225,000) (225,000)
Net income................................... -- -- -- 1,695,038 -- -- 1,695,038
--------- ----------- ---------- ------------ --------- --------- ----------
BALANCE, DECEMBER 31, 1993................... 4,160,690 41,607 1,608,382 (8,024,149) (75,000) (225,000) (6,599,160)
Exercise of stock options and warrants....... 191,272 1,912 133,273 -- -- -- 135,185
8% Redeemable Preferred Stock dividends...... -- -- (74,476) -- -- -- (74,476)
Accretion of 8% Redeemable Preferred Stock... -- -- (288,791) -- -- -- (288,791)
Conversion of 8% Redeemable Preferred
Stock...................................... 478,600 4,786 7,174,214 -- -- -- 7,179,000
Issuance of Common Stock..................... 1,650,000 16,500 21,989,195 -- -- -- 22,005,695
Net income................................... -- -- -- 4,727,558 -- -- 4,727,558
--------- ----------- ---------- ------------ --------- --------- ----------
BALANCE, DECEMBER 31, 1994................... 6,480,562 64,805 30,541,797 (3,296,591) (75,000) (225,000) 27,085,011
Exercise of stock options and warrants....... 44,072 441 94,549 -- -- -- 94,990
Issuance of Common Stock..................... 1,249,000 12,490 18,254,135 -- -- -- 18,266,625
Cumulative translation adjustment............ -- -- -- (33,445) -- -- (33,445)
Treasury stock reissued...................... -- -- 30,750 -- 3,000 9,000 39,750
Treasury stock acquired...................... -- -- -- -- (235) (4,935) (4,935)
Retirement of treasury stock................. (235) (2) (116) (4,817) 235 4,935 --
Net loss..................................... -- -- -- (46,563,944) -- -- (46,563,944)
--------- ----------- ---------- ------------ --------- --------- ----------
BALANCE, DECEMBER 31, 1995................... 7,773,399 77,734 48,921,115 (49,898,797) (72,000) (216,000) (1,115,948)
Exercise of stock options.................... 70,764 708 139,391 -- -- -- 140,099
Cumulative translation adjustments........... -- -- -- 52,909 -- -- 52,909
Conversion of subordinated debt.............. 351,000 3,510 5,189,637 -- -- -- 5,193,147
Net income................................... -- -- -- 4,969,141 -- -- 4,969,141
--------- ----------- ---------- ------------ --------- --------- ----------
BALANCE, JUNE 30, 1996 (unaudited)........... 8,195,163 $ 81,952 $54,250,143 ($44,876,747) (72,000) $(216,000) $9,239,348
--------- ----------- ---------- ------------ --------- --------- ----------
--------- ----------- ---------- ------------ --------- --------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1995 1996
----------- ------------ ------------- ------------ -----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................ $ 1,695,038 $ 4,727,558 $ (46,563,944) $ 3,075,164 $ 4,969,141
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 1,187,520 1,674,189 3,060,801 1,188,378 3,925,065
Write-off of in-process research and
development.............................. -- -- 53,000,000 -- --
Other non-cash losses...................... -- -- -- -- 225,990
Deferred income taxes...................... (273,000) 157,000 (2,012,700) -- (1,278)
Change in operating assets and liabilities:
Accounts receivable.................... (4,665,989) (477,246) (839,721) (722,075) (3,658,969)
Other current assets................... (179,667) (461,046) 355,833 (207,409) (1,661,542)
Other assets........................... (170,249) 41,783 -- (134,085) (14,418)
Accounts payable....................... 578,820 1,147,423 (3,128,006) (273,165) (108,716)
Accrued expenses....................... 5,145,920 (1,926,770) 631,373 (1,067,131) 299,361
Deferred revenue....................... 13,000 (13,000) -- -- --
Other liabilities...................... -- -- 176,021 -- 100,219
Income taxes payable................... 153,000 121,306 1,665,745 (274,306) 509,313
----------- ------------ ------------- ------------ -----------
Net cash provided by operating activities.... 3,484,393 4,991,197 6,345,402 1,585,371 4,584,166
INVESTING ACTIVITIES
Acquisition of property, plant and
equipment.................................. (2,290,559) (4,280,337) (3,650,251) (2,141,710) (4,689,966)
Acquisition of businesses.................... (500,000) -- (46,199,458) -- (1,275,000)
Purchase of computer software................ (57,622) (365,028) (252,327) -- --
Purchase of held-to-maturity securities...... -- (5,818,012) (11,692,002) (5,873,990) --
Sale of held-to-maturity securities.......... -- -- 17,510,014 -- --
Investments in affiliates.................... -- (339,700) (4,599) -- (2,352)
Loans to affiliate........................... -- (902,589) (1,622,513) (713,146) (760,675)
----------- ------------ ------------- ------------ -----------
Net cash used in investing activities........ (2,848,181) (11,705,666) (45,911,136) (8,728,846) (6,727,993)
FINANCING ACTIVITIES
Payments of acquisition liability............ (1,200,000) (600,000) -- -- --
Proceeds from notes payable.................. -- 1,495,701 40,000,000 -- 700,000
Payment of debt issuance costs............... -- -- (1,402,500) -- --
Repayments of other loans and notes
payable.................................... (11,025) (2,599,486) (292,892) -- (2,862,197)
Repayments of related party loans and notes
payable.................................... (633,429) (3,618,102) -- -- --
Repayments of capital lease obligations...... (26,990) (39,502) (79,917) (18,747) (98,002)
Net proceeds from issuance of Common Stock... (178,221) 22,371,206 129,805 71,558 140,099
Redemption of Preferred Stock shares......... -- (372,000) -- -- --
Payment of Preferred Stock dividends......... (20,035) (74,476) -- -- --
----------- ------------ ------------- ------------ -----------
Net cash (used in) provided by financing
activities................................. (2,069,700) 16,563,341 38,354,496 52,811 (2,120,100)
Effect of exchange rate changes on cash...... -- -- (33,445) (184) (284,023)
----------- ------------ ------------- ------------ -----------
(Decrease) increase in cash and cash
equivalents................................ (1,433,488) 9,848,872 (1,244,683) (7,090,848) (4,547,950)
Cash and cash equivalents at beginning of
year....................................... 1,905,549 472,061 10,320,933 10,320,933 9,076,250
----------- ------------ ------------- ------------ -----------
Cash and cash equivalents at end of year..... $ 472,061 $ 10,320,933 $ 9,076,250 $ 3,230,085 $ 4,528,300
----------- ------------ ------------- ------------ -----------
----------- ------------ ------------- ------------ -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
The Company entered into capital lease agreements for equipment in the
amount of $97,006 and $161,200 in 1993 and 1995, respectively.
The Company made interest payments of $392,671, $104,973, $31,011, $2,061
(unaudited) and $2,123,648 (unaudited) during the years ended December 31, 1993,
1994 and 1995 and the six months ended June 30, 1995 and 1996, respectively. The
Company made income tax payments of $832,000, $1,663,000, $3,103,000, $1,538,737
(unaudited) and $2,967,014 (unaudited) during the years ended December 31, 1993,
1994 and 1995, and the six months ended June 30, 1995 and 1996, respectively.
The Company declared Preferred Stock dividends of $575,944 and $74,476
during 1993 and 1994, respectively. Of these dividends, $556,000 and $0,
respectively, were payable in additional shares of Preferred Stock and $19,944
and $74,476, respectively, were payable in cash. The carrying value of the
Preferred Stock was increased by $43,416 and $288,791 during 1993 and 1994,
respectively, which represents the accretion of the difference between the
carrying value and the mandatory redemption value at the date of issue using the
interest method.
During 1993, the Company purchased 75,000 shares of outstanding Common Stock
from a former officer of the Company at $3.00 per share in exchange for an
agreement to pay such amount to this officer. During 1995, the Company issued
3,000 treasury shares of Common Stock, as part of a legal settlement with a
former investor.
During 1994, 7,179 shares of Preferred Stock were converted into Common
Stock at a conversion price of $15.00 per share of Common Stock.
The purchase price for the businesses acquired in 1995 is allocated to the
assets acquired and liabilities assumed based on their estimated fair market
values as follows:
<TABLE>
<S> <C>
Fair value of assets acquired:
Current assets excluding cash................................ $11,466,998
Property, plant and equipment................................ 7,956,162
In-process research and development.......................... 53,000,000
Customer lists............................................... 5,600,000
Purchased software........................................... 2,700,000
Cost in excess of fair value of net assets acquired.......... 8,304,201
Other assets................................................. 1,561,401
Less liabilities assumed:
Current liabilities.......................................... (16,173,973)
Other liabilities............................................ (5,040,388)
Common Stock issued to sellers................................. (18,266,625)
Subordinated debt issued to sellers............................ (4,908,318)
----------
Net cash paid.................................................. $46,199,458
----------
----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Xpedite Systems, Inc. (the "Company") was incorporated in Delaware in July
1988. The Company develops and markets enhanced fax communication services
worldwide. The Company generates revenues from the following: (i) usage fees
charged for the Company's fax broadcast service ("Fax Broadcast") and gateway
messaging service ("Gateway Messaging") to customers in diverse industries; (ii)
sales of fax message handling systems, including equipment; and (iii) royalties
with respect to the use of the Company's software. Revenues from the sales of
systems are recognized when risk of ownership and title passes to the customer.
The Company performs ongoing credit evaluations of customers and does not
generally require collateral. Reserves are maintained for potential credit
losses and allowances, and such losses and allowances have been within
management's expectations.
BASIS OF PRESENTATION
The consolidated financial statements and notes to consolidated financial
statements for the six month period ended June 30, 1995 and 1996 are unaudited
and have been prepared from the books and records of the Company in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, all adjustments (including only normal, recurring
adjustments) considered necessary for a fair presentation have been included.
Interim results for the six-month period ended June 30, 1996 are not necessarily
indicative of the results that may be expected for the year.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements have been prepared on a consolidated
basis to include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany amounts have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION
The Company and each of its subsidiaries use their local currency as their
functional currency. Gains and losses from foreign currency transactions are
included in the determination of net income. Cumulative translation adjustments,
which result from the process of translating the consolidated financial
statements from the functional currencies of each subsidiary into the reporting
currency, are included as a component of stockholders' equity.
FOREIGN EXCHANGE FORWARD CONTRACTS
Foreign exchange forward contracts are legal agreements between two parties
to purchase and sell a foreign currency, for a price specified at the contract
date, with delivery and settlement in the future. The Company uses such
contracts to hedge risk of changes in foreign currency exchange rates associated
with certain obligations denominated in foreign currency. Such contracts are
designated as hedges; therefore, gains and losses are deferred until contracts
are settled and are included in interest income (expense) when the contracts are
settled.
The Company held contracts for German marks and Japanese yen of
approximately $3.4 million at December 31, 1995, and $3.8 million at June 30,
1996, and German marks of approximately $1.0 million at December 31, 1994,
associated with the loans to affiliates (see Note 10) and intercompany balances
with subsidiaries.
Contracts for German marks have maturity dates ranging from 1997 through
1999. Contracts for Japanese yen have maturity dates during 1996.
F-8
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The fair value of such contracts at December 31, 1995, and June 30, 1996,
based upon current market quotes for contracts with similar terms, approximated
the carrying value of such contracts. In the event of non-performance of
contract terms by the banks, the Company would be required to sell German marks
and Japanese yen at the prevailing exchange rates.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The fair value of these
investments approximates cost.
INVESTMENTS IN HELD-TO-MATURITY SECURITIES
The Company's investments in held-to-maturity securities at December 31,
1994 are recorded at amortized cost and consist of U.S. Treasury Bills with
maturities of between three and six months when purchased. The gross unrealized
gain and estimated fair value of these investments were $26,788 and $5,844,800,
respectively, at December 31, 1994. These investments were sold at their
maturity dates during 1995 and there were no investments in held-to-maturity
securities at December 31, 1995, and June 30, 1996. Realized gains on the sale
of investments in held-to-maturity securities in 1995 were not material.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is provided
using the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<CAPTION>
YEARS
-----------
<S> <C>
Buildings.............................................................................. 25
Equipment.............................................................................. 5
Furniture and fixtures................................................................. 7
</TABLE>
Leasehold improvements are amortized using the straight-line method over the
lesser of the term of the lease or the estimated useful life of the related
improvement.
PURCHASED SOFTWARE AND CUSTOMER LISTS
Purchased software is being amortized on a straight line basis over the
estimated useful life of three to five years. Such amortization is greater than
the amount computed using the ratio that current gross revenues related to the
purchased software bear to the total of current and anticipated future gross
revenues related to the purchased software. Amortization of purchased software
amounted to $212,062, $242,110, $337,871, $151,649, and $493,893 during the
years ended December 31, 1993, 1994 and 1995, and the six months ended June 30,
1995 and 1996, respectively, and is included in cost of sales.
Customer lists are being amortized on a straight-line basis over the
estimated useful life of eight years. In the opinion of management, the customer
list assets will be recovered over a period of eight years based upon the
anticipated future revenue stream generated from the customer base existing on
the acquisition dates.
F-9
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
Costs in excess of the fair value of the tangible net assets and
identifiable intangible assets of businesses acquired are amortized on a
straight-line basis over ten years. The Company assesses the recoverability of
costs in excess of the fair value of the net assets acquired by determining
whether the carrying value of these assets can be recovered through undiscounted
forecasted future cash flows over their remaining lives.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 as of January 1, 1995, which did not have a
material effect on the Company's consolidated financial position or results of
operations.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
STOCK BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of the
grant. The Company accounts for stock based compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees", and intends to
continue to do so.
RESEARCH AND DEVELOPMENT
The Company expenses research and development costs related to existing
software and systems as incurred.
NET INCOME (LOSS) PER COMMON SHARE
The net income (loss) per Common Share for the years ended December 31, 1994
and 1995, and the six months ended June 30, 1995 and 1996 is computed using the
weighted average number of common shares and dilutive common share equivalents
outstanding. The amount of dilution, where appropriate, is computed by
application of the treasury stock method. The pro forma net income per common
share for the year ended December 31, 1993, is computed using the weighted
average number of common and common equivalent shares outstanding during the
period, assuming the exercise of Common Stock options and stock warrants using
the treasury stock method and reflects the conversion of shares of 8% Redeemable
Preferred Stock ("Preferred Stock") and cash dividend payments made thereon in
connection with the Company's initial public offering (see Note 9).
RECLASSIFICATIONS
Certain 1993 and 1994 amounts have been reclassified to conform to 1995
presentation.
F-10
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
2. ACQUISITIONS
On November 20, 1995, the Company purchased all of the outstanding capital
stock of Swift Global Communications, Inc. ("Swift"), ViTel International
Holding Company, Inc. ("ViTel") and Comwave Communications AG ("Comwave"). The
purchase prices for the acquisitions, including transaction costs, were
approximately $23,195,000, $41,540,000 and $11,340,000, respectively, which
includes a total of $2,000,000 held in escrow for settlement of certain
representations and warranties. A portion of the purchase prices were paid
through the issuance of 1,249,000 shares of the Company's Common Stock valued at
$18,267,000, and subordinated notes payable to the sellers of ViTel with a
carrying value of approximately $4,908,000 (see Note 5). The acquisitions were
accounted for as purchases. Accordingly, the acquired assets and liabilities
assumed through these purchases have been recorded at their estimated fair
market values at the date of acquisition. Identifiable intangible assets
acquired included $53,000,000 of in-process research and development costs,
customer lists of $5,600,000, and purchased software of $2,700,000. Since the
technological feasibility of the in-process research and development costs had
not yet been established and the technology had no alternative future use at the
acquisition date, the in-process research and development costs were immediately
written-off and included in the results of operations as a non-recurring charge
for the year ended December 31, 1995.
A stockholder of the Company received $348,000 of fees for services provided
in connection with the transactions.
The results of operations of the purchased businesses are included in the
accompanying consolidated statements of operations from the date of acquisition.
Unaudited pro forma results as if the acquisitions had occurred on January 1,
1994 and 1995, which includes the $53,000,000 write-off of in-process research
and development costs, are as follows:
<TABLE>
<CAPTION>
1994 1995
-------------- --------------
<S> <C> <C>
Net revenues................................................. $ 88,164,000 $ 107,126,000
Net loss..................................................... $ (53,272,000) $ (51,274,000)
Net loss per Common Share.................................... $ (6.79) $ (6.23)
</TABLE>
The pro forma results are not necessarily indicative of the results of
operations that would have occurred had the acquisitions taken place at the
beginning of the periods presented nor are they intended to be indicative of
results that may occur in the future.
As of February 1, 1993, the Company significantly expanded its Gateway
Messaging business by purchasing certain tangible and intangible non-current
assets related to the fax and telex business from TRT/ FTC Communications, Inc.
("TRT"), a subsidiary of Pacific Telecom, Inc. The total purchase price was
$3,600,000. The acquisition was accounted for as a purchase, and the results of
operations relating to such acquisition are included with those of the Company
from the date of acquisition. Net revenues generated from TRT operations were
$9,490,000 for the period from February 1, 1993, to December 31, 1993 and
$7,386,000 for the year ended December 31, 1994.
F-11
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
2. ACQUISITIONS--(CONTINUED)
The fair values of the assets acquired are summarized as follows:
<TABLE>
<S> <C>
Equipment.................................................................. $ 330,000
Software................................................................... 1,038,000
Customer list.............................................................. 2,232,000
----------
$3,600,000
----------
----------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Land....................................................... $ -- $ 75,753 $ 75,753
Building................................................... -- 103,977 103,503
Equipment.................................................. 8,075,058 17,880,624 21,489,296
Furniture and fixtures..................................... 945,193 1,681,859 2,059,860
Leasehold improvements..................................... 193,992 884,940 1,324,938
------------ ------------- -------------
9,214,243 20,627,153 25,053,350
Less accumulated depreciation and amortization............. 2,845,175 4,391,760 6,473,289
------------ ------------- -------------
$ 6,369,068 $ 16,235,393 $ 18,580,061
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
TRT cost of service........................................... $ 1,529,475 $ 75,913 $ --
Certain cost of service, inclusive of communication line
charges..................................................... 754,723 1,358,454 2,082,701
Salaries and related benefits................................. 1,261,631 3,213,181 2,761,541
Accrued interest.............................................. -- 467,671 89,533
Other......................................................... 549,960 2,011,943 1,836,770
------------ ------------ ------------
$ 4,095,789 $ 7,127,162 $ 6,770,545
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-12
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
-------------- --------------
<S> <C> <C>
Term loan............................................................... $ 40,000,000 $ 37,500,000
Revolving loan.......................................................... -- 700,000
Subordinated notes to former owners..................................... 4,957,450 --
Notes payable to banks.................................................. 989,930 668,297
Notes payable to former owners of ViTel................................. 468,788 374,586
-------------- --------------
46,416,168 39,242,883
Less current maturities................................................. (10,652,747) (6,286,833)
-------------- --------------
$ 35,763,421 $ 32,956,050
-------------- --------------
-------------- --------------
</TABLE>
The Company entered into a credit agreement which provided a $40,000,000
term loan to finance the acquisition of Swift, ViTel, and Comwave in November
1995 (see Note 2). The term loan is payable in quarterly installments of
$1,250,000 increasing periodically to $2,250,000 with a final payment in
November 2001. The credit agreement also provides for a $5,000,000 revolving
loan limited to 80% of eligible accounts receivable, as defined. The credit
agreement expires in November 2001. A commitment fee is payable at a rate of
0.5% per annum of the unused portion of the revolving loan. There was no amount
outstanding under the revolving loan at December 31, 1995; $0.7 million was
outstanding at June 30, 1996.
At the Company's option, the term loan and revolving loan bear interest at
either (a) the bank's Base Rate, defined as the higher of (i) 0.5% ("Base
Margin") in excess of the Federal Funds rate or (ii) the bank's prime rate plus
1.5%; or (b) at a rate equal to the LIBOR rate plus 2.75%. The Base Margin will
be adjusted in November 1996 and thereafter until maturity based on the
Company's outstanding indebtedness and results of operations. The Company has
elected to be charged interest at LIBOR (5.6%) plus 2.75% at December 31, 1995
and LIBOR (5.625%) plus 2.75% at June 30, 1996. Substantially all of the assets
of the Company collateralize the term loan and revolving loan.
The principal amounts of the subordinated notes issued in connection with
the acquisition of ViTel were approximately $5,133,000. The notes began to
accrue interest on May 20, 1996, at the rate of 17% per annum until November 20,
1996, and thereafter at the rate of 12% per annum until maturity on January 1,
2002. Accordingly, the notes were recorded at their fair value of $4,908,000 at
the date of acquisition. Interest of $49,000 and $225,000 has been accreted
through December 31, 1995 and May 20, 1996, respectively, using a 9% effective
interest rate. Interest on the notes is payable annually by the issuance of
additional notes in principal amount equal to the interest payment.
In the event that all unpaid principal and accrued interest is not paid in
full on or prior to November 20, 1996, the aggregate principal amount of the
notes will increase to approximately $7,445,000. In June 1996, the Company
issued 351,000 shares of Common Stock to the holders of the ViTel notes in
prepayment of the outstanding principal amount of the notes; such shares were
placed in escrow pending approval by the Company's stockholders of such
prepayment. Such prepayment has been reflected in the accompanying financial
statements during the six months ended June 30, 1996.
F-13
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
5. LONG-TERM DEBT--(CONTINUED)
The credit agreement contains certain financial covenants which include
minimum levels of net worth, current ratio, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and indebtedness as compared to EBITDA.
The notes payable to banks consists of the following: (a) a note payable to
a U.K. bank bearing interest at 9.5% with an outstanding balance of $28,000 and
$19,000 at December 31, 1995 and June 30, 1996, respectively, on which principal
and interest is payable monthly through September 1997, and repayment of which
is collateralized by liens on real property, which has a carrying value of
$182,235 at December 31, 1995; and (b) four notes in the amount of $962,000 in
the aggregate and three notes in the amount of $649,000 in the aggregate at
December 31, 1995 and June 30, 1996, respectively, payable to Japanese banks
bearing interest at rates ranging from 2.8% to 3.6%, on which principal and
interest is payable monthly or quarterly through September 1998.
The notes payable to former owners of ViTel bear interest at rates ranging
from 7% to 12%. Principal and interest is payable monthly through April 2000.
Aggregate maturities of long-term debt at December 31, 1995 for the next
five years and thereafter are as follows: 1996-$10,652,747; 1997-$5,628,206;
1998-$6,135,215; 1999-$7,000,000; 2000-$8,000,000; thereafter-$9,000,000.
The carrying amount of the Company's borrowings approximates the fair value.
Costs incurred in connection with obtaining the term and revolving loans
totaled $1,403,000 and are included in Other Assets in the accompanying
consolidated balance sheets. These costs are amortized on a straight line basis
over the life of the credit agreement, which is six years. Accumulated
amortization totaled $26,000 and $143,000 at December 31, 1995 and June 30,
1996, respectively.
6. INCOME TAXES
The components of income tax expense (benefit) for the years ended December
31, 1993, 1994 and 1995 are:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ------------ -------------
<S> <C> <C> <C>
Federal:
Current............................................................... $ 784,000 $ 1,493,000 $ 3,971,390
Deferred.............................................................. (211,000) 122,000 (2,050,400)
State and local:
Current............................................................... 201,000 300,400 782,200
Deferred.............................................................. (62,000) 35,000 37,700
----------- ------------ -------------
$ 712,000 $ 1,950,400 $ 2,740,890
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
F-14
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
6. INCOME TAXES--(CONTINUED)
The reconciliation of income taxes computed at the U.S. statutory federal
tax rate to income tax expense for the years ended December 31, 1993, 1994 and
1995 are:
<TABLE>
<CAPTION>
1993 1994 1995
------------------ ------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- ------- ---------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at U.S. statutory rate................... $ 818,000 34% $2,270,400 34% $(14,900,000) (34)%
Write-off of in process research and development............... 18,020,000 41
State income taxes, net of federal income tax benefit.......... 92,000 4 221,000 3 541,000 1
Reduction in valuation allowance............................... (381,000) (16) (336,000) (5) (2,279,000) (5)
Other items.................................................... 183,000 8 (205,000) (3) 1,358,890 3
-- -- --
--------- ---------- ------------
Income tax expense............................................. $ 712,000 30% $1,950,400 29% $ 2,740,890 6%
-- -- --
-- -- --
--------- ---------- ------------
--------- ---------- ------------
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Reserve for allowances for doubtful accounts...................... $ 185,000 $ 760,200
Accruals and reserves............................................. 145,000 1,278,400
Future tax benefits of net operating loss carryforwards........... 2,279,000 2,376,000
------------ ------------
Gross deferred tax asset.......................................... 2,609,000 4,414,600
------------ ------------
Deferred tax liabilities:
Fixed assets.................................................... 214,000 1,423,800
Intangibles..................................................... -- 3,320,000
Other liabilities............................................... -- 42,500
------------ ------------
Gross deferred tax liability...................................... 214,000 4,786,300
------------ ------------
Net deferred tax asset (liability)................................ 2,395,000 (371,700)
Valuation allowance for deferred tax assets....................... (2,279,000) (192,700)
------------ ------------
Net deferred tax assets (liability)............................... $ 116,000 $ (564,400)
------------ ------------
------------ ------------
</TABLE>
The Company has recorded a deferred tax asset of $2,376,000 at December 31,
1995 reflecting the benefit of $5,960,000 in loss carryforwards, which expire in
varying amounts between 2004 and 2007. Realization is dependent on generating
sufficient taxable income prior to expiration of the loss carryforwards.
Although realization is not assured, management believes it is more likely than
not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near
term if estimates of future taxable income during the carryforward period are
reduced.
As a result of certain transactions involving the Company's stock, an
ownership change, as defined in Section 382 of the Internal Revenue Code,
occurred in 1992. Consequently, future utilization of the Company's federal net
operating loss carryforwards are subject to an annual limitation of
approximately $640,000.
F-15
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
7. LEASES
The Company leases office space and office equipment under long-term lease
agreements.
The obligations related to the leasing of equipment, which expire in 1996,
are classified as capital leases. Equipment under capital leases totaled $70,009
and $835,526, net of accumulated depreciation, at December 31, 1994 and 1995,
respectively.
The leases of real property are classified as operating leases and expire
through 2001. These leases are subject to increases in property taxes and
maintenance costs.
The following is a schedule of future minimum lease payments for capital and
operating leases as of December 31, 1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
---------- ------------
<S> <C> <C>
1996.................................................................................... $ 377,842 $ 2,163,266
1997.................................................................................... 278,807 1,730,500
1998.................................................................................... 194,714 1,352,391
1999.................................................................................... 115,927 725,302
2000.................................................................................... 6,123 252,528
Thereafter.............................................................................. 154,025
---------- ------------
Total minimum lease payments............................................................ 973,413 $ 6,378,012
------------
------------
Less amount representing interest....................................................... 106,924
----------
Present value of minimum lease payments................................................. 866,489
Less current portion.................................................................... 307,232
----------
$ 559,257
----------
----------
</TABLE>
Rent expense totaled $605,146, $895,730, $1,201,632, $518,412 and $1,237,797
for the years ended December 31, 1993, 1994 and 1995 and the six months ended
June 30, 1995 and 1996, respectively.
8. BENEFIT PLANS
In November 1993, the Company established an incentive stock option plan for
its officers and employees (the "1993 Plan"). A total of 450,000 shares of
Common Stock were reserved for issuance pursuant to options granted under the
1993 Plan.
The 1992 Incentive Stock Option Plan (the "1992 Plan") was approved by the
Board of Directors in 1992 and authorized the issuance of up to 715,696 options.
F-16
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
8. BENEFIT PLANS--(CONTINUED)
Stock option plans' activity is summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ---------
<S> <C> <C> <C>
Outstanding at beginning of year............................................... 585,780 604,450 675,420
Canceled....................................................................... (6,672) (12,608) (6,319)
Granted........................................................................ 129,550 266,350 170,600
Exercised (prices ranging from $0.50 to $16.125 per share)..................... (104,208) (182,772) (35,738)
---------- ---------- ---------
Outstanding at end of period (prices ranging from $0.50 to $16.125 per
share)....................................................................... 604,450 675,420 803,963
---------- ---------- ---------
---------- ---------- ---------
Exercisable at end of year (prices ranging from $0.50 to $16.125 per share).... 176,218 210,993 397,943
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
In 1991 and 1992, the Company issued 4,500 and 10,500 stock warrants,
respectively, in connection with bridge financing which entitle the holders to
purchase shares of Common Stock at a purchase price of $3.42 per share. In
November 1994 and 1995, 8,500 and 5,000, respectively, were exercised, leaving
1,500 warrants outstanding, which expire September 30, 1996.
During 1993, the Company issued 7,000 stock warrants to a consultant to
purchase shares of Common Stock at a purchase price of $0.50 per share. These
warrants expire December 31, 1999. Also during 1993, the Company issued 5,000
stock warrants to a stockholder of the Company to purchase shares of Common
Stock at a purchase price of $7.00 per share. These warrants expire November 16,
2003.
In February 1994, the Company granted warrants to purchase 10,000 shares of
Common Stock at a purchase price of $15.00 per share, to a new member of the
Board of Directors. During 1995, 3,334 of these warrants were exercised. The
remaining 6,666 warrants were canceled during 1995.
The Company has a defined contribution 401(k) plan (the "Plan") which allows
all eligible employees to defer a portion of their income through contributions
to the Plan. Under the terms of the Plan, the Company contributes an amount
equal to 50% of the employee's elective deferrals up to 5% of the total annual
compensation paid to the Plan participant. The Company's expense under the Plan
was $75,100, $174,090, $228,294, $109,178 and $201,743 for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and
1996, respectively.
9. INITIAL PUBLIC OFFERING
In February 1994, the Company issued 1,650,000 shares of Common Stock in an
initial public offering. The Company used a portion of the net proceeds of the
offering to repay all outstanding indebtedness (except indebtedness related to
capital lease obligations) and to redeem 227 shares of Preferred Stock. At the
closing of the offering, 7,179 shares of Preferred Stock were converted into
Common Stock at a conversion price equal to the initial public offering price
($15.00 per share of Common Stock).
10. SYSTEM AND MARKETING AGREEMENTS
On June 24, 1994, the Company entered into a System and Marketing Agreement
with Xpedite Systems, GmbH, a German corporation, ("Xpedite Germany"), whereby
the Company agreed to sell Xpedite Germany an enhanced fax communications
service system, including a non-exclusive, non-transferable, terminable license
to use the Company's software. Xpedite Germany is controlled by affiliates of
certain venture capital funds managed by Patricof & Co. Ventures, Inc., which
venture capital funds are
F-17
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
10. SYSTEM AND MARKETING AGREEMENTS--(CONTINUED)
stockholders of the Company. The agreement has three major components: (a) a
sale of an initial system to Xpedite Germany for $472,800 which includes payment
for all hardware and software; (b) royalties to the Company for the use of the
software and software maintenance and configuration management; and (c)
predetermined prices for additional equipment ("expansion costs").
Under a Put and Call Option Agreement dated as of June 24, 1994, the Company
has agreed with APA Expert Beteiligungsellschaft GmbH and certain others
(collectively, the "Xpedite Germany Shareholders") and Xpedite Germany to
purchase the capital stock of Xpedite Germany (the "Option Shares") from the
Xpedite Germany Shareholders. The Xpedite Germany Shareholders have granted the
Company a "call" option with respect to their Option Shares, exercisable
(subject to certain conditions) at various times prior to December 31, 2006. The
Company has granted the Xpedite Germany shareholders a "put" option with respect
to their Option Shares, exercisable (subject to certain conditions) at various
times prior to December 31, 2006. The purchase price potentially payable in
connection with the exercise of such 'put' option is based upon the product of
the earnings of Xpedite Germany, as defined in the agreement, and a percentage
of the Company's stock price to earnings ratio, as defined in the agreement.
Xpedite Germany has not met the minimum amount of earnings necessary for the put
option to be exercisable, and therefore, due to the uncertainties as to the
ability of Xpedite Germany to achieve the required financial results in the
future, and the uncertainty of future events, the Company does not consider the
exercise of these options to be probable during the next twelve months. However,
assuming that Xpedite Germany achieves the minimum amount of earnings of $1.7
million and utilizing the Company's stock price and earnings at and as of the
twelve months ended December 31, 1995, the purchase price payable in connection
with the exercise of 100% of the put option would be approximately $23 million.
If Xpedite Germany achieves the minimum earnings level at sometime in the
future, and the Xpedite Germany Shareholders choose to exercise this put option,
the actual amount of the purchase price will more than likely differ from this
amount due to the variable factors used to determine the purchase price. The
purchase price can be paid in cash, the Company's Common Stock or a combination
of cash and the Company's Common Stock, at the Company's option.
In 1994, the Company invested, at then current exchange rates, approximately
$150,000 for a 19% equity interest in Xpedite Germany. As of December 31, 1995,
the Company has also provided Xpedite Germany approximately $2.5 million in
non-convertible loans which are non-interest bearing through December 31, 1995,
and payable in German marks. Beginning January 1, 1996, these loans bear
interest at 10% per annum. The Company agreed to provide up to an additional
$800,000 in such loans over the next three years. The Company has purchased
forward contracts for 3,383,000 German marks to hedge the loan amount
outstanding at December 31, 1995, reducing its risk to fluctuation in foreign
exchange rates.
On January 29, 1993, the Company entered into a System and Marketing
Agreement with Xpedite Systems, Ltd., a United Kingdom corporation ("Xpedite
UK"), to provide to Xpedite UK a fax message handling system, including
hardware, software and equipment. Xpedite UK is controlled by affiliates of
certain venture capital funds managed by Patricof & Co. Ventures, Inc., which
venture capital funds are stockholders of the Company. The agreement has three
major components: (a) a sale of an initial system to Xpedite UK for $604,000
which includes payment for all hardware and software; (b) royalties to the
Company for the use of the software and software maintenance and configuration
management; and (c) predetermined prices for additional equipment ("expansion
costs"). The Company does not have an equity interest in Xpedite UK.
F-18
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
10. SYSTEM AND MARKETING AGREEMENTS--(CONTINUED)
Under a Put and Call Option Agreement amended as of July 6, 1995, the
Company has agreed with APAX Partners & Co. Ventures, Ltd. and certain others
(collectively, the "Xpedite UK Shareholders") and Xpedite UK to purchase the
capital stock of Xpedite UK (the "Option Shares") from the Xpedite UK
Shareholders. The Xpedite UK Shareholders have granted the Company a "call"
option with respect to their Option Shares, exercisable (subject to certain
conditions) from January 1, 1998 until December 31, 2005. The Company has
granted the Xpedite UK Shareholders a "put" option with respect to their Option
Shares, exercisable from January 1, 1998 until December 31, 2005. The purchase
price potentially payable in connection with the exercise of such "put" option
is based upon the product of the earnings of Xpedite UK, as defined in the
agreement, and a percentage of the Company's stock price to earnings ratio, as
defined in the agreement. Xpedite UK has not met the minimum amount of earnings
necessary for the put option to be exercisable, and therefore, due to the
uncertainties as to the ability of Xpedite UK to achieve the required financial
results in the future, and the uncertainty of future events, the Company does
not consider the exercise of these options to be probable during the next twelve
months. However, assuming that Xpedite UK achieves the minimum amount of
earnings of $2.5 million and utilizing the Company's stock price and earnings at
and as of the twelve months ended December 31, 1995, the purchase price payable
in connection with the exercise of 100% of the put option would be approximately
$38 million. If Xpedite UK achieves the minimum earnings level at sometime in
the future, and the Xpedite UK Shareholders choose to exercise this put option,
the actual amount of the purchase price will more than likely differ from this
amount due to the variable factors used to determine the purchase price. The
purchase price can be paid in cash, the Company's Common Stock or a combination
of cash and the Company's Common Stock, at the Company's option.
Pursuant to a System Agreement dated May 4, 1992, between the Company and
Xpedite Systems, S.A. (successor to Eurofax, a French corporation) ("Xpedite
France"), Xpedite France purchased an enhanced fax communications service system
including a non-exclusive, non-transferable, terminable license to the Company's
software for use in France. The initial purchase price of the system was
$296,000. The agreement also provides for royalties to be paid to the Company
based on varying percentages of the net revenues of Xpedite France. The
agreement also provides that Xpedite France may for ten years from the date of
the agreement purchase additional hardware and software to be used in such
system. Software licenses under this agreement have been granted for 25 years.
In November 1994, the Company invested, at then current exchange rates,
approximately $190,000 for a 2.7% equity interest in Xpedite France.
As of December 15, 1993, the Company entered into a Put and Call Option
Agreement with APAX Partners & Cie., Olivier de Puymorin, and Xpedite France, to
purchase the capital stock of Xpedite S.A. ("Option Shares") from the Xpedite
France shareholders. Xpedite France is controlled by affiliates of certain
venture capital funds managed by Patricof & Co. Ventures, Inc. which venture
capital funds are stockholders of the Company. The Xpedite France shareholders
have granted the Company a "call" option with respect to their Option Shares,
exercisable (subject to certain conditions) from the first day of the month
following the eighteen month anniversary of the closing date of an initial
public offering until the earlier to occur of December 31, 2005 or the date on
which the Company sells any shares of Xpedite France owned by the Company. The
Company has granted the Xpedite France shareholders a "put" option with respect
to their Option Shares, exercisable (subject to certain conditions) at various
times prior to December 31, 2005. The purchase price potentially payable in
connection with the exercise of such "put" option is based upon the product of
the earnings of Xpedite France, as defined in the agreement, and a percentage of
the Company's stock price to earnings ratio, as defined in the agreement.
Xpedite France has not met the minimum amount of earnings necessary for the put
option to be exercisable, and therefore, due to the
F-19
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND JUNE 30, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO JUNE 30, 1995 AND 1996 ARE UNAUDITED)
10. SYSTEM AND MARKETING AGREEMENTS--(CONTINUED)
uncertainties as to the ability of Xpedite France to achieve the required
financial results in the future, and the uncertainty of future events, the
Company does not consider the exercise of these options to be probable during
the next twelve months. However, assuming that Xpedite France achieves the
minimum amount of earnings of $1.5 million and utilizing the Company's stock
price and earnings at and as of the twelve months ended December 31, 1995, the
purchase price payable in connection with the exercise of 100% of the put option
would be approximately $23 million. If Xpedite France achieves the minimum
earnings level at sometime in the future, and the Xpedite France shareholders
choose to exercise this put option, the actual amount of the purchase price will
more than likely differ from this amount due to the variable factors used to
determine the purchase price. The purchase price can be paid in cash, the
Company's Common Stock or a combination of cash and the Company's Common Stock,
at the Company's option.
If and when the put and call options are exercised, the investments in
Xpedite Germany, Xpedite UK and Xpedite France will be accounted for either on
the equity method of accounting or will be consolidated, depending on the
Company's percentage of ownership.
11. SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment. The following table presents
financial information based on the Company's geographic segments for the year
ended December 31, 1995:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE
REVENUES (LOSS) INCOME ASSETS
------------- -------------- -------------
<S> <C> <C> <C>
North America...................................................... $ 52,022,430 $ (44,020,454) $ 49,650,056
Far East........................................................... 2,198,893 (102,167) 11,994,268
Europe............................................................. 1,462,639 43,237 11,238,447
------------- -------------- -------------
Total.............................................................. $ 55,683,962 $ (44,079,384) $ 72,882,771
------------- -------------- -------------
------------- -------------- -------------
</TABLE>
12. SUBSEQUENT EVENTS
The Company has executed an agreement to increase its ownership interest in
Xpedite France, is currently negotiating to increase its ownership interest in
Xpedite Germany, and has executed a letter of intent to purchase the assets of
one of its Nodal Partners in Korea. The increased interests in Xpedite France
and Xpedite Germany are not pursuant to the Put and Call Option Agreements.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Swift Global Communications, Inc.
Glen Head, New York
We have audited the accompanying consolidated balance sheets of Swift Global
Communications, Inc., and Subsidiaries as of August 31, 1994 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years then ended. 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our previously issued report dated October 25, 1995 we stated that the
August 31, 1993 financial statements, audited by other auditors, did not fairly
present financial position, results of operations, and cash flows in conformity
with generally accepted accounting principles due to the misapplication of
accounting principles with regard to product development costs. As stated in
Note 11, the Company has corrected this error by restating the August 31, 1993
financial statements and, accordingly, our present opinion of the August 31,
1994 and 1995 financial statements, as presented herein, is different from that
expressed in our previous report.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Swift Global
Communications, Inc. and Subsidiaries as of August 31, 1994 and 1995, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
DAVID BERDON & CO. LLP
Certified Public Accountants
New York, New York
October 25, 1995 (except for
Notes 1, 6, 7, 8, 11, 12 and 13,
as to which the date is May 31, 1996)
F-21
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AUGUST 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994* 1995
----------- -----------
<S> <C> <C>
ASSETS
- -----------------------------------------------------------------------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents (Note 1(f) and (g))........................................ $ 1,471,058 $ 1,155,027
Accounts receivable (net of allowance for uncollectible accounts of $130,000 in 1994
and $389,000 in 1995) (Notes 1(f) and 12)........................................... 3,195,769 3,235,347
Loans receivable -- related parties (Note 2)......................................... 73,915 654,018
Prepaid expenses and other current assets............................................ 61,093 52,177
Security deposit..................................................................... -- 350,000
----------- -----------
TOTAL CURRENT ASSETS............................................................. 4,801,835 5,446,569
PROPERTY AND EQUIPMENT -- Net (Notes 1(c), 3 and 5).................................... 2,944,833 3,350,986
OTHER ASSETS:
Goodwill (net of accumulated amortization of $2,125 in 1994 and $8,125 in 1995) (Note
1(e))............................................................................... 167,875 161,875
Security deposits.................................................................... 116,772 184,932
----------- -----------
TOTAL OTHER ASSETS............................................................... 284,647 346,807
----------- -----------
$ 8,031,315 $ 9,144,362
----------- -----------
----------- -----------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 2,351,795 $ 3,488,059
Accrued expenses payable (Note 4).................................................... 494,334 960,830
Accrued expenses payable -- related parties (Notes 8(c), 9 and 10)................... -- 271,525
Current portion of long-term debt (Note 5)........................................... 608,676 --
Current portion of long-term debt -- related party (Note 5).......................... 200,000 --
Obligations under capital leases -- current portion (Note 8)......................... 23,182 2,582
Income taxes payable (Note 7)........................................................ 274,000 260,711
Other current liabilities............................................................ 191,280 102,949
Loan payable -- related party (Note 10).............................................. -- 70,215
----------- -----------
TOTAL CURRENT LIABILITIES........................................................ 4,143,267 5,156,871
Other Liabilities:
Obligations under capital leases (Note 8)............................................ 1,352 --
Deferred income taxes payable (Note 7)............................................... 483,717 396,000
Accrued postretirement benefits (Note 8(c)).......................................... 22,500 37,727
----------- -----------
TOTAL OTHER LIABILITIES.......................................................... 507,569 433,727
----------- -----------
TOTAL LIABILITIES................................................................ 4,650,836 5,590,598
MINORITY INTEREST...................................................................... -- 4,243
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY (Notes 6 and 11):
Common stock, $.01 par value: 10,000,000 shares authorized; 2,112,189 issued and
outstanding......................................................................... 21,122 21,122
Additional paid-in capital........................................................... 2,999,478 2,983,478
Retained earnings.................................................................... 359,879 544,921
----------- -----------
TOTAL SHAREHOLDERS' EQUITY....................................................... 3,380,479 3,549,521
----------- -----------
$ 8,031,315 $ 9,144,362
----------- -----------
----------- -----------
</TABLE>
- -------------
* Reclassified to conform to August 31, 1995 presentation
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED AUGUST 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
SALES (Notes 12 and 13):
Fax.............................................................................. $ 8,845,148 $ 11,115,666
Telex............................................................................ 2,801,364 4,325,465
Equipment and other.............................................................. 903,112 2,023,844
------------- -------------
12,549,624 17,464,975
------------- -------------
COST OF GOODS SOLD:
Fax.............................................................................. 5,015,332 6,968,680
Telex............................................................................ 1,351,499 2,537,010
Equipment and other.............................................................. 463,573 976,483
------------- -------------
6,830,404 10,482,173
------------- -------------
GROSS PROFIT....................................................................... 5,719,220 6,982,802
------------- -------------
EXPENSES (Note 10):
Selling.......................................................................... 1,218,876 1,439,175
General and administrative....................................................... 3,792,232 4,364,165
Provision for doubtful accounts.................................................. 80,242 858,188
Interest......................................................................... 196,236 34,356
------------- -------------
TOTAL EXPENSES............................................................... 5,287,586 6,695,884
------------- -------------
INCOME BEFORE PROVISION FOR INCOME TAX AND MINORITY INTEREST....................... 431,634 286,918
Provision for income tax (Note 7).................................................. 247,948 97,633
------------- -------------
NET INCOME BEFORE MINORITY INTEREST................................................ 183,686 189,285
Minority interest.................................................................. -- (4,243)
------------- -------------
NET INCOME......................................................................... $ 183,686 $ 185,042
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NOTE 6)
FOR THE YEARS ENDED AUGUST 31, 1994 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ TOTAL
NUMBER PAID-IN RETAINED TREASURY SHAREHOLDERS'
OF SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------------ ---------- ------------ ------------ ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- SEPTEMBER 1, 1993........ 10,857 $ 112,605 $ -- $ 294,733 $ (7,545) $ 399,793
Net income for the year............. -- -- -- 183,686 -- 183,686
Issuance of common stock............ 200 -- -- -- -- --
Purchase of common stock............ -- -- -- -- (203,000) (203,000)
Retirement and recapitalization of
common stock....................... (267) (92,005) -- (118,540) 210,545 --
Common stock dividend............... 2,049,192 -- -- -- -- --
Exercise of warrants and waiver of
purchase rights.................... 52,207 522 (522) -- -- --
Capital contribution................ -- -- 3,000,000 -- -- 3,000,000
------------ ---------- ------------ ------------ ----------- -----------------
BALANCE -- AUGUST 31, 1994.......... 2,112,189 21,122 2,999,478 359,879 -- 3,380,479
Repurchase of warrants.............. -- -- (16,000) -- -- (16,000)
Net income for the year............. -- -- -- 185,042 -- 185,042
------------ ---------- ------------ ------------ ----------- -----------------
BALANCE -- AUGUST 31, 1995.......... 2,112,189 $ 21,122 $ 2,983,478 $ 544,921 $ -- $ 3,549,521
------------ ---------- ------------ ------------ ----------- -----------------
------------ ---------- ------------ ------------ ----------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-24
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994* 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................................... $ 183,686 $ 185,042
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization...................................................... 537,986 680,039
Deferred income taxes (benefit).................................................... 99,978 (87,717)
Bad debts.......................................................................... 80,242 858,188
Minority interest.................................................................. -- 4,243
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable.............................................................. (1,452,609) (897,766)
Prepaid expenses and other current assets........................................ 315,337 8,916
Security deposits................................................................ (19,803) (418,160)
Increase (decrease) in:
Accounts and accrued expense payable............................................. (711,141) 1,874,285
Other current liabilities........................................................ 120,311 (88,331)
Income taxes payable............................................................. 147,900 (13,289)
Accrued postretirement benefits.................................................. 22,500 15,227
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................................... (675,613) 2,120,677
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in loans receivable.............................................. 456,246 (580,103)
Expenditures for property and equipment.............................................. (676,613) (1,077,692)
Increase in goodwill................................................................. (170,000) (2,500)
----------- -----------
NET CASH (USED IN) INVESTING ACTIVITIES................................................ (390,367) (1,660,295)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in loan payable -- related party............................................ -- 70,215
Proceeds from long-term debt......................................................... 610,000 --
Repayment of long-term debt.......................................................... (1,013,278) (808,676)
Payments of capital lease obligations................................................ (32,150) (21,952)
Capital contribution................................................................. 3,000,000 --
Purchase of common stock............................................................. (203,000) --
Purchase of warrants................................................................. -- (16,000)
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES.................................... 2,361,572 (776,413)
----------- -----------
NET (DECREASE) INCREASE IN CASH........................................................ 1,295,592 (316,031)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR......................................... 175,466 1,471,058
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................................... $ 1,471,058 $ 1,155,027
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for
Interest........................................................................... $ 178,964 $ 42,437
----------- -----------
----------- -----------
Income taxes....................................................................... $ 70 $ 198,639
----------- -----------
----------- -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Retirement of treasury stock......................................................... $ 210,545 $ --
----------- -----------
----------- -----------
</TABLE>
- -------------
* Reclassified to conform to August 31, 1995 presentation
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Swift Global Communications, Inc. and two subsidiaries: Swift Global
Communications (HK) Limited ("Hong Kong"), a 95%-owned Hong Kong corporation and
Swift Global International, Ltd., a wholly-owned corporation. All material
intercompany accounts and transactions have been eliminated.
(B) LINE OF BUSINESS
The principal business activity of the Company is to route telex and
facsimile messages via their computerized transmission network. The Company
operates internationally and has entered into agreements with companies
("nodes") in various countries. In addition, the Company sells communications
equipment to the nodes.
(C) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost, less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method based on
the estimated useful lives of the respective assets (5 to 10 years). Leasehold
improvements are being amortized on a straight-line basis over the terms of the
respective leases. Maintenance and repairs are charged to expense as incurred.
(D) TRANSLATION OF FOREIGN CURRENCY
The Company translates the foreign currency financial statements of Hong
Kong in accordance with the requirements of Statement of Financial Accounting
Standards No. 52, "Foreign Currency Translation". If material, translation
adjustments are accumulated and reported in a separate component of
shareholders' equity and are excluded from the determination of net income.
Gains or loss from foreign currency transactions, which are immaterial, are
included in the accompanying statements of income.
(E) GOODWILL
Goodwill, relating to the purchase of additional shares of Hong Kong common
stock, is being amortized using the straight-line method over a period of twenty
years.
(F) CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. At August 31, 1995, the Company has substantially all its cash on
deposit with one financial institution. Concentrations of credit risk with
respect to accounts receivable are limited due to a large customer base and its
geographic dispersion.
(G) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
NOTE 2. LOANS RECEIVABLE
At August 31, 1994 and 1995, loans receivable consist primarily of
noninterest-bearing advances to shareholders, employees and related entities
which are payable on demand.
F-26
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment at August 31, 1994 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Computer equipment................................................ $ 3,962,252 $ 4,690,328
Computer software................................................. 1,322,886 1,411,678
Computer software-in-progress..................................... 116,246 316,351
Assets under capital leases....................................... 125,982 125,982
Transportation equipment.......................................... 169,353 169,353
Furniture and fixtures............................................ 141,451 188,787
Leasehold improvements............................................ 293,366 306,749
------------ ------------
6,131,536 7,209,228
Less, accumulated depreciation and amortization................... 3,186,703 3,858,242
------------ ------------
$ 2,944,833 $ 3,350,986
------------ ------------
------------ ------------
</TABLE>
NOTE 4. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Cost of service....................................................... $ 213,670 $ 356,944
Consulting and professional fees...................................... 122,835 297,500
Other................................................................. 157,829 306,386
---------- ----------
$ 494,334 $ 960,830
---------- ----------
---------- ----------
</TABLE>
NOTE 5. LONG-TERM DEBT
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
At August 31, 1994 and 1995, respectively, long-term debt consists of the following:
Note payable, collateralized by certain equipment, due in monthly installments of
$4,000, plus interest at 10%; the note was repaid in January 1995...................... $ 391,550 $ --
Note payable -- collateralized by certain equipment; due in monthly installments of
$6,944 plus interest at 12%; balance prepaid in September 1994......................... 48,578 --
8% promissory note -- principal and interest due March 1, 1995; collateralized by 95,455
shares of common stock, and guaranteed by an officer/shareholder of the Company........ 160,000 --
12% promissory notes -- payable to certain shareholders; balance prepaid in September
1994................................................................................... 200,000 --
Sundry -- at interest rates from 15.9% to 24%........................................... 8,548 --
---------- ----------
$ 808,676 $ --
---------- ----------
---------- ----------
</TABLE>
F-27
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY
(A) STOCK DIVIDEND
In July 1994, the Board of Directors approved an increase in the number of
its authorized shares from 10,000 (no par value) to 10,000,000 ($.01 par value),
and declared a stock dividend of approximately 190 shares for each share held.
(B) COMMON STOCK WARRANTS
(i) On August 26, 1993, 275 warrants, each to purchase one share of common
stock, were issued in connection with a loan. At the date of issuance, the
exercise price exceeded the fair value of the Company's common stock. The
Company deemed the warrants of no value as of the date of issue. On February 24,
1994, an additional 75 warrants were issued. After giving effect to the
aforementioned July 1994 stock dividend, 66,818 warrants were outstanding at an
exercise price of $1.17 per share. The holder of the warrants had the ability to
cause the Company to purchase the warrants at a price based on a formula
specified in the warrants.
In connection with the stock purchase agreement (see (e) below) 52,207
warrants were exercised at an exercise price of $61,082. The holder received
$61,082 in exchange for waiving its right to cause the Company to purchase the
remaining outstanding warrants.
The remaining 14,611 common stock warrants expire on December 31, 2013. Each
warrant is convertible into one share of common stock at a price of $1.17 per
share. The warrants are callable on December 30, 2007 and each subsequent
December 30, provided that the Company shall call no more than 10% of the
warrants outstanding on the prior December 31. The call price shall be the
greater of:
(1)8.5 times earnings before interest, taxes and depreciation and
amortization.
(2)3.5 times book value per share.
(3)The highest price per share paid during the prior 750 days to or by the
Company or its two largest shareholders, less the exercise price then in
effect multiplied by 11,000 and divided by the aggregate number of shares
outstanding on the date of agreement to buy or sell such stock.
(ii) On February 28, 1994, additional warrants, each to purchase one share
of common stock, were issued in connection with a loan. At the date of issuance,
the exercise price exceeded the fair value of the Company's common stock. The
Company deemed the warrants of no value as of the date of issue. After giving
effect to the July 1994 stock dividend, 100,000 warrants were outstanding. In
January 1995, the Company repurchased the warrants for $16,000.
(C) ISSUANCE OF COMMON STOCK
In February 1994, the Company issued 200 shares of common stock to a former
employee/shareholder due to an erroneous allocation of a stock repurchase in
prior years. Upon issuance of such shares, the former employee/shareholder
rescinded prior claims made against the Company.
(D) TREASURY STOCK
In February 1994, the Company repurchased 200 shares of common stock for
$203,000. Prior to the aforementioned stock dividend, all of the Company's
treasury stock was retired.
F-28
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY (CONTINUED)
(E) STOCK PURCHASE AGREEMENT
On July 22, 1994, a stock purchase agreement was effected, under which the
shareholders of the Company sold 75% of their stock. Under the terms of the
agreement, the purchaser was required to make a $3 million capital contribution
to the Company.
NOTE 7. INCOME TAXES
The income tax provision for the years ended August 31, 1994 and 1995 is
comprised of the following:
<TABLE>
<CAPTION>
1994 1995
---------------------- ---------------------
<S> <C> <C> <C> <C>
Current:
Federal.......................................................... $ 98,800 $ 134,781
State and local.................................................. 34,170 29,543
Foreign.......................................................... $ 33,500 $ 21,026
Benefit of net operating loss carryforward....................... (18,500) 15,000 -- 21,026
---------- ---------- --------- ----------
147,970 185,350
---------- ----------
Deferred:
Federal.......................................................... 72,578 (72,292)
State and local.................................................. 27,400 (15,425)
---------- ----------
99,978 (87,717)
---------- ----------
$ 247,948 $ 97,633
---------- ----------
---------- ----------
</TABLE>
The deferred tax liability reflects the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and amounts used for income tax purposes. Significant
components of the Company's deferred tax liabilities and assets at August 31,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment.............................................. $ 508,000 $ 525,000
---------- ----------
Deferred tax assets:
Allowance for uncollectible accounts................................ -- 102,000
Other............................................................... 24,283 27,000
---------- ----------
24,283 129,000
Less, valuation allowance............................................. -- --
---------- ----------
24,283 129,000
---------- ----------
Net deferred tax liability............................................ $ 483,717 $ 396,000
---------- ----------
---------- ----------
</TABLE>
F-29
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. INCOME TAXES (CONTINUED)
Reconciliation of the statutory federal income tax rate to the Company's
effective tax rate for the years ended August 31, 1994 and 1995 is as follows:
<TABLE>
<CAPTION>
1994 1995
--------------------- ---------------------
<S> <C> <C> <C> <C>
AMOUNT % AMOUNT %
---------- --------- ---------- ---------
Tax at U.S. statutory rate................................................ $ 146,756 34.0 $ 97,552 34.0
Change in estimated tax rates from an average graduated federal income tax
rate to the highest statutory federal income tax rate.................... 45,555 10.5 -- --
State income taxes, net of federal income tax benefit..................... 40,637 9.4 9,318 3.2
Foreign income taxes...................................................... 15,000 3.5 21,026 7.3
Reduction of taxes provided in prior years................................ -- -- (30,263) (10.5)
---------- --- ---------- ---------
$ 247,948 57.4 $ 97,633 34.0
---------- --- ---------- ---------
---------- --- ---------- ---------
</TABLE>
NOTE 8. COMMITMENTS AND CONTINGENCIES
(A) CAPITAL LEASES
The Company leases various computer equipment and automobiles under
long-term lease agreements. Future minimum payments under the capital leases
with initial terms of one year or more consist of the following at August 31,
1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Minimum lease payments................................................... $ 34,164 $ 3,796
Less, amounts denoting interest.......................................... 9,630 1,214
--------- ---------
Present value of minimum lease payments.................................. $ 24,534 $ 2,582
--------- ---------
--------- ---------
</TABLE>
(B) OPERATING LEASES
The Company leases its office facilities under noncancellable operating
leases expiring at various dates through 2002.
Future minimum payments required under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AUGUST 31,
- ------------------------------------------------------------------------------------
<S> <C>
1996................................................................................ $ 296,000
1997................................................................................ 251,000
1998................................................................................ 256,000
1999................................................................................ 262,000
2000................................................................................ 163,000
2001 and thereafter................................................................. 82,000
------------
$ 1,310,000
------------
------------
</TABLE>
In addition to the above minimum payments, certain of the leases provide for
escalation of rentals based upon increases in lessors' operating expenses over a
specified base.
Rent expense (net) aggregated $231,498 and $324,158 for the years ended
August 31, 1994 and 1995, respectively.
F-30
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(C) EMPLOYMENT AGREEMENTS
The Company has an employment agreement with one of its employees for his
lifetime, whereby a $4,000 salary will be paid to the employee monthly for
services as defined in the agreement. In addition, this employee receives
commissions on sales that he generates. Commissions earned approximated $94,200
and $89,200 for the years ended August 31, 1994 and 1995. Upon the employee's
death, the Company is further obligated to pay, for a ten-year period, 50% of
the commissions that would have been paid had the employee survived. Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", requires that the expected cost of
this benefit be charged to expense during the years of the employee's service so
that, at the employee's death, a liability has been established equal to the
present value of all future benefits to be paid. The amount charged to expense
was $22,500 and $15,200 for the years ended August 31, 1994 and 1995,
respectively.
The Company has entered into an employment agreement with an
officer/shareholder that provides for a salary of $250,000 per annum through
July 22, 1998. The agreement also provides for an annual bonus to be paid based
on certain sales levels. The Company has accrued a bonus of approximately
$172,000 for the year ended August 31, 1995.
(D) CONTINGENCIES
The Company is a defendant in several lawsuits which have arisen in the
ordinary course of business. Management is of the opinion, after consulting with
counsel, that these actions are without merit or will not have a material
adverse effect on the Company.
During the fiscal year ended August 31, 1994, the Company settled a legal
action with a former vendor for $160,000. The Company had accrued $150,000 with
respect to this action at August 31, 1993.
NOTE 9. RETIREMENT PLAN
The Company maintains a 401(k) plan covering all eligible employees.
Participants are allowed to contribute up to 20% of the salary to the Plan. The
Company has the option to match 50% of the employee contribution to the extent
that the contribution does not exceed 4% of compensation. The Company's
contribution amounted to $2,775 and $19,729 for the years ended August 31, 1994
and 1995, respectively.
NOTE 10. RELATED PARTY TRANSACTIONS
The Company was charged for accounting services totaling $87,750 for the
year ended August 31, 1994 from a partnership, one of whose partners is a
minority shareholder. The Company also leased space to the partnership on a
monthly basis. For the years ended August 31, 1994 and 1995, respectively, rent
received totalled $20,400 and $21,200, respectively.
The Company leases offices from an affiliated partnership. A total of
$35,970 and $43,560 was paid to this partnership during the years ended August
31, 1994 and 1995, respectively.
For the years ended August 31, 1994 and 1995, respectively, the Company paid
$73,243 and $21,532 in consulting fees to an entity related to an
officer/shareholder of the Company.
For the year ended August 31, 1995, the Company earned commissions of
$57,256 from an entity related to a shareholder of the Company.
For the year ended August 31, 1995, the Company incurred a consulting fee of
$100,000 from an entity related through common ownership. The consulting fee was
unpaid at August 31, 1995, and the related liability is included in accrued
expenses payable.
F-31
<PAGE>
SWIFT GLOBAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. RELATED PARTY TRANSACTIONS (CONTINUED)
The loan payable to related party consists of a noninterest-bearing advance
from an entity related through common ownership.
NOTE 11. PRIOR PERIOD ADJUSTMENT
Effective September 1, 1993, the Company changed its method of accounting
for product development costs. Previously, product development costs were
incorrectly capitalized and amortized over a two-year period. Such costs are now
being expensed as incurred, as required by generally accepted accounting
principles. Prior period financial statements have been restated to give effect
to the correction of an error, net of income taxes, in the amount of $58,160, as
well as to correct an error in the calculation of income taxes with the respect
to Hong Kong, in the amount of $163,300.
NOTE 12. CONCENTRATION OF CREDIT RISK
The Company's largest customer accounted for approximately 10% of revenues
for each of the years ended August 31, 1994 and 1995. Amounts due from this
customer were $98,394 and $288,315 at August 31, 1994 and 1995, respectively.
NOTE 13. EXPORT SALES
Export sales to unaffiliated customers in foreign countries are as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Asia.............................................................. $ 4,634,966 $ 3,483,396
Europe............................................................ 1,086,133 816,388
South America..................................................... 749,165 701,147
North America (other than the United States)...................... 684,272 583,458
------------ ------------
$ 7,154,536 $ 5,584,389
------------ ------------
------------ ------------
</TABLE>
The revenue generated by the Company's foreign operations and the
identifiable assets of the Company's foreign operations are not regarded as
significant.
F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
ViTel International Holding Company, Inc.
Mill Valley, California
We have audited the accompanying consolidated balance sheets of ViTel
International Holding Company, Inc. and Subsidiaries as of June 30, 1994 and
1995, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended June 30, 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 the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ViTel
International Holding Company, Inc. and Subsidiaries at June 30, 1994 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended June 30, 1995, in conformity with generally accepted
accounting principles.
BDO SEIDMAN, LLP
San Francisco, California
November 3, 1995
F-33
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
<CAPTION>
ASSETS
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Current
Cash and cash equivalents................................................................. $ 2,454 $ 4,216
Accounts receivable, net of allowance for doubtful accounts of $95 and $98 (Note 4)....... 3,471 4,380
Income tax receivable (Note 3)............................................................ -- 301
Deferred income tax assets, net (Note 3).................................................. -- 233
Other current assets...................................................................... 691 1,024
--------- ---------
Total current assets.................................................................. 6,616 10,154
Property and equipment, net (Notes 1 and 2)................................................. 5,822 6,327
Intangible assets, net...................................................................... 1,088 938
Covenant not to compete, net (Note 7)....................................................... -- 764
Deferred income tax assets, net (Note 3).................................................... 359 802
Other assets................................................................................ 818 861
--------- ---------
$ 14,703 $ 19,846
--------- ---------
--------- ---------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Current
Accounts payable and accruals (Note 4).................................................... $ 4,751 $ 5,868
Current maturities of long-term debt and capital lease obligations (Note 2)............... 878 1,067
Income taxes payable (Note 3)............................................................. 186 221
Current portion of other long-term liabilities (Note 7)................................... -- 489
--------- ---------
Total current liabilities............................................................. 5,815 7,645
Long-term debt and capital lease obligations, net of current maturities (Note 2)............ 161 1,159
Deferred income tax liabilities (Note 3).................................................... 1,170 962
Other long-term liabilities (Note 7)........................................................ -- 730
--------- ---------
Total liabilities..................................................................... 7,146 10,496
--------- ---------
Commitments and subsequent event (Notes 4, 5, 7 and 8)
Stockholders' equity
Common stock (Notes 4 and 7), $.01 par -- shares authorized, 4,000,000; outstanding,
1,108,966 and 1,358,766 at June 30, 1994 and 1995........................................ 11 14
Additional paid-in capital (Note 4)....................................................... 2,528 5,276
Retained earnings......................................................................... 4,731 3,390
Cumulative translation adjustment......................................................... 287 670
--------- ---------
Total stockholders' equity............................................................ 7,557 9,350
--------- ---------
$ 14,703 $ 19,846
--------- ---------
--------- ---------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-34
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1993 1994 1995
--------- --------- ---------
Data transmission revenues....................................................... $ 25,802 $ 25,381 $ 28,935
Costs of data transmission....................................................... 15,637 15,117 17,970
--------- --------- ---------
Gross profit from data transmission.............................................. 10,165 10,264 10,965
Selling, general and administrative expenses (Note 4)............................ 8,794 8,937 10,531
Stock acquisition expenses (Notes 4 and 7)....................................... -- -- 2,764
--------- --------- ---------
Operating (loss) profit.......................................................... 1,371 1,327 (2,330)
--------- --------- ---------
Other income (expense)
Interest expense............................................................... (130) (110) (66)
Foreign currency gains......................................................... 102 64 160
Other, net..................................................................... 118 238 38
--------- --------- ---------
90 192 132
--------- --------- ---------
(Loss) income before income taxes................................................ 1,461 1,519 (2,198)
Income tax benefit (expense) (Note 3)............................................ (510) (562) 857
--------- --------- ---------
Net (loss) income................................................................ $ 951 $ 957 $ (1,341)
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-35
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
------------------------ PAID-IN RETAINED SUBSCRIPTION TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS RECEIVABLE ADJUSTMENT
----------- ----------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1992......................... 1,268 $ 13 $ 3,551 $ 2,823 $ (439) $ 341
Foreign currency translation adjustment........ -- -- -- -- -- (162)
Net income..................................... -- -- -- 951 -- --
----- --- ----------- ----------- ----- -----
Balance, June 30, 1993......................... 1,268 $ 13 $ 3,551 $ 3,774 $ (439) $ 179
Termination of stock subscription (Note 4)..... (22) -- (439) -- 439 --
Repurchase of common stock (Note 4)............ (137) (2) (584) -- -- --
Foreign currency translation adjustment........ -- -- -- -- -- 108
Net income..................................... -- -- -- 957 -- --
----- --- ----------- ----------- ----- -----
Balance, June 30, 1994......................... 1,109 11 2,528 4,731 -- 287
Stock compensation for stock options
granted (Note 4)............................. -- -- 1,909 -- -- --
Exercise of employees' stock options
(Note 4)..................................... 250 3 839 -- -- --
Foreign currency translation adjustment........ -- -- -- -- -- 383
Net loss....................................... -- -- -- (1,341) -- --
----- --- ----------- ----------- ----- -----
Balance, June 30, 1995......................... 1,359 $ 14 $ 5,276 $ 3,390 $ -- $ 670
----- --- ----------- ----------- ----- -----
----- --- ----------- ----------- ----- -----
<CAPTION>
TOTAL
---------
<S> <C>
Balance, June 30, 1992......................... $ 6,289
Foreign currency translation adjustment........ (162)
Net income..................................... 951
---------
Balance, June 30, 1993......................... $ 7,078
Termination of stock subscription (Note 4)..... --
Repurchase of common stock (Note 4)............ (586)
Foreign currency translation adjustment........ 108
Net income..................................... 957
---------
Balance, June 30, 1994......................... 7,557
Stock compensation for stock options
granted (Note 4)............................. 1,909
Exercise of employees' stock options
(Note 4)..................................... 842
Foreign currency translation adjustment........ 383
Net loss....................................... (1,341)
---------
Balance, June 30, 1995......................... $ 9,350
---------
---------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-36
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1993 1994 1995
--------- --------- ---------
Cash flows from operating activities
Net (loss) income............................................................... $ 951 $ 957 $ (1,341)
--------- --------- ---------
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization................................................... 1,675 1,629 1,926
Loss on sale of capital assets, net............................................. 106 34 65
Stock acquisition expenses...................................................... -- -- 2,464
Increase (decrease) in cash from changes in:
Accounts receivable, net...................................................... (351) (181) (648)
Other current assets.......................................................... 19 (85) (287)
Other assets.................................................................. 10 (42) --
Accounts payable and accruals................................................. 777 530 1,035
Income taxes payable.......................................................... (77) (31) (291)
Deferred income taxes......................................................... 310 21 (917)
--------- --------- ---------
Total adjustments................................................................. 2,469 1,875 3,347
--------- --------- ---------
Net cash provided by operating activities......................................... 3,420 2,832 2,006
--------- --------- ---------
Cash flows from investing activities
Capital expenditures............................................................ (1,900) (2,520) (2,131)
Proceeds from sale of capital assets............................................ 2 14 5
--------- --------- ---------
Net cash used in investing activities............................................. (1,898) (2,506) (2,126)
--------- --------- ---------
Cash flows from financing activities
Proceeds from long-term debt.................................................... 1,188 1,273 2,104
Principal payments on long-term debt and capital lease obligations.............. (1,236) (1,683) (1,077)
Repurchase of common stock (Note 4)............................................. -- (586) --
Exercise of employees' stock options (Note 4)................................... -- -- 842
--------- --------- ---------
Net cash provided by (used in) financing activities............................... (48) (996) 1,869
--------- --------- ---------
Effect of exchange rate changes on cash........................................... (434) (30) 13
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 1,040 (700) 1,762
Cash and cash equivalents, beginning of year...................................... 2,114 3,154 2,454
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 3,154 $ 2,454 $ 4,216
--------- --------- ---------
--------- --------- ---------
</TABLE>
Supplemental disclosures of cash flow information
During the year ended June 30, 1995, the Company was assigned a covenant not
to compete and the related liability valued at $900,000 (Note 7).
Cash paid for:
<TABLE>
<S> <C> <C> <C>
Interest........................................................ $ 148 $ 143 $ 122
Income taxes.................................................... $ 250 $ 592 $ 350
--------- --------- ---------
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-37
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
SUMMARY OF ACCOUNTING POLICIES
BUSINESS
ViTel International Holding Company, Inc. (the Company) is engaged in the
business of electronic message and data transmission including electronic mail,
facsimile, and telex. The Company conducts its operations in the United States
and through a network of subsidiary companies located in countries throughout
the world including Japan, Hong Kong, Australia and the United Kingdom. In
addition, the Company maintains a research and development facility in Boulder,
Colorado (Note 8), dedicated to the development and enhancement of its
communications technology.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all subsidiary companies throughout the world. All subsidiaries are 100
percent owned. All material intercompany accounts and transactions are
eliminated. The Company employs accounting policies for consolidated reporting
purposes that are in conformity with generally accepted accounting principles in
the United States.
CASH AND CASH EQUIVALENTS
Cash equivalents are principally comprised of cash invested in certificates
of deposit and temporary money market instruments, stated at cost plus accrued
interest, with original maturities of three months or less.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Major additions and betterments
are capitalized; repairs and maintenance are charged to operations as incurred.
Depreciation is provided using straight-line and declining balance methods,
principally over the following useful lives:
<TABLE>
<S> <C>
Buildings............................ 25 years
Communications equipment............. 4-5 years
</TABLE>
Amortization of leasehold improvements and assets under capital lease
obligations is provided using the straight-line method over the life of the
asset or the lease term.
INTANGIBLE ASSETS
Intangible assets include goodwill and purchased customer lists which are
amortized using the straight-line method over periods from ten to twenty years.
Amortization of intangible assets charged to operations in 1994 and 1995 totaled
$231,000 and $228,000.
COVENANT NOT TO COMPETE
Covenant not to compete is amortized using the straight-line method over a
period of three years, the terms of the agreement. Amortization expense charged
to operations in 1995 totaled $136,000 (Note 7).
FOREIGN CURRENCY TRANSLATION
The Company and each of its subsidiaries use their local currency as their
functional currency. Gains and losses from foreign currency transactions are
included in the determination of net income. Cumulative translation adjustments,
which result from the process of translating the consolidated financial
statements from the functional currencies of each subsidiary into the reporting
currency, are included as a component of stockholders' equity.
REVENUE RECOGNITION
Revenue from data transmission is recognized when the data is delivered to
customer specified destinations.
F-38
<PAGE>
SOFTWARE RESEARCH AND DEVELOPMENT COSTS
The Company incurred research and development costs totaling $487,000,
$304,000 and $395,000 for the years ended June 30, 1993, 1994 and 1995, which
are included in general and administrative expenses.
The Company capitalizes internal software development costs in accordance
with Statement of Financial Accounting Standards No. 86. Capitalization of these
costs begins when a product's technological feasibility has been established and
ends when the product is available for general release to customers. Amounts
capitalized in the years ending June 30, 1993, 1994 and 1995, totaled $609,000,
$674,000 and $679,000. Amortization is computed over a five year estimated
economic life of the products.
INCOME TAXES
Income taxes are calculated using the liability method specified by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
FINANCIAL INSTRUMENTS
The Company uses foreign exchange contracts to hedge the effects of exchange
rate changes associated with the future transfer of funds from one subsidiary to
another to settle existing liabilities. Gains and losses on contracts that
effectively hedge foreign currency transactions are deferred and included in
income as the transfer of funds occurs. See Note 7.
F-39
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Communications equipment.................................................................... $ 11,706 $ 10,781
Computer software........................................................................... 4,043 4,724
Equipment under capital leases.............................................................. 847 1,262
Land, building and leasehold improvements................................................... 747 833
--------- ---------
17,343 17,600
Less accumulated depreciation and amortization.............................................. 11,521 11,273
--------- ---------
$ 5,822 $ 6,327
--------- ---------
</TABLE>
Accumulated depreciation relating to equipment under capital leases totaled
$475,000 and $558,000 at June 30, 1994 and 1995. Accumulated amortization
relating to the computer software totaled $2,514,000 and $3,125,000 at June 30,
1994 and 1995.
Depreciation expense of $64,000, $92,000 and $202,000 on equipment under
capital leases was recorded for the years ended June 30, 1993, 1994 and 1995.
Amortization expense of $609,000, $547,000 and $611,000 on computer software
was recorded for the years ended June 30, 1993, 1994 and 1995.
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations consisted of the following (in
thousands):
<TABLE>
<CAPTION>
JUNE 30,
--------------------
<S> <C> <C>
1994 1995
--------- ---------
Notes payable to U.K. bank, interest at 9.5%, principal and interest payable monthly through
September 1997, secured by mortgages on real property......................................... $ 50 $ 36
Notes payable to Japanese banks, interest at 2.8% to 3.6%, principal and interest payable
monthly through March 1998, unsecured......................................................... 339 1,176
Notes payable to the Company's former majority stockholder, interest at 12%, principal and
interest payable monthly through February 1996, unsecured..................................... 360 170
Obligations under capital leases, secured by communications equipment (Note 5)................. 290 844
--------- ---------
1,039 2,226
Less current portion........................................................................... 878 1,067
--------- ---------
$ 161 $ 1,159
--------- ---------
</TABLE>
Interest expense on the note payable to the Company's former majority
stockholder totaled $81,000, $67,000 and $40,000 for the years ended June 30,
1993, 1994 and 1995.
F-40
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
At June 30, 1995, minimum principal payments required on long-term debt and
capital lease obligations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30, AMOUNT
- -------------------------------------------------------------------------------------------------------- -----------
<S> <C>
1996.................................................................................................... $ 1,067
1997.................................................................................................... 591
1998.................................................................................................... 386
1999.................................................................................................... 118
2000.................................................................................................... 64
-----------
$ 2,226
-----------
</TABLE>
3. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized.
Income tax benefit (expense) is comprised of the following:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
U.S. Federal.......................................................................... $ (10) $ (168) $ 160
State and local....................................................................... (7) (47) --
Foreign............................................................................... (189) (378) (226)
--------- --------- ---------
(206) (593) (66)
--------- --------- ---------
Deferred:
U.S. Federal.......................................................................... (171) (24) 874
State and local....................................................................... (30) (4) 154
Foreign............................................................................... (103) 59 (105)
--------- --------- ---------
(304) 31 923
--------- --------- ---------
$ (510) $ (562) $ 857
--------- --------- ---------
</TABLE>
The domestic and foreign components of earnings (loss) before income taxes
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1993 1994 1995
--------- --------- ---------
Domestic............................................................................ $ 359 $ 799 $ (2,683)
Foreign............................................................................. 1,102 720 485
--------- --------- ---------
$ 1,461 $ 1,519 $ (2,198)
--------- --------- ---------
</TABLE>
F-41
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES (CONTINUED)
The difference between taxes at the U.S. Federal statutory income tax rate
and the actual current year's taxes on income is as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Tax benefits (expenses) computed at U.S. Federal statutory rate.......................... $ (497) $ (516) $ 747
Income taxes on foreign operations (more) less than taxes at the U.S. Federal statutory
rate.................................................................................... 68 5 (61)
State tax benefits (expenses), net of Federal income tax benefit......................... (25) (32) 92
Other.................................................................................... (56) (19) 79
--------- --------- ---------
$ (510) $ (562) $ 857
--------- --------- ---------
</TABLE>
Significant components of the Company's long-term deferred income tax assets
and liabilities, primarily relating to U.S. taxes, at June 30, 1993, 1994 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Depreciation......................................................................... $ 48 $ 46 $ 55
Compensated absences................................................................. 77 82 144
State taxes.......................................................................... 12 18 --
Bad debt reserve..................................................................... 28 36 27
Loss carryforward.................................................................... -- 85 653
Tax credits.......................................................................... 150 105 415
Other................................................................................ 37 4 50
--------- --------- ---------
Gross deferred income tax assets..................................................... 352 376 1,344
Deferred income tax assets valuation allowance....................................... (44) (17) (542)
--------- --------- ---------
Net deferred income tax assets....................................................... $ 308 $ 359 $ 802
--------- --------- ---------
</TABLE>
The deferred income tax asset valuation allowance was $51,000 at the
beginning of fiscal year 1993.
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Depreciation......................................................................... $ 180 $ 267 $ 330
Intangible assets.................................................................... 346 267 206
Research and development costs....................................................... 562 636 426
--------- --------- ---------
Deferred income tax liabilities...................................................... $ 1,088 $ 1,170 $ 962
--------- --------- ---------
</TABLE>
The current deferred income tax asset at June 30, 1995 of $233,000 relates
primarily to the estimated utilization of net operating loss carryforwards
expected to offset future taxable income in the United States.
As of June 30, 1995, the income tax receivable relates to estimated taxes
paid in the current year of approximately $60,000 plus $187,000 relating to the
carryback of net operating losses in the United States plus $54,000 relating to
the carryback of net operating losses in the United Kingdom.
For tax purposes, the Company has foreign net operating loss carryforwards
of approximately $414,000 which may be carried forward to offset future taxable
income. For Federal and state income tax purposes, the Company is expected to
have available net operating loss carryforwards of approximately $1.7 million
and
F-42
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INCOME TAXES (CONTINUED)
$1.8 million. The Federal loss carryforwards expire in 15 years and the state
loss carryforwards expire over a period of 5 to 15 years. Additionally, the
Company also has U.S. general business tax credit carryforwards of approximately
$415,000 that may be carried forward to offset regular tax liabilities for a
15-year period from the year that credits were earned. The credits expire from
2000 to 2010.
4. COMMON STOCK TRANSACTIONS
In October 1994, the former majority stockholder of the Company entered into
an agreement to sell all his issued and outstanding common stock. Terms of his
agreement required the buyer to make a tender offer for all other outstanding
stock, including all outstanding options to purchase 250,000 shares of common
stock.
Included in stock acquisition expenses is $200,000 paid to an entity which
is affiliated with the new stockholder. This same affiliated entity also
provided $100,000 of administrative services to the Company for the year ended
June 30, 1995. The Company also provided administrative services to another
affiliated entity for $100,000 during the year ended June 30, 1995. As of June
30, 1995, the Company is owed, and owes, $100,000 from and to these affiliated
entities for such administrative services.
On October 25, 1991, the Company entered into an agreement with a third
party to sell 43,950 shares of its unissued common stock. As part of the
agreement, the third party was also granted the option to purchase up to 5% of
the then total outstanding common stock at a purchase price of $15 per share,
exercisable through December 31, 1993. Total consideration for the sale was
$879,000, half of which was paid on January 1, 1992, and the balance of which
was due on January 1, 1993. During fiscal 1994, the Company, the Company's
principal stockholder and the third party entered into a settlement agreement
relating to the unpaid stock subscription. The terms of the settlement resulted
in the Company canceling the stock subscription and entering into an agreement
to repurchase from the third party 136,772 shares of common stock. The 136,772
shares repurchased by the Company includes 21,975 shares previously sold by the
Company and 114,797 shares sold by the Company's principal stockholder to the
third party in a related October 1991 transaction. The purchase price for the
136,772 shares was $575,000. Legal fees incurred by the Company relating to this
matter totaled approximately $267,000. Of this amount, the third party
reimbursed the Company $200,000, and the Company's principal stockholder
reimbursed the Company approximately $56,000 in fiscal 1995. The settlement of
this transaction was recorded at June 30, 1994. Accordingly, paid-in capital and
stock subscription receivable were adjusted by $439,000. Additionally, common
stock and paid-in capital have been adjusted to reflect the Company's
acquisition of 136,772 shares of common stock at a cost, including expenses of
approximately $11,000, of $586,000. As of June 30, 1994, accounts payable
included $375,000 due to the third party for the repurchase of the 136,772
shares of stock and accounts receivable included $56,000 due from the Company's
former majority stockholder for his share of legal fees relating to the
transaction.
Under the Company's non-qualified stock option plan, as amended in May 1994,
250,000 common shares had been reserved for award to officers, employees, and
independent contractors retained by the
F-43
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMMON STOCK TRANSACTIONS (CONTINUED)
Company or its subsidiaries. Shares were awarded at the discretion of the
Company's Board of Directors. Options were granted at the estimated fair market
value of the stock. Options generally vested equally over a five-year period.
Stock option transactions during fiscal years 1994 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTION
STOCK PRICE
OPTIONS PER SHARE
----------- ----------
<S> <C> <C>
Outstanding, June 30, 1992.......................................... 167,950
Granted............................................................. 5,600 $5.75
Canceled............................................................ (24,550) 2.55-5.12
----------- ----------
Outstanding, June 30, 1993.......................................... 149,000 2.55-5.75
Granted............................................................. 19,400 4.05
Canceled............................................................ (10,700) 2.55-5.75
----------- ----------
Outstanding, June 30, 1994.......................................... 157,700
Granted............................................................. 104,500 4.05
Canceled............................................................ (12,400) 2.55-5.75
Exercised........................................................... (249,800) 2.55-5.75
----------- ----------
Outstanding, June 30, 1995.......................................... --
----------- ----------
</TABLE>
On September 30, 1994, after the cancellation of options to purchase 12,400
shares of common stock, the Company granted various Company employees options to
purchase 104,500 shares of common stock at $4.05 per share. As a result of the
January 1995 sale of the stockholders' stock described above, all 250,000
outstanding options became immediately 100% vested. In January 1995,
substantially all options were exercised, the related stock issued and then
immediately sold. As a result of the issuance of the stock options in 1995, and
the sale of all stock, the Company recorded compensation expense of
approximately $1.9 million relating to the stock options issued in 1995 which
were deemed to be compensatory.
5. LEASES
The Company and its subsidiaries have entered into various operating lease
agreements for office facilities and communications equipment, certain of which
include renewal options.
F-44
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LEASES (CONTINUED)
The future minimum lease payments under capital leases and all
non-cancelable operating leases with initial or remaining terms in excess of one
year are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING JUNE 30,
----------------------
<S> <C> <C>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
1996......................................................................................... $ 342 $ 928
1997......................................................................................... 277 769
1998......................................................................................... 196 630
1999......................................................................................... 132 448
2000......................................................................................... 68 98
--------- -----------
Total minimum future lease payments.......................................................... 1,015 $ 2,873
--------- -----------
-----------
Less amount representing interest, calculated at rates ranging from 7.2% to 11.7%............ 171
---------
Present value of net minimum lease payments (Note 2)......................................... $ 844
---------
---------
</TABLE>
Rent expense under all non-cancelable operating leases was approximately
$1,236,000, $1,001,000 and $1,024,000 for the years ended June 30, 1993, 1994
and 1995.
6. GEOGRAPHIC INFORMATION
The Company operates exclusively in the communications industry. Summarized
data by geographic region for the Company's operations are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
<S> <C> <C> <C>
1993 1994 1995
--------- --------- ---------
United States.................................................................... $ 4,056 $ 4,002 $ 3,905
Japan............................................................................ 9,974 10,524 11,421
United Kingdom................................................................... 6,658 6,120 6,185
Southeast Asia................................................................... 2,629 2,460 4,170
Australia........................................................................ 2,485 2,275 3,254
--------- --------- ---------
Total revenues................................................................... $ 25,802 $ 25,381 $ 28,935
--------- --------- ---------
--------- --------- ---------
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
United States.................................................................... $ 359 $ 799 $ (2,683)
Japan............................................................................ 136 480 459
United Kingdom................................................................... 240 (75) (58)
Southeast Asia................................................................... 633 180 160
Australia........................................................................ 93 135 (76)
--------- --------- ---------
(Loss) income before income taxes................................................ $ 1,461 $ 1,519 $ (2,198)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-45
<PAGE>
VITEL INTERNATIONAL HOLDING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
United States.................................................................... $ 5,120 $ 5,096 $ 7,020
Japan............................................................................ 3,138 4,090 5,097
United Kingdom................................................................... 3,665 3,588 3,617
Southeast Asia................................................................... 1,185 1,116 2,267
Australia........................................................................ 744 813 1,845
--------- --------- ---------
Total assets..................................................................... $ 13,852 $ 14,703 $ 19,846
--------- --------- ---------
--------- --------- ---------
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
In connection with the January 1995 stock transaction (Note 4), the Company
entered into three year employment agreements with three executive officers. The
employment agreements require annual salaries totaling approximately $440,000
plus monthly health benefits and automobile allowances. During the year ended
June 30, 1995, one executive officer terminated his employment contract with the
Company. As a result of this termination, the Company recognized compensation
expense (included in stock acquisition expense) of approximately $420,000, of
which $394,000 represents the present value of future payments, which total
approximately $128,000, $163,000 and $103,000 for the years ending June 30,
1996, 1997 and 1998.
In connection with the January 1995 stock acquisition, the former majority
shareholder entered into a three year covenant not to compete with the purchaser
of the stock. The agreement requires twelve quarterly payments of $75,000. The
first payment was made in April 1995. Subsequent to January 1995, the agreement
was assigned from the purchaser to the Company.
The Company is involved in various lawsuits which management does not
believe will have a material adverse effect on future operating results.
The Company's Board of Directors has entered into preliminary discussions
with a public company in the United States regarding the sale of the Company's
common stock. As of November 1995, no definitive agreement has been finalized.
During May 1995, the Company entered into a forward exchange contract to
exchange 230 million Japanese Yen for approximately $2.8 million. Through June
30, 1995, 100 million Japanese Yen had been exchanged for U.S. Dollars resulting
in a foreign currency transaction gain of approximately $42,000. Subsequent to
June 30, 1995, the remaining 130 million Japanese Yen were exchanged for U.S.
Dollars resulting in a gain of approximately $160,000.
8. SUBSEQUENT EVENT
In May, 1995, the Company decided to consolidate its non-research operations
in Colorado with an affiliate's operations in New York, the consolidation was
completed at the end of October 1995. The Company anticipates expending
significant cash in connection with the relocation of its Colorado operations,
primarily relating to moving expenses, costs to purchase and install new
equipment, leasehold improvements and severance payments. As of June 30, 1995,
the Company accrued $182,000 of severances which were paid to approximately 15
terminated employees. Approximately $64,000 of both leasehold improvement and
computer equipment were written off in connection with the relocation.
F-46
<PAGE>
COMWAVE COMMUNICATIONS AG, CH-BASEL
AUDIT REPORT ON THE CONSOLIDATED ACCOUNTS
FOR THE PERIOD ENDED DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
We have audited the consolidated report and financial statements in Swiss
Francs at and as of the year ended December 31, 1994 and at and as of the nine
month period ended September 30, 1995 of
- - Comwave Communications AG, CH-Basel
which includes the following subsidiaries at 100%
--Comwave (UK) Limited
--US Comwave Communications Inc.
--Comwave Communications GmbH
This consolidated report and financial statements are the responsibility of
Comwave Communications AG. Our responsibility is to express an opinion on these
statements based upon our audit.
We conducted our audit in accordance with generally accepted auditing
standards, which would materialy be on the same basis as US generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the schedule. An audit also includes
assessing management, as well as evaluating the overall schedule presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated report and the financial statements refered
to above presents fairly, in all material respects, the situation of Comwave
Communications AG for the year ended December 31, 1994 and the nine month period
ended September 30, 1995 in accordance with US generally accepted accounting
principles.
This revised report replaces our reports dated January 3, 1996, May 2, 1996
and May 21, 1996.
Basel, May 22, 1996
Visura Treuhand-Gesellschaft
O. HEINIGER
I.V. L.
FORNASIERO
---------------------------------------------
---------------------------------------------
O. Heiniger
i.V. L. Fornasiero
AUDITOR IN CHARGE
Annexe:
Consolidated Financial Statements for the year ended December 31, 1994 and the
nine month period ended September 30, 1995
F-47
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
CONSOLIDATED STATEMENT OF PROFIT / (LOSS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
YEAR ENDED ------------------------
NOTE DECEMBER 31, 1994 1994 1995
----- ----------------- ----------- -----------
<S> <C> <C> <C> <C>
CHF
CHF UNAUDITED CHF
Turnover.................................................... 2 7,657,296 5,694,094 6,953,509
Cost of sales............................................... (4,792,741) (3,377,037) (2,817,903)
----------------- ----------- -----------
Gross operating margin...................................... 2,864,555 2,317,057 4,135,606
----------------- ----------- -----------
Administrative expenses..................................... 3 (4,203,922) (3,047,435) (3,288,335)
Other operating income...................................... 30,055 69,243 1,818
----------------- ----------- -----------
(4,173,867) (2,978,192) (3,286,517)
----------------- ----------- -----------
Operating income / (loss)................................... 4 (1,309,312) (661,135) 849,089
Other income / (expense)
Bank interest receivable.................................... 26,098 19,936 22,677
Overdraft and loan interest................................. (87,947) (50,622) (52,246)
Other expense............................................... -- -- (50,462)
----------------- ----------- -----------
(61,849) (30,686) (80,031)
----------------- ----------- -----------
Income / (loss) before income taxes......................... (1,371,161) (691,821) 769,058
Income tax recovery / (provision)........................... 5 (1,018) -- --
----------------- ----------- -----------
Net income / (loss)......................................... (1,372,179) (691,821) 769,058
----------------- ----------- -----------
----------------- ----------- -----------
</TABLE>
The accompanying notes form part of these financial statements.
F-48
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30,
NOTE 1994 1995
----- -------------- --------------
<S> <C> <C> <C>
CHF CHF
<CAPTION>
ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets
Cash.................................................................... 1,844,352 2,168,833
Trade accounts receivable............................................... 1,382,685 1,553,048
Accounts receivable, other.............................................. 149,091 70,867
Recoverable taxes....................................................... 48,858 144,780
Prepayments and accrued revenues........................................ 205,424 196,175
-------------- --------------
Total current assets................................................ 3,630,410 4,133,703
Furniture, Machinery and Equipment........................................ 6 570,519 582,744
Investment in subsidiary.................................................. 7 -- 59,750
Goodwill.................................................................. 8 1,388,000 1,151,849
-------------- --------------
Total Assets.............................................................. 5,588,929 5,928,046
-------------- --------------
-------------- --------------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current liabilities
Accounts payable........................................................ 1,956,744 1,057,284
Other creditors......................................................... 7,438 545,069
Tax liability........................................................... 219 193
Creditors for indirect taxation......................................... 28,419 37,604
Obligations under capital leases........................................ 3,120
-------------- --------------
1,995,940 1,640,150
-------------- --------------
Long term debt............................................................ 9 1,470,305 1,111,872
-------------- --------------
Share capital and deficit
Share capital........................................................... 10 3,500,000 3,800,000
Deficit................................................................. (1,377,316) (623,976)
-------------- --------------
11 2,122,684 3,176,024
-------------- --------------
Total Liabilities and Shareholders' Equity.......................... 5,588,929 5,928,046
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes form part of these financial statements.
F-49
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
CONSOLIDATED STATEMENT OF DEFICIT
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ---------------------
1994 1994 1995
------------ --------- ----------
<S> <C> <C> <C>
CHF CHF CHF
<CAPTION>
UNAUDITED
<S> <C> <C> <C>
Balance, beginning of period................................................ 33,246 33,246 1,377,316
Net (profit) / loss for the period.......................................... 1,372,179 691,821 (769,058)
Prior year losses assumed by shareholders................................... (29,695) -- --
Cumulative translation adjustment account................................... 1,586 824 15,718
------------ --------- ----------
Balance, end of period...................................................... 1,377,316 725,891 623,976
------------ --------- ----------
------------ --------- ----------
</TABLE>
The accompanying notes form part of these financial statements.
F-50
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
CONSOLIDATED CASH FLOW STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------- ------------------------------------------
NOTE 1994 1994 1995
----- -------------------- -------------------- --------------------
CHF CHF CHF CHF CHF CHF
UNAUDITED
<S> <C> <C> <C> <C> <C> <C> <C>
Net cash (outflow) / inflow
from operating activities.... 12 (1,383,233) (947,960) 719,263
Returns on investments and
servicing of finance
Interest paid............... (86,905) (50,622) (51,331)
Finance charges paid........ (1,042) -- (915)
Interest received........... 26,098 19,936 22,677
--------- --------- ---------
Net cash (outflow) /
inflow from returns on
investment and servicing
of finance.............. (61,849) (30,686) (29,569)
Taxation
Tax paid...................... (799)
Investing activities
Payments to acquire
intangible fixed assets... 8 (1,600,000) (1,600,000)
Purchase of subsidiary
undertakings (net of cash
and cash equivalents)..... 7 277,270 (59,750)
Payments to acquire fixed
assets.................... (651,133) (545,110) (222,063)
--------- --------- ---------
Net cash (outflow) /
inflow from investing
activities.............. (1,973,863) (2,145,110) (281,813)
--------- --------- ---------
Net cash (outflow) / inflow
before financing............. (3,419,744) (3,123,756) 407,881
Financing
Issue of shares............. 1,500,000 300,000
Proceeds from loan from
shareholders.............. 1,470,305 1,482,614
Repayments of loan to
shareholders.............. 9,184 (358,433)
Capital element of capital
lease payments............ (20,049) (3,120)
Cost of capital increase.... (46,500) (21,849)
--------- --------- ---------
Net cash inflow from
financing............... 14 2,903,756 1,491,798 (83,402)
--------- --------- ---------
(Decrease) / increase in cash
and cash equivalents......... 13 (515,988) (1,631,958) 324,479
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes form part of these financial statements.
F-51
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
There have been no changes in accounting policies during the period.
The financial statements have been prepared under the historical cost
convention and are in accordance with applicable accounting standards. The
following principal accounting policies have been applied:
TURNOVER
Turnover represents sales to external customers at invoiced amounts less
value added tax or local sales taxes.
DEPRECIATION
Depreciation is provided to write off the cost of all fixed assets over
their expected useful lives. It is calculated at the following rates:
Furniture--20-33 1/3%, straight line; Machinery and equipment-- 20-33 1/3%,
straight line.
BASIS OF CONSOLIDATION
The consolidated accounts include the accounts of Comwave Communications AG
and subsidiary undertakings. The acquisition method is used to consolidate the
results of subsidiaries undertakings.
GOODWILL
Purchased goodwill is capitalised and amortised over its expected useful
economic life of 5 years. The company assesses the recoverability of goodwill by
determining whether the carrying value of these assets can be recovered through
undiscounted forecasted future cash flows over their remaining lives.
COST OF CAPITAL INCREASE
Cost of capital increases represents the taxes paid on increasing the share
capital of the company. This is capitalised and amortised over 5 years in
accordance with Swiss statute.
EXCHANGE TRANSLATION
Accounts of overseas subsidiary undertakings in foreign currencies are
translated into Swiss francs at the rates ruling at balance sheet date. Exchange
differences on translations of opening net assets are dealt with through
reserves. Foreign currency transactions of individual companies are translated
at the rates ruling when they occured and monetary assets and liabilities at the
rates ruling at the balance sheet date. Any differences are taken to the profit
and loss account.
CASH EQUIVALENTS
Cash equivalents comprise short-term, highly liquid investments which are
readily convertible into known amounts of cash without notice and which were
within three months of maturity when acquired.
LEASED ASSETS
Where assets are financed by leasing agreements that give rights
approximating to ownership (capital leases), the assets are treated as if they
had been purchased outright. The amount capitalised is the present value of the
minimum lease payments payable during the lease term. The corresponding leasing
commitments are shown as amounts payable to the lessor. Depreciation on the
relevant assets is charged to the profit and loss account.
Lease payments are split between capital and interest using the actuarial
method. The interest is charged to the profit and loss account. The capital part
reduces the amounts payable to the lessor.
F-52
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
LEASED ASSETS (CONTINUED)
All other leases are treated as operating leases. Their annual rentals are
charged to the profit and loss account on a straight-line basis over the lease
term.
DEFERRED TAXATION
Provision is made for timing differences between the treatment of certain
items for taxation and accounting purposes.
COMWAVE GROUP
The following were the subsidiary undertakings at the end of the year and
have all been included in the consolidated financial statements
<TABLE>
<CAPTION>
PROPORTION OF
COUNTRY OF SHARE CAPITAL NATURE OF
COMPANY INCORPORATION HELD BUSINESS
- ------------------------------------------------ ------------- ----------------- ------------------------
<S> <C> <C> <C>
Comwave (UK) Limited............................ England 100% facsimile broadcasting
US Comwave Communications Inc................... U.S.A. 100% facsimile broadcasting
Comwave GmbH.................................... Germany 100% facsimile broadcasting
Not consolidated:
Comwave Communications Sarl..................... France 100% facsimile broadcasting
</TABLE>
reason: -- the company was purchased in 1995
-- the company has no activity
-- it is planned to liquidate this company in 1996
2. TURNOVER AND RESULTS
TURNOVER
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
1994 SEPTEMBER 30,
------------ ----------------------
1994 1995
CHF ---------- ----------
CHF CHF
UNAUDITED
<S> <C> <C> <C>
Analysis by class of business
Facsimile broadcasting.................................................... 7,345,666 5,382,464 6,953,509
Computer communications equipment......................................... 311,630 311,630 0
------------ ---------- ----------
7,657,296 5,694,094 6,953,509
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
F-53
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. TURNOVER AND RESULTS (CONTINUED)
The group discontinued the supply of computer communications equipment in
June 1994.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1994
YEAR ENDED ---------- 1995
DECEMBER 31, ----------
------------ CHF
1994 UNAUDITED CHF
------------
CHF
<S> <C> <C> <C>
Turnover is analysed by market below:
Europe.................................................................... 5,991,737 4,498,334 5,665,634
America................................................................... 1,456,312 1,024,937 1,144,798
Asia...................................................................... 209,247 170,823 143,077
------------ ---------- ----------
7,657,296 5,694,094 6,953,509
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
Export sales were not significant.
INCOME BEFORE TAXES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------
1994
YEAR ENDED ----------- 1995
DECEMBER 31, ----------
------------ CHF
1994 UNAUDITED CHF
------------
CHF
<S> <C> <C> <C>
Analysis by class of business
Facsimile broadcasting........................................................ (1,443,250) (763,910) 769,058
Computer communications equipment............................................. 72,089 72,089 0
------------ ----------- ----------
(1,371,161) (691,821) 769,058
------------ ----------- ----------
------------ ----------- ----------
Income before taxes is analysed by market below
Europe........................................................................ (1,318,641) (609,513) 981,386
America....................................................................... (92,609) (102,395) (254,793)
Singapore..................................................................... 40,089 20,087 42,465
------------ ----------- ----------
Total......................................................................... (1,371,161) (691,821) 769,058
------------ ----------- ----------
------------ ----------- ----------
</TABLE>
IDENTIFIABLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
<S> <C> <C>
CHF CHF
Europe.......................................................... 5,165,266 5,569,129
America......................................................... 370,695 288,541
Asia............................................................ 52,968 70,376
------------ -------------
5,588,929 5,928,046
------------ -------------
------------ -------------
</TABLE>
F-54
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. STAFF COSTS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
----------------------
1994
YEAR ENDED ---------- 1995
DECEMBER 31, ----------
------------ CHF
1994 UNAUDITED CHF
------------
CHF
<S> <C> <C> <C>
These consist of:
Wages and salaries............................................................ 1,718,574 1,380,664 1,277,596
Social security costs and pension costs....................................... 264,354 212,346 131,684
------------ ---------- ----------
1,982,928 1,593,010 1,409,280
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The number of employees was 22 at September 30, 1995 and 24 at December 31,
1994.
DIRECTORS EMOLUMENTS
<TABLE>
<S> <C> <C> <C>
Fees to directors.............................................. 7,500 10,000 0
Salaries to directors.......................................... 132,000 176,000 90,000
----------- --------- ---------
139,500 186,000 90,000
----------- --------- ---------
Emoluments (excluding pension contributions) of:
President and highest paid director............................ 132,000 176,000 90,000
Other directors emoluments fell within the ranges:
CHF 0 - CHF 5.000............................................. 6 6 4
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1994
---------- 1995
DECEMBER 31, ----------
------------ CHF
1994 UNAUDITED CHF
------------
CHF
<S> <C> <C> <C>
ADMINISTRATIVE EXPENSES
Staff costs............................................................... 1,982,928 1,593,010 1,409,280
Rent and leasing.......................................................... 166,542 66,650 95,533
Repair and maintenance.................................................... 23,505 15,936 13,434
Insurances................................................................ 10,886 15,351 23,618
Energy.................................................................... 24,817 19,608 10,861
Depreciation of fixed assets.............................................. 197,069 117,392 175,475
Amortisation of goodwill / intangible assets.............................. 347,000 258,000 258,000
Advertising and promotion................................................. 58,072 89,399 50,200
Other operating expense................................................... 555,662 408,164 400,490
General and administration................................................ 764,232 374,303 657,384
Foreign exchange loss..................................................... 73,209 89,622 194,060
------------ ---------- ----------
4,203,922 3,047,435 3,288,335
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
F-55
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. OPERATING INCOME
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
----------------- ----------------------
1994 1994 1995
----------------- ----------- ---------
CHF CHF CHF
----------------- ----------- ---------
UNAUDITED
<S> <C> <C> <C>
This is arrived at after charging:
Depreciation of fixed assets
owned assets........................................................ 184,127 107,685 166,952
assets held on capital leases....................................... 12,942 9,707 8,523
Amortisation of goodwill / intangible assets.......................... 347,000 258,000 258,000
Auditors remuneration................................................. 71,645 53,735 86,210
Exchange differences.................................................. 73,209 89,622 194,060
Operating lease rentals............................................... 4,001 3,001 95,533
</TABLE>
5. TAXATION
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- ---------------------------------
1994 1994 1995
--------------------- ---------- ---------------------
CHF % CHF CHF %
---------- --- ---------- ---------- ---
UNAUDITED
<S> <C> <C> <C> <C> <C>
Tax at satutory rate............................................. (466,451) (34) (235,219) 261,450 34
Reduction (increase) in valuation allowance...................... 465,433 34 235,219 (261,450) (34)
---------- ---------- ----------
(1,018) 0 0
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
There are no differences between the bases used for income tax purposes and
financial reporting purposes.
The following are the components of deferred taxes:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ ----------------------
1994 1994
------------ ----------
CHF CHF
1995
----------
CHF
UNAUDITED
----------
<S> <C> <C> <C>
Net operating loss carryforwards............................................ 488,700 227,250 257,468
Less: Valuation allowance................................................... (488,700) (227,250) (257,468)
------------ ---------- ----------
0 0 0
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
The company has operating losses carried forward at September 30, 1995 which
expire as follows:
<TABLE>
<CAPTION>
CHF YEAR
---------- ---------
<S> <C> <C>
Comwave (UK) Ltd............................................................................. 1,037,747 1997
</TABLE>
F-56
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. FURNITURE, MACHINERY AND EQUIPMENT
<TABLE>
<CAPTION>
MACH. AND
FURNITURE EQUIPMENT TOTAL
----------- ----------- ----------
<S> <C> <C> <C>
CHF CHF CHF
Cost
At beginning of period...................................................... 113,762 738,991 852,753
Additions................................................................... 32,684 189,379 222,063
Exchange differences........................................................ (5,543) (57,379) (62,922)
----------- ----------- ----------
At end of period............................................................ 140,903 870,991 1,011,894
----------- ----------- ----------
Depreciation
At beginning of period...................................................... 47,547 234,687 282,234
Provision for the period.................................................... 16,439 159,036 175,475
Exchange differences........................................................ (3,891) (24,668) (28,559)
----------- ----------- ----------
At end of period............................................................ 60,095 369,055 429,150
----------- ----------- ----------
Net book value
At September 30, 1995....................................................... 80,808 501,936 582,744
----------- ----------- ----------
----------- ----------- ----------
At December 31, 1994........................................................ 66,215 504,304 570,519
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
The net book value of tangible fixed assets includes an amount of CHF 6.938
(1994: CHF 17.592) in respect of assets held under capital leases.
7. INVESTMENT ON SUBSIDIARY
In 1995 the Company purchased the business of Comwave Communications Sarl
(France) for CHF 59,750 (a newly formed company). This amount has been recorded
as investment in subsidiary in the Balance Sheet.
Comwave Communications Sarl (France) is not included in the financial
statements because it has no activity and it is planned to liquidate this
company in 1996.
During December 1993, the company acquired the share capital of Comwave (UK)
Limited and Comwave GmbH from Comwave AG at net liability value. This resulted
in an amount (net of cash and cash equivalents) received of CHF 277,270, which
was deferred until 1994.
F-57
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. GOODWILL
<TABLE>
<CAPTION>
COST OF
CAPITAL GOODWILL ON
INCREASE ACQUISITION TOTAL
--------- ----------- ----------
<S> <C> <C> <C>
Cost
At beginning of period..................................................... 135,000 1,600,000 1,735,000
Additions.................................................................. 21,849 0 21,849
--------- ----------- ----------
At end of period........................................................... 156,849 1,600,000 1,756,849
--------- ----------- ----------
Depreciation
At beginning of period..................................................... 27,000 320,000 347,000
Provided for the year...................................................... 18,000 240,000 258,000
--------- ----------- ----------
At end of period........................................................... 45,000 560,000 605,000
--------- ----------- ----------
Net book value
At September 30, 1995...................................................... 111,849 1,040,000 1,151,849
--------- ----------- ----------
--------- ----------- ----------
At December 31, 1994....................................................... 108,000 1,280,000 1,388,000
--------- ----------- ----------
--------- ----------- ----------
</TABLE>
In January 1994, the company purchased the goodwill of Comwave AG for CHF
1,600,000.
Since no tangible assets or identifiable assets were acquired, goodwill was
recorded in the amount of the purchase price. The results of the acquired entity
are included with that of Comwave since the date of acquisition.
Cost of capital increase relates to fees incurred in connection with the
issuance of additional share capital.
9. LONG TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
<S> <C> <C>
CHF CHF
Other loan = loan from shareholders............................. 1,470,305 1,111,872
------------ -------------
1,470,305 1,111,872
------------ -------------
------------ -------------
</TABLE>
Other loan of CHF 1,111,872 is unsecured and repayable between two and five
years. Interest is charged at 5.5% per annum on the loan. The loan was repaid in
October 1995.
10. SHARE CAPITAL
<TABLE>
<S> <C> <C>
Allotted, called up and fully paid. Shares issued at
December 31, 1994 and September 30, 1995 were
3,500,000 and 3,800,000, respectively................ 3,500,000 3,800,000
--------- ---------
--------- ---------
</TABLE>
F-58
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. RECONCILIATION OF MOVEMENTS IN SHARE CAPITAL AND DEFICIT
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
<S> <C> <C>
CHF CHF
Profit / (Loss) for the period.................................. (1,372,179) 769,058
Exchange differences............................................ (1,586) (15,718)
Issue of shares................................................. 1,500,000 300,000
Prior year losses taken by shareholders......................... 29,695 0
------------ -------------
Net addition to shareholders' funds............................. 155,930 1,053,340
Opening shareholders' funds..................................... 1,966,754 2,122,684
------------ -------------
2,122,684 3,176,024
------------ -------------
------------ -------------
</TABLE>
12. RECONCILIATION OF OPERATING PROFIT TO NET CASH FLOW FROM OPERATING
ACTIVITIES
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- ---------------------------
1994 1994 1995
------------- ------------ -------------
<S> <C> <C> <C>
CHF CHF CHF
<CAPTION>
UNAUDITED
<S> <C> <C> <C>
Operating profit / (loss)............................................ (1,309,312) (661,136) 849,089
Depreciation......................................................... 197,069 117,392 175,475
Exchange differences................................................. 28,109 (824) (31,844)
Amortisation of intangible assets.................................... 347,000 258,000 258,000
Decrease / (Increase) in stocks...................................... 62,524 55,778 0
Decrease / (Increase) in trade receivables........................... (727,027) (736,021) (170,362)
Decrease / (Increase) in recoverable taxes........................... 13,666 0 (95,922)
Decrease / (Increase) in accrued revenues............................ (184,467) 20,957 31,796
Decrease / (Increase) in deposits paid/others........................ 41,210 324,670 55,675
(Decrease) / Increase trade accounts payable......................... 319,948 (265,839) (502,693)
(Decrease) / Increase tax liabilities................................ 58,569 (87,207) 9,159
(Decrease) / Increase accrued expenses............................... (230,522) 26,270 4,667
(Decrease) / Increase other payables operating....................... 0 136,223
------------- ------------ -------------
Net cash (outflow) / inflow from operating activities................ (1,383,233) (947,960) 719,263
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
13. ANALYSIS OF CHANGES IN CASH EQUIVALENTS DURING THE YEAR
<TABLE>
<CAPTION>
CASH AT BANK
------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1994 1994 1995
------------ ------------- -------------
<CAPTION>
CHF CHF CHF
UNAUDITED
<S> <C> <C> <C>
Balance at begining of period........................................ 2,360,340 2,360,340 1,844,352
Net cash (outflow) / inflow.......................................... (515,988) (1,631,957) 324,481
------------ ------------- -------------
Balance at end of period............................................. 1,844,352 728,383 2,168,833
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
F-59
<PAGE>
COMWAVE COMMUNICATIONS AG, BASEL
NOTES FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR
<TABLE>
<CAPTION>
SHARE CAPITAL AND LOANS AND FINANCE
COST OF CAPITAL INCREASE LEASE OBLIGATIONS
------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
------------ ---------------------- ------------ ----------------------
1994 1994 1995 1994 1994 1995
------------ ---------- ---------- ------------ ---------- ----------
<CAPTION>
CHF CHF CHF CHF CHF CHF
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period............ 1,911,500 1,911,500 3,392,000 23,169 23,169 1,473,425
Cash inflow from financing................ 1,453,500 0 282,000 1,450,256 1,491,798 0
Cash outflow from financing............... 0 0 0 0 0 (361,553)
Amortisation of cost of capital
increase................................. 27,000 18,000 18,000 0 0 0
------------ ---------- ---------- ------------ ---------- ----------
Balance at end of period.................. 3,392,000 1,929,500 3,692,000 1,473,425 1,514,967 1,111,872
------------ ---------- ---------- ------------ ---------- ----------
------------ ---------- ---------- ------------ ---------- ----------
</TABLE>
F-60
<PAGE>
[On the inside back cover page of the Prospectus, an outline drawing of a world
map appears, showing points on the map which indicate countries in which the
Xpedite Network has a physical point of presence.]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Available Information.......................... 3
Incorporation of Certain Documents by
Reference.................................... 3
Prospectus Summary............................. 4
Risk Factors................................... 9
Use of Proceeds................................ 13
Price Range of Common Stock and Dividend
Policy....................................... 13
Capitalization................................. 14
Selected Consolidated Financial and Operating
Data......................................... 15
Pro Forma Condensed Combined Statement of
Operations................................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 20
Business....................................... 29
Management..................................... 40
Principal and Selling Stockholders............. 43
Underwriting................................... 45
Legal Matters.................................. 46
Experts........................................ 46
Index to Financial Statements.................. F-1
</TABLE>
840,000 SHARES
XPEDITE SYSTEMS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the expenses which the Registrant expects to incur
in connection with the Offering described in this Registration Statement. All
expenses are estimated except for the Commission's registration fee, the
National Association of Securities Dealers Inc. ("NASD") filing fee and the
Nasdaq National Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............ $15,316.92
NASD filing fee................................................ 4,879.00
Nasdaq National Market listing fee............................. 12,650.00
Legal fees and expenses........................................ 300,000.00
Accounting fees and expenses................................... 75,000.00
Printing and engraving expenses................................ 62,500.00
Registrar and transfer agent's fee............................. 15,000.00
Blue Sky fees and expenses..................................... 10,000.00
Miscellaneous.................................................. 4,654.08
----------
Total...................................................... $500,000.00
----------
----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware permits
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 the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he 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 conduct was unlawful.
In the case of an action by or in the right of the corporation, Section 145
permits the 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 or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. No indemnification may be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in the preceding two paragraphs, Section 145 requires
that he be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
II-1
<PAGE>
Section 145 provides that expenses (including attorneys' fees) incurred by
an officer or director in defending any civil, criminal, administrative or
investigative action, suit or proceeding may be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in Section 145.
Article 6 of the Registrant's Amended and Restated Certificate of
Incorporation eliminates the personal liability of the directors of the
Registrant to the Registrant or its stockholders for monetary damages for breach
of fiduciary duty as directors, with certain exceptions. Article VII, Section 7
of the Registrant's By-laws requires indemnification of directors and officers
of the Registrant to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law.
See Item 17 below.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Specimen Certificate for Common Stock of the Registrant.*
4.2 Shareholders Agreement, dated as of November 20, 1995, among the Registrant, David Epstein, Stuart
Epstein, Robert Epstein, APA Excelsior III, L.P., a Delaware limited partnership, Coutts & Co. (Jersey),
Custodian for APA Excelsior III/Offshore, L.P., a Channel Islands corporation, CIN Venture Nominees,
Ltd., a United Kingdom corporation, APA/Fostin Pennsylvania Venture Capital Fund, L.P., a New York
limited partnership, 11313 Yukon Ltd., a Yukon corporation, George Abi Zeid, Fortune Partner Investments
Ltd., a British Virgin Islands corporation, Gold Chalet Overseas Ltd., a British Virgin Islands
corporation, Barclay Holdings Corporation, a British Virgin Islands corporation, Zeev Remez, Ian Wilder,
Paul Leslie Hammond, Roy B. Andersen, Jr., Stuart S. Levy, Max A. Slifer and Dennis Schmaltz.**
4.3 Stock Purchase Agreement dated as of June 12, 1992 among the Registrant, Robert A. Epstein, Stuart
Epstein, David Epstein, and APA Excelsior III, L.P., Coutts & Co. (Jersey), Ltd., Custodian for APA
Excelsior III/Offshore, L.P., CIN Venture Nominees, Ltd., and APA/Fostin Pennsylvania Venture Capital
Fund, L.P.*
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP.
10.1 Employment Agreement, dated as of June 27, 1996, between the Registrant and Robert S. Vaters.+
23.1 Consent of Ernst & Young LLP.
23.2 Consent of David Berdon & Co. LLP.
23.3 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.+
23.4 Consent of BDO Seidman, LLP.
23.5 Consent of Visura Treuhand-Gesellschaft.
23.6 Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit 5.1).
24.1 Power of Attorney.+
27.1 Financial Data Schedule.
</TABLE>
- ------------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, Registration No. 33-73258, originally filed with the Commission on
December 22, 1993, and declared effective on February 11, 1994.
** Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Commission on December 4, 1995, and amended pursuant to (i)
Amendment No. 1 on Form 8-K/A, filed with the
II-2
<PAGE>
Commission on January 5, 1996; (ii) Amendment No. 2 on Form 8-K/A filed with
the Commission on January 12, 1996; (iii) Amendment No. 3 on Form 8-K/A
filed with the Commission on May 3, 1996 and (iv) Amendment No. 4 on Form
8-K/A filed with the Commission on June 28, 1996.
+ Previously filed.
ITEM 17. UNDERTAKINGS.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement 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.
(h) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities 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 the Securities Act and will be governed by the final
adjudication of such issue.
(i) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Eatontown, State of New
Jersey, on August 15, 1996.
XPEDITE SYSTEMS, INC.
By: /s/ ROY B. ANDERSEN, JR.
------------------------------------
Roy B. Andersen, Jr.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------------------ ------------------------------------------------- ------------------
<S> <C> <C>
/s/ ROY B. ANDERSEN, JR. President, Chief Executive Officer and Director August 15, 1996
--------------------------------- (Principal Executive Officer)
Roy B. Andersen, Jr.
* Executive Vice President--Finance and Chief August 15, 1996
--------------------------------- Financial Officer (Principal Accounting and
Robert S. Vaters Financial Officer)
* Director August 15, 1996
---------------------------------
John C. Baker
* Director August 15, 1996
---------------------------------
David Epstein
* Director August 15, 1996
---------------------------------
Robert Chefitz
* Director August 15, 1996
---------------------------------
Philip A. Campbell
</TABLE>
* By: /s/ ROY B. ANDERSEN,
JR.
------------------------
Roy B. Andersen, Jr.
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Specimen Certificate for Common Stock of the Registrant.*
4.2 Shareholders Agreement, dated as of November 20, 1995, among the Registrant, David Epstein, Stuart
Epstein, Robert Epstein, APA Excelsior III, L.P., a Delaware limited partnership, Coutts & Co. (Jersey),
Custodian for APA Excelsior III/Offshore, L.P., a Channel Islands corporation, CIN Venture Nominees,
Ltd., a United Kingdom corporation, APA/Fostin Pennsylvania Venture Capital Fund, L.P., a New York
limited partnership, 11313 Yukon Ltd., a Yukon corporation, George Abi Zeid, Fortune Partner Investments
Ltd., a British Virgin Islands corporation, Gold Chalet Overseas Ltd., a British Virgin Islands
corporation, Barclay Holdings Corporation, a British Virgin Islands corporation, Zeev Remez, Ian Wilder,
Paul Leslie Hammond, Roy B. Andersen, Jr., Stuart S. Levy, Max A. Slifer and Dennis Schmaltz.**
4.3 Purchase Agreement dated as of June 12, 1992 among the Registrant, Robert A. Epstein, Stuart Epstein,
David Epstein, and APA Excelsior III, L.P., Coutts & Co. (Jersey), Ltd., Custodian for APA Excelsior
III/Offshore, L.P., CIN Venture Nominees, Ltd., and APA/Fostin Pennsylvania Venture Capital Fund, L.P.*
5.1 Opinion of Paul, Hastings, Janofsky & Walker LLP.
10.1 Employment Agreement, dated as of June 27, 1996, between the Registrant and Robert S. Vaters.+
23.1 Consent of Ernst & Young LLP.
23.2 Consent of David Berdon & Co. LLP.
23.3 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.+
23.4 Consent of BDO Seidman, LLP.
23.5 Consent of Visura Treuhand-Gesellschaft.
23.6 Consent of Paul, Hastings, Janofsky & Walker LLP (included in Exhibit 5.1).
24.1 Power of Attorney.+
27.1 Financial Data Schedule.
</TABLE>
- ------------
* Incorporated by reference to the Registrant's Registration Statement on Form
S-1, Registration No. 33-73258, originally filed with the Commission on
December 22, 1993, and declared effective on February 11, 1994.
** Incorporated by reference to the Registrant's Current Report on Form 8-K,
filed with the Commission on December 4, 1995, and amended pursuant to (i)
Amendment No. 1 on Form 8-K/A, filed with the Commission on January 5, 1996;
(ii) Amendment No. 2 on Form 8-K/A filed with the Commission on January 12,
1996; (iii) Amendment No. 3 on Form 8-K/A filed with the Commission on May
3, 1996; and (iv) Amendment No. 4 on Form 8-K/A filed with the Commission on
June 28, 1996.
+ Previously filed.
<PAGE>
[Draft - 8/15/96]
840,000 Shares of Common Stock
XPEDITE SYSTEMS, INC.
UNDERWRITING AGREEMENT
August ___, 1996
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED,
As Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
Xpedite Systems, Inc., a corporation organized and existing under the laws
of Delaware (the "Company"), proposes, subject to the terms and conditions
stated herein, to issue and sell to the several underwriters named in Schedule I
hereto (the "Underwriters"), for whom Bear, Stearns & Co. Inc. and Prudential
Securities Incorporated are acting as representatives (the "Representatives"),
an aggregate of 550,000 shares (the "Company's Firm Shares") of common stock,
par value $.01 per share, of the Company (the "Common Stock"), and certain
stockholders of the Company named in Schedule II hereto (the "Selling
Stockholders") propose, subject to the terms and conditions stated herein, to
sell to the Underwriters an aggregate of 290,000 shares (the "Stockholders' Firm
Shares"), of Common Stock. The Company's Firm Shares and the Stockholders' Firm
Shares are hereinafter collectively referred to as the "Firm Shares." In
addition, for the sole purpose of covering over-allotments in connection with
the sale of the Firm Shares, the Company proposes to issue and sell to the
Underwriters, at the option of the Underwriters, up to an additional 82,500
shares (the "Company's Additional Shares") of Common Stock, and the Selling
Stockholders propose to sell to the Underwriters, at the option of the
Underwriters, up to an additional 43,500 shares, (the "Stockholders' Additional
Shares"), of Common Stock. The Company's Additional Shares and the
Stockholders' Additional Shares are hereinafter collectively referred to as the
"Additional Shares." The Firm Shares and any Additional Shares purchased by the
Underwriters are herein
<PAGE>
referred to as the "Shares." The Shares are more fully described in the
Registration Statement referred to below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
(a) The Company represents and warrants to, and agrees with, the
Underwriters that:
(i) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-3 (No. 333-08265), for the
registration of the Shares under the Securities Act of 1933, as amended
(the "Act"). Such registration statement, including all documents
incorporated by reference therein, the prospectus, financial statements and
schedules, exhibits and all other documents filed as a part thereof, as
amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the
Rules and Regulations of the Commission under the Act (the "Regulations"),
and any additional registration statement filed pursuant to Rule 462(b) of
the Regulations with respect to the Shares ("Rule 462(b) Registration
Statement"), is herein called the "Registration Statement," and the
prospectus (including any prospectus subject to completion meeting the
requirements of Rule 434(b) of the Regulations provided by the Company
together with any term sheet meeting the requirements of such Rule 434(b)
as the prospectus provided to meet the requirements of Section 10(a) of the
Act), including all documents incorporated by reference therein, in the
form first filed with the Commission pursuant to Rule 424(b) of the
Regulations or filed as part of the Registration Statement at the time of
effectiveness if no such Rule 424(b) or Rule 434 filing is required, is
herein called the "Prospectus." The term "preliminary prospectus" as used
herein means a preliminary prospectus as described in Rule 430 of the
Regulations. Any reference herein to the Registration Statement, any
preliminary prospectus or the Prospectus shall be deemed to refer to and
include the documents incorporated by reference therein pursuant to Item 12
of Form S-3 which were filed under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), on or before the effective date of the
Registration Statement, the date of such preliminary prospectus or the date
of the Prospectus, as the case may be, and any reference herein to the
terms "amend," "amendment" or "supplement" with respect to the Registration
Statement, any preliminary prospectus or the Prospectus shall be deemed to
refer to and include (A) the filing of any document under the Exchange Act
after the effective date of the Registration Statement, the date of such
preliminary prospectus or the date of the Prospectus, as the case may be,
which is incorporated therein by reference and (B) any such document so
filed.
(ii) At the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any
supplement to or amendment of the Prospectus is filed with the
-2-
<PAGE>
Commission, when any document filed under the Exchange Act is filed, and at
the Closing Date and the Additional Closing Date, if any (as hereinafter
respectively defined), the Registration Statement and the Prospectus and
any amendments thereof and supplements thereto complied or will comply in
all material respects with the applicable provisions of the Act and the
Regulations and the Exchange Act and the rules and regulations thereunder
and does not or will not contain an untrue statement of a material fact and
does not or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein (A) in the
case of the Registration Statement, not misleading and (B) in the case of
the Prospectus, in the light of the circumstances under which they were
made, not misleading. When any related preliminary prospectus was first
filed with the Commission (whether filed as part of the registration
statement for the registration of the Shares or any amendment thereto or
pursuant to Rule 424(a) of the Regulations) and when any amendment thereof
or supplement thereto was first filed with the Commission, such preliminary
prospectus and any amendments thereof and supplements thereto complied in
all material respects with the applicable provisions of the Act and the
Regulations and the Exchange Act and the rules and regulations thereunder
and did not contain an untrue statement of a material fact and did not omit
to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. No representation and warranty
is made in this subsection (a)(ii) by the Company, however, with respect to
any information contained in or omitted from the Registration Statement or
the Prospectus or any related preliminary prospectus or any amendment
thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through you as herein stated expressly for use in connection
with the preparation thereof. Any term sheet and prospectus subject to
completion provided by the Company to the Underwriters for use in
connection with the offering and sale of the Shares pursuant to Rule 434 of
the Regulations together are not materially different from the last
preliminary prospectus included in the Registration Statement at the time
of its effectiveness (exclusive of any information deemed to be a part
thereof by virtue of Rule 434(d) of the Regulations).
(iii) The documents incorporated or deemed to be incorporated by
reference in the Prospectus, at the time they were or hereafter are filed
(or, if any amendment with respect to any such document was filed, when
such amendment was filed) with the Commission, complied and will comply in
all material respects with the requirements of the Exchange Act and the
rules and regulations of the Commission thereunder, and, when read together
with the other information in the Prospectus, at the time the Registration
Statement and any amendments thereto become effective and at the Closing
Date and the Additional Closing Date, if any, will not contain 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 the light
of the circumstances under which they were made, not misleading.
-3-
<PAGE>
(iv) Ernst & Young LLP, who have certified the financial
statements and supporting schedules thereto included in the Registration
Statement, and whose report is filed with the Commission as part of the
Registration Statement, are independent public accountants with regard to
the Company as required by the Act and the Regulations.
(v) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as set
forth in the Registration Statement and the Prospectus, there has been no
material adverse change or any development involving a prospective material
adverse change in the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company and
its subsidiaries taken as a whole, whether or not arising from transactions
in the ordinary course of business, and since the date of the latest
balance sheet presented in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has incurred or undertaken
any liabilities or obligations, direct or contingent, which are material to
the Company and its subsidiaries taken as a whole, except for liabilities
or obligations which were incurred or undertaken in the ordinary course of
business consistent with past practice or which are reflected in the
Registration Statement and the Prospectus. Subsequent to the dates as of
which information is given in the Registration Statement and the
Prospectus, except as set forth in the Registration Statement and the
Prospectus, there has not been any material adverse change, or any
development involving a prospective material adverse change, in the capital
stock or the long-term indebtedness of the Company, or any material
increase in the short-term indebtedness of the Company or any of its
subsidiaries or any payment of or declaration to pay any dividends or any
other distribution with respect to the capital stock of the Company.
(vi) This Agreement and the transactions contemplated herein have
been duly and validly authorized by the Company and this Agreement has been
duly and validly executed and delivered by the Company and is a legal,
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, subject to applicable bankruptcy,
insolvency, reorganization, conservatorship, receivership, fraudulent
conveyance and similar laws affecting creditors' rights generally and
subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law).
(vii) The execution, delivery and performance by the Company of
this Agreement and the consummation of the transactions contemplated hereby
do not and will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, any agreement, instrument, franchise, license or permit to
which the Company or any of its subsidiaries is a party or by which any of
such corporations or their respective properties or assets may be bound or
(B) violate or conflict with any
-4-
<PAGE>
provision of the certificate of incorporation, by-laws or equivalent
instruments of the Company or any of its subsidiaries or any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective properties or
assets. No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective properties or
assets is required for the execution, delivery and performance of this
Agreement by the Company or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the
Shares to be issued, sold and delivered by the Company hereunder, except
the registration under the Act of the Shares, the authorization of the
Shares for listing on the Nasdaq National Market and such consents,
approvals, authorizations, orders, registrations, filings, qualifications,
licenses and permits as may be required under state securities or Blue Sky
laws in connection with the purchase and distribution of the Shares by the
Underwriters.
(viii) All of the currently outstanding shares of Common Stock
(including the Shares being sold by the Selling Stockholders) are duly and
validly authorized and issued, fully paid and nonassessable and were not
issued and are not now in violation of or subject to any preemptive rights.
The Shares being sold by the Company hereunder, when issued, delivered and
sold in accordance with this Agreement, will be duly and validly issued and
outstanding, fully paid and nonassessable, and will not have been issued in
violation of or be subject to any preemptive rights. The Company had, at
June 30, 1996, an authorized and outstanding capitalization as set forth in
the Registration Statement and the Prospectus. The Common Stock conforms
to the description thereof contained in the Registration Statement and the
Prospectus. The Common Stock currently outstanding is included for
trading, and, prior to the Closing Date, the Shares to be sold under this
Agreement to the Underwriters will be duly included for trading, on the
Nasdaq National Market.
(ix) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to
be so qualified or in good standing which will not in the aggregate have a
material adverse effect on the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company and
its subsidiaries taken as a whole. Each of the Company and its
subsidiaries has all requisite power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses, franchises and permits of and from all public, regulatory or
governmental agencies and bodies, to own, lease and operate its properties
and conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus (except for those the absence
-5-
<PAGE>
of which, individually or in the aggregate, would not have a material
adverse effect on the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company and
its subsidiaries taken as a whole), and no such consent, approval,
authorization, order, registration, qualification, license, franchise or
permit contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus. To the best
knowledge of the Company, all of the issued and outstanding shares of
capital stock of each subsidiary of the Company has been duly and validly
authorized and issued, fully paid and nonassessable and were not issued in
violation of preemptive rights and are owned directly or indirectly by the
Company, free and clear of any lien, encumbrance, claim, security interest,
restriction on transfer, shareholders' agreement, voting trust or other
defect of title whatsoever (other than any such title defect that would not
have a material adverse effect on the business, prospects, properties,
operations, condition (financial or other) or results of operations of the
Company and its subsidiaries taken as a whole).
(x) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company or any of its
subsidiaries is a party or to which any property of the Company or any of
its subsidiaries is subject or which is pending or, to the knowledge of the
Company, threatened against the Company or any of its subsidiaries which
might result in any material adverse change or any development involving a
material adverse change in the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company and
its subsidiaries taken as a whole or which is required to be disclosed in
the Registration Statement and the Prospectus.
(xi) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Shares.
(xii) The consolidated financial statements, including the notes
thereto, and supporting schedules included in or incorporated by reference
into the Registration Statement and the Prospectus present fairly the
consolidated financial position of the Company and its subsidiaries as of
the dates indicated and the consolidated results of operations and cash
flows for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
(xiii) Except as described in the Prospectus and except for the
Shares being sold by the Selling Stockholders, no holder of securities of
the Company has any rights to the registration of securities of the Company
because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby (other than any
such registration rights that have been waived in writing).
-6-
<PAGE>
(xiv) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
"investment company" under the Investment Company Act of 1940, as amended
(the "Investment Company Act").
(xv) Except as otherwise disclosed in the Registration Statement
and the Prospectus, the Company and its subsidiaries have good and
marketable title to all real property and to all personal property owned by
them, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere in any material
respect with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property, buildings and personal
property held under lease by the Company and its subsidiaries are held by
them under valid, subsisting and enforceable leases with such exceptions as
are not material and do not interfere with the use thereof made and
proposed to be made by the Company and its subsidiaries.
(xvi) Except as otherwise described in the Prospectus, no labor
dispute with the employees of the Company or its subsidiaries exists or, to
the best of the Company's knowledge, is threatened or imminent that could
result in a material adverse change in the business, prospects, properties,
operations, condition (financial or other) or results of operations of the
Company and its subsidiaries taken as a whole or which is required to be
disclosed in the Registration Statement and the Prospectus.
(xvii) Except as otherwise described in the Prospectus, the Company
and its subsidiaries own or possess, or can acquire on reasonable terms,
all material patents, patent applications, trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential
information that it currently employs in connection with its business, and
neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of any third party with
respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company and
its subsidiaries taken as a whole or which is required to be disclosed in
the Registration Statement and the Prospectus.
(xviii) Except as otherwise described in the Prospectus, the Company
and its subsidiaries are insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts and with
such deductibles as are prudent and customary in the businesses in which it
is engaged. Neither the Company nor any of its subsidiaries has any reason
to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not materially and adversely affect the business,
prospects, properties, operations,
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<PAGE>
condition (financial or other) or results of operations of the Company and
its subsidiaries taken as a whole.
(xix) Neither the Company nor any of its subsidiaries is in
default (nor has any event occurred which, with notice or lapse of time or
both, would constitute a default) under any provisions of any agreement,
contract, lease, indenture, instrument, license or arrangement to which the
Company or any of its subsidiaries is a party or by which it is bound,
where such default could have a material adverse effect on the business,
prospects, properties, condition (financial or otherwise) or results of
operations of the Company and its subsidiaries taken as a whole.
(xx) The Company and its subsidiaries have filed all foreign,
federal, state and local tax returns that are required to be filed or has
requested extensions thereof (except in any case in which the failure so to
file would not have a material adverse effect on the business, prospects,
properties, condition (financial or otherwise) or results of operations of
the Company and its subsidiaries taken as a whole) and have paid all taxes
required to be paid by them and any other assessment, fine or penalty
levied against them, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is currently
being contested in good faith or as described in the Prospectus.
(xxi) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (A) transactions
are executed in accordance with management's general or specific
authorizations; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (C) access to
assets is permitted only in accordance with management's general or
specific authorization; and (D) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxii) The Company meets all conditions for use of a Form S-3
registration statement pursuant to the Act and the Regulations.
(b) Each Selling Stockholder represents and warrants to, and agrees
with, the several Underwriters that:
(i) Such Selling Stockholder has duly executed and delivered a power
of attorney and custody agreement (with respect to such Selling
Stockholder, the "Power-of-Attorney" and the "Custody Agreement",
respectively), each in the form heretofore delivered to the
Representatives, appointing Roy B. Andersen, Jr., Robert S. Vaters and Neil
A. Torpey, and each of them, as such Selling Stockholder's attorney-in-fact
(the "Attorney-in-Fact") with authority to execute, deliver and perform
this Agreement on behalf of such Selling Stockholder and appointing First
Union National Bank of North Carolina, as custodian thereunder (the
"Custodian"). Certificates
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<PAGE>
in negotiable form, endorsed in blank or accompanied by blank stock powers
duly executed, with signatures appropriately guaranteed, representing the
Shares to be sold by such Selling Stockholder have been deposited with the
Custodian pursuant to the Custody Agreement for the purpose of delivery
under this Agreement. Such Selling Stockholder specifically agrees that
each of the Shares represented by the certificates on deposit with the
Custodian is subject to the interests of the Underwriters hereunder, that
the arrangements made for such custody, the appointment of the
Attorney-in-Fact and the right, power and authority of the Attorney-in-Fact
to execute and deliver this Agreement, to agree on the price at which the
Shares (including such Selling Stockholder's Shares) are to be sold to the
Underwriters, and to carry out the terms of this Agreement, are to that
extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated, except as provided in this Agreement or
the Custody Agreement, by any act of such Selling Stockholder, by operation
of law or otherwise, whether in the case of any individual Selling
Stockholder by the death or incapacity of such Selling Stockholder, in the
case of a trust or estate by the death of the trustee or trustees or the
executor or executors or the termination of such trust or estate, or in the
case of a corporate or partnership Selling Stockholder by its liquidation
or dissolution or by the occurrence of any other event. If any individual
Selling Stockholder, trustee or executor should die or become incapacitated
or any such trust should be terminated, or if any corporate or partnership
Selling Stockholder shall liquidate or dissolve, or if any other event
should occur, before the delivery of such Shares hereunder, the
certificates for such Shares deposited with the Custodian shall be
delivered by the Custodian in accordance with the terms and conditions of
this Agreement as if such death, incapacity, termination, liquidation or
dissolution or other event had not occurred, regardless of whether or not
the Custodian or the Attorney-in-Fact shall have received notice thereof.
(ii) The execution, delivery and performance of this Agreement,
the Custody Agreement and the Power of Attorney by or on behalf of such
Selling Stockholder and the consummation of the transactions contemplated
hereby and thereby will not (a) conflict with or result in the breach of
any of the terms and provisions of, or constitute a default (or an event
which with notice or lapse of time, or both, would constitute a default) or
require consent under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of such Selling
Stockholder pursuant to the terms of any agreement, instrument, franchise,
license or permit to which such Selling Stockholder is a party or by which
such Selling Stockholder or any of such Selling Stockholder's property or
assets may be bound, (b) if applicable, violate or conflict with any
provision of the certificate of incorporation, by-laws or equivalent
instruments of such Selling Stockholder or (c) violate or conflict with any
judgment, decree, order, statute, rule or regulation of any court or any
public, governmental or regulatory agency or body having jurisdiction over
such Selling Stockholder or such Selling Stockholder's properties or
assets.
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<PAGE>
(iii) Such Selling Stockholder has, and at the time of delivery of
the Shares to be sold by such Selling Stockholder such Selling Stockholder
will have, full legal right, power, authority and capacity, and, except as
required under the Act and state securities and Blue Sky laws, all
necessary consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies as are required for the
execution, delivery and performance of this Agreement, the Custody
Agreement and the Power of Attorney and the consummation of the
transactions contemplated hereby and thereby, including the sale,
assignment, transfer and delivery of the Shares to be sold, assigned,
transferred and delivered by such Selling Stockholder hereunder.
(iv) Each of this Agreement, the Custody Agreement and the Power
of Attorney has been duly and validly authorized, executed and delivered by
such Selling Stockholder and each of this Agreement, the Custody Agreement
and the Power of Attorney is a legal, valid and binding obligation of such
Selling Stockholder, enforceable against such Selling Stockholder in
accordance with its respective terms, subject to applicable bankruptcy,
insolvency, reorganization, conservatorship, receivership, fraudulent
conveyance and similar laws affecting creditors' rights generally and
subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law).
(v) Such Selling Stockholder is the lawful owner of, and has
good, valid and marketable title to, the Shares to be sold by such Selling
Stockholder pursuant to this Agreement, free and clear of all liens,
encumbrances, claims, security interests, restrictions on transfer (other
than any restrictions on transfer imposed by the Act and by the securities
or Blue Sky laws of certain jurisdictions), voting trusts and other defects
in title whatsoever. Such Selling Stockholder has full power to deliver
the Shares to be sold by such Selling Stockholder hereunder, and, upon the
delivery of and payment for such Shares as herein contemplated, each of the
Underwriters will receive good, valid and marketable title to the Shares
purchased by it from such Selling Stockholder, free and clear of all liens,
encumbrances, claims, security interests, restrictions on transfer,
shareholders' agreements, voting trusts and other defects in title
whatsoever.
(vi) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which has constituted or which was
designed to constitute or which might be reasonably expected to cause or
result in stabilization or manipulation of the price of the shares of
Common Stock.
(vii) At the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) of the Regulations, when any amendment
of or supplement to the Prospectus is filed with the Commission, when any
document filed under the Exchange Act is filed and at the Closing Date and
the Additional Closing Date, if any, such parts of the Registration
Statement and the
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<PAGE>
Prospectus and any amendments thereof and supplements thereto as relate to
such Selling Stockholder and are based upon information furnished in
writing to the Company by or on behalf of such Selling Stockholder
expressly for use therein did not and will not contain an untrue statement
of a material fact and did not and will not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading; and when any related preliminary prospectus was
first filed with the Commission (whether filed as part of the Registration
Statement for the registration of the Shares or any amendment thereto or
pursuant to Rule 424(a) of the Regulations) and when any amendment thereof
or supplement thereto was first filed with the Commission, such parts of
such preliminary prospectus and any amendments thereof and supplements
thereto as relate to such Selling Stockholder and are based on information
furnished in writing to the Company by or on behalf of such Selling
Stockholder expressly for use therein did not contain an untrue statement
of a material fact and did not omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
In addition, such Selling Stockholder has reviewed the Prospectus and the
Registration Statement and the information regarding such Selling
Stockholder set forth therein under the caption "Principal and Selling
Stockholders" is complete and accurate in all material respects.
(viii) The sale of Shares by such Selling Stockholder pursuant
hereto is not prompted by any adverse information concerning the Company or
any of its subsidiaries that is not set forth in the Registration Statement
or the Prospectus.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, (A) the Company agrees to sell to each Underwriter and each Underwriter,
severally and not jointly, agrees to purchase from the Company, at a purchase
price of $___________ per Share, the number of Firm Shares set forth opposite
the name of such Underwriter in Column (1) of Schedule I hereto (plus any
additional number of Firm Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 9 hereof) and (B) each Selling
Stockholder, severally and not jointly, agrees to sell to each Underwriter, and
each Underwriter, severally and not jointly, agrees to purchase from such
Selling Stockholder, at the same purchase price per Share, the number of Firm
Shares equal to the total number of Firm Shares set forth opposite the name of
such Underwriter in Column (2) of Schedule I hereto (plus any additional number
of Firm Shares which such Underwriter may become obligated to purchase pursuant
to the provisions of Section 9 hereof), multiplied by a fraction, the numerator
of which is the number of Firm Shares set forth opposite the name of such
Selling Stockholder in Column (1) of Schedule II and the denominator of which is
the total number of Firm Shares to be sold by all Selling Stockholders, in each
case subject to such adjustments to eliminate any fractional shares as you in
your sole discretion shall make.
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<PAGE>
(b) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the office of Bear, Stearns & Co. Inc.,
245 Park Avenue, New York, New York 10167, or at such other place as shall be
agreed upon by the Representatives and the Company, at 9:30 a.m., New York time,
on the third or fourth business day (as permitted under Rule 15c6-1 under the
Exchange Act)(unless postponed in accordance with the provisions of Section 9
hereof) following the date of this Agreement, or such other time not later than
seven business days after such date as shall be agreed upon by the
Representatives, the Company and the Selling Stockholders (such time and date of
payment and delivery being herein called the "Closing Date"). Payment shall be
made to the Company and the Custodian, as the case may be, by certified or
official bank check or checks drawn in federal funds or similar same day funds
payable to the order of the Company or the Custodian, as the case may be (or by
wire transfer to an account of the Company and an account of the Custodian with
a bank in New York City specified by each of them at least two business days
prior to the Closing Date), against delivery to you for the respective accounts
of the Underwriters of certificates for the Firm Shares to be purchased by them.
Certificates for the Firm Shares shall be registered in such name or names and
in such authorized denominations as you may request in writing at least two full
business days prior to the Closing Date. The Company and the Custodian will
permit you to examine and package such certificates for delivery at least one
full business day prior to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to 82,500 Additional Shares and the Selling Stockholders
hereby grant the Underwriters the option to purchase up to 43,500 Additional
Shares, in each case at the same purchase price per Share to be paid by the
Underwriters to the Company for the Firm Shares set forth in clause (a) of this
Section 2, for the sole purpose of covering any over-allotments in the sale of
the Firm Shares by the Underwriters. Any such election to purchase Additional
Shares may be exercised at any time (but not more than once), in whole or in
part, by written notice from you to the Company, the Custodian and the Attorney-
in-Fact, given within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Additional Shares to be
purchased and the date and time when such Additional Shares are to be delivered,
as reasonably determined by you (such date and time being herein sometimes
referred to as the "Additional Closing Date"); PROVIDED, HOWEVER, that the
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second business day after the date on which the option shall have been
exercised nor later than the eighth business day after the date on which the
option shall have been exercised (unless such time and date are postponed in
accordance with the provisions of Section 9 hereof). Certificates for
Additional Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least two full
business days prior to the Additional Closing Date. The Company and the
Custodian will permit you to examine and package such certificates for delivery
at least one full business day prior to the Additional Closing Date.
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<PAGE>
The Company and the Selling Stockholders agree, severally and not
jointly, to sell to the several Underwriters the respective numbers of
Additional Shares obtained by multiplying the total number of Shares specified
in such notice by a fraction, the numerator of which is, in the case of the
Company, 82,500, and, in the case of each of the Selling Stockholders, the
maximum number of Additional Shares set forth opposite the name of such Selling
Stockholder in Column (2) of Schedule II hereto, and the denominator of which is
126,000, subject to such adjustments to eliminate any fractional shares as you
in your sole discretion shall make. Such Additional Shares shall be purchased
from the Company and each Selling Stockholder for the account of each
Underwriter in the same proportion as the number of Firm Shares set forth
opposite the name of such Underwriter in Column (3) of Schedule I (or such
number increased as set forth in Section 9 hereof) bears to the total number of
Firm Shares, subject to such adjustments to eliminate any fractional shares as
you in your sole discretion shall make.
Payment for the Additional Shares shall be made by certified or
official bank check or checks, in federal funds or similar same day funds,
payable to the order of the Company or the Custodian, as the case may be (or by
wire transfer to an account of the Company and an account of the Custodian with
a bank in New York City specified by each of them at least two business days
prior to the Closing Date), at the offices of Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, or such other location as may be mutually
acceptable, upon delivery of the certificates for the Additional Shares to you
for the respective accounts of the Underwriters.
3. OFFERING. Upon your authorization of the release of the Firm Shares,
the Underwriters propose to offer the Shares for sale to the public upon the
terms set forth in the Prospectus.
4. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
(a) The Company covenants and agrees with the Underwriters that:
(i) If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement
and any amendments thereto to become effective as promptly as possible, and
if Rule 430A of the Regulations is used or the filing of the Prospectus is
otherwise required under Rule 424(b) or Rule 434 of the Regulations, the
Company will file the Prospectus (properly completed if such Rule 430A has
been used) pursuant to such Rule 424(b) or Rule 434 within the prescribed
time period and will provide evidence satisfactory to you of such timely
filing. If the Company elects to rely on Rule 434, the Company will
prepare and file a term sheet that complies with the requirements of Rule
434.
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<PAGE>
The Company will promptly notify you, and confirm such advice in
writing, (A) when the Registration Statement and any post-effective
amendments thereto become effective, (B) of any request by the Commission
for any amendment of or supplement to the Registration Statement or the
Prospectus or for any additional information, (C) of the mailing or the
delivery to the Commission for filing of any amendment of or supplement to
the Registration Statement or the Prospectus, (D) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of the
initiation, or the threatening, of any proceedings therefor, (E) of the
receipt of any comments from the Commission, and (F) of the receipt by the
Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation
or threatening of any proceeding for that purpose. If the Commission
shall propose or enter a stop order at any time, the Company will make
every reasonable effort to prevent the issuance of any such stop order and,
if issued, to obtain the lifting of such order as soon as possible. The
Company will not file any amendment to the Registration Statement or any
amendment of or supplement to the Prospectus (including any prospectus
required to be filed pursuant Rule 424(b) and including the issuance or
filing of any term sheet within the meaning of Rule 434 of the Regulations)
that differs from the prospectus on file at the time of the effectiveness
of the Registration Statement before or after the effective date of the
Registration Statement, or file any document under the Exchange Act if such
document would be deemed to be incorporated by reference into the
Prospectus, to which you shall reasonably object in writing after being
timely furnished in advance a copy thereof.
(ii) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a
result of which the Prospectus as then amended or supplemented would, in
the judgment of the Underwriters or the Company, include an untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it
shall be necessary at any time to amend or supplement the Prospectus or
Registration Statement to comply with the Act or the Regulations, or to
file under the Exchange Act so as to comply therewith any document
incorporated by reference in the Registration Statement or the Prospectus
or in any amendment thereof or supplement thereto, the Company will notify
you promptly and prepare and file with the Commission an appropriate
amendment or supplement (in form and substance reasonably satisfactory to
you) which will correct such statement or omission or which will effect
such compliance and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.
(iii) The Company will promptly deliver to you three signed copies
of the Registration Statement, including exhibits and all documents
incorporated by reference therein and all amendments thereto, and the
Company will promptly deliver to each of the Underwriters such number of
copies of any preliminary prospectus, the Prospectus, the Registration
Statement, all amendments of and supplements to such documents, if
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<PAGE>
any, and all documents incorporated by reference in the Registration
Statement and Prospectus or any amendment thereof or supplement thereto,
without exhibits, as you may reasonably request.
(iv) The Company will endeavor in good faith, in cooperation with
the Representatives, at or prior to the time of effectiveness of the
Registration Statement, to qualify the Shares for offering and sale under
the securities laws relating to the offering or sale of the Shares of such
jurisdictions as you may designate and to maintain such qualification in
effect for so long as required for the distribution thereof, except that in
no event shall the Company be obligation in connection therewith to qualify
as a foreign corporation or to execute a general consent to service of
process.
(v) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to the
Representatives as soon as practicable, but not later than 45 days after
the end of its fiscal quarter in which the first anniversary date of the
effective date of the Registration Statement occurs, an earning statement
(in form complying with the provisions of Rule 158 of the Regulations)
covering a period of at least twelve consecutive months beginning after the
effective date of the Registration Statement.
(vi) During the period of 90 days from the date of the
Prospectus, the Company will not, without the prior written consent of
Bear, Stearns & Co. Inc., on behalf of the Underwriters, directly or
indirectly, issue, offer, sell, pledge, offer to sell, contract to sell or
grant any option to purchase, or otherwise sell or dispose (or announce any
issuance, offer, sale, pledge, offer of sale, contract of sale or grant of
an option to purchase or other sale or disposition) of, any shares of
Common Stock or other capital stock of the Company (or any securities
convertible into, or exchangeable or exercisable for, any shares of Common
Stock or other capital stock of the Company), and the Company will use its
best efforts to obtain the undertaking of each of its officers and
directors and such of its stockholders as have been heretofore designated
by the Representatives and listed on Schedule III attached hereto not to
engage in any of the aforementioned transactions on their own behalf, other
than the Company's sale of Shares hereunder and the Company's issuance of
Common Stock upon the exercise of presently outstanding stock options.
(vii) During a period of three years from the effective date of
the Registration Statement, the Company will furnish to you copies of (A)
all reports to its stockholders; and (B) all reports, financial statements
and proxy or information statements filed by the Company with the
Commission, any national securities exchange or the Nasdaq National Market.
(viii) The Company will apply the net proceeds from the sale of the
Shares by it hereunder as set forth under the caption "Use of Proceeds" in
the Prospectus.
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(ix) If the Company elects to rely on Rule 462(b) of the
Regulations, the Company shall both file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) and pay the
applicable filing fees in accordance with Rule 111 of the Regulations by
the earlier of (A) 10:00 p.m., New York time, on the date of this Agreement
and (B) the time confirmations are sent or given, as specified by Rule
462(b)(2).
(x) The Company will cause the Shares to be listed on the Nasdaq
National Market.
(xi) The Company, during the period when the Prospectus is
required to be delivered under the Act or the Exchange Act, will file all
documents required to be filed with the Commission pursuant to Section 13,
14 or 15 of the Exchange Act within the time periods required by the
Exchange Act and the rules and regulations thereunder.
(b) Each Selling Stockholder covenants and agrees with the several
Underwriters that:
(i) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action which is designed to or which has
constituted or which might reasonably be expected to cause or result in
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Shares.
(ii) During the period of 90 days from the date of the
Prospectus, such Selling Stockholder will not, without the prior written
consent of Bear, Stearns & Co. Inc., on behalf of the Underwriters,
directly or indirectly, offer, sell, pledge, offer to sell, contract to
sell or grant any option to purchase, or otherwise sell or dispose (or
announce any offer, sale, pledge, offer of sale, contract of sale or grant
of an option to purchase or other sale or disposition) of, any shares of
Common Stock or other capital stock of the Company (or any securities
convertible into, or exchangeable or exercisable for, any shares of Common
Stock or other capital stock of the Company), other than such Selling
Stockholder's sale of Shares hereunder.
(iii) As soon as any Selling Stockholder is advised thereof, such
Selling Stockholder will advise the Representatives (and immediately
confirm such advice in writing), (i) of receipt by the Selling Stockholder
or by any representative or agent of the Selling Stockholder, of any
communication from the Commission relating to the Registration Statement,
the Prospectus or any preliminary prospectus, or any notice or order of the
Commission relating to the Company or the Selling Stockholder in connection
with the transactions contemplated by this Agreement and (ii) of the
happening of any event which makes or may make any statement made in the
Registration Statement, the Prospectus or any preliminary prospectus untrue
or that requires the making of any change in the Registration Statement,
the Prospectus or such preliminary prospectus, as the case may be, in order
to make any such statement, in the light of the circumstances in which it
was made, not misleading.
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5. PAYMENT OF EXPENSES. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay or cause to be paid all costs and expenses incident to the
performance of the obligations of the Company and the Selling Stockholders
hereunder, including those in connection with (i) preparing, printing,
duplicating, filing and distributing the Registration Statement, as originally
filed and all amendments thereof (including all exhibits thereto), any
preliminary prospectus, the Prospectus and any amendments or supplements thereto
(including, without limitation, fees and expenses of the Company's accountants
and counsel), any additional registration statement filed pursuant to Rule
462(b), the underwriting documents (including this Agreement, the related
Agreement Among Underwriters and the Selling Agreement) and all other documents
related to the public offering of the Shares (including those supplied to the
Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer
and delivery of the Shares to the Underwriters, including any transfer or other
taxes payable thereon, (iii) the qualification of the Shares under state or
foreign securities or Blue Sky laws, including the costs of printing and mailing
a preliminary and final "Blue Sky Survey" and the reasonable fees of counsel for
the Underwriters and such counsel's disbursements in relation thereto, (iv)
quotation of the Shares on the Nasdaq National Market, (v) the filing fees of
the Commission and the National Association of Securities Dealers, Inc., (vi)
the cost of printing certificates representing the Shares and (vii) the cost and
charges of any transfer agent or registrar. Each Selling Stockholder shall pay
the costs and expenses incident to the performance by such Selling Stockholder
of its obligations hereunder and in connection with the offer, sale and delivery
of the Shares to be sold by it, including any stock transfer taxes payable upon
the sale of such Shares to the Underwriters and the underwriting discounts and
commissions payable to the Underwriters.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Selling Stockholders herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 6
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date, if different, for the Additional Shares), to the
absence from any certificates, opinions, written statements or letters furnished
to the Representatives or to Stroock & Stroock & Lavan ("Underwriters' Counsel")
pursuant to this Section 6 of any misstatement or omission, to the performance
by the Company and the Selling Stockholders of their respective obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 p.m., New York time, on the date of this Agreement, or at such later
time and date as shall have been consented to in writing by the Representatives;
if the Company shall have elected to rely upon Rule 430A or Rule 434 of the
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 4(a) hereof; and at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
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(b) At the Closing Date, the Representatives shall have received the
opinion of Paul, Hastings, Janofsky & Walker LLP, counsel for the Company, dated
the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) Each of the Company and its subsidiaries listed on Schedule IV
hereto (the "Material Subsidiaries") has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. Each of the Company and its Material
Subsidiaries is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to
be so qualified or in good standing which will not in the aggregate have a
material adverse effect on the Company and its subsidiaries taken as a
whole. Each of the Company and its Material Subsidiaries has all requisite
power and authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses, franchises and permits of
and from all public, regulatory or governmental agencies and bodies, to
own, lease and operate its properties and conduct its business as now being
conducted and as described in the Registration Statement and the Prospectus
(except for those the absence of which, individually or in the aggregate,
would not have a material adverse effect on the Company and its
subsidiaries taken as a whole or on the transactions contemplated by this
Agreement). To the best of such counsel's knowledge, all of the issued and
outstanding shares of capital stock of each Material Subsidiary of the
Company has been duly and validly authorized and issued, fully paid and
nonassessable and were not issued in violation of preemptive rights and are
owned directly or indirectly by the Company, free and clear of any material
lien, encumbrance, claim, security interest, restriction on transfer,
shareholders' agreement, voting trust or other defect of title whatsoever.
(ii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the
Prospectus. All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable and were not
issued and are not now in violation of or subject to any preemptive rights.
The Shares being sold by the Company hereunder, when issued, delivered and
sold in accordance with this Agreement, will be duly and validly issued and
outstanding, fully paid and nonassessable, and will not have been issued in
violation of or be subject to any preemptive rights. The Common Stock
conforms to the description thereof contained in the Registration Statement
and the Prospectus.
(iii) The Common Stock currently outstanding is included for
quotation, and the Shares to be sold under this Agreement to the
Underwriters have been approved for quotation, on the Nasdaq National
Market.
(iv) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
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(v) The execution, delivery and performance by the Company of this
Agreement and the consummation of the transactions contemplated hereby do
not and will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which with
notice or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, any agreement, instrument, franchise, license or permit known
to such counsel to which the Company or any of its subsidiaries is a party
or by which any of such corporations or their respective properties or
assets may be bound (other than any such conflicts, breaches or defaults
which, individually or in the aggregate, would not have a material adverse
effect on the Company and its subsidiaries taken as a whole or on the
transactions contemplated by this Agreement) or (B) violate or conflict
with any provision of the certificate of incorporation, by-laws or
equivalent instruments of the Company or any of its subsidiaries or, (C) to
the best knowledge of such counsel, violate or conflict with any judgment,
decree, order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective properties or
assets. No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their respective properties or
assets is required for the execution, delivery and performance by the
Company of this Agreement or the consummation of the transactions
contemplated hereby, including the issuance, sale and delivery of the
Shares to be issued, sold and delivered by the Company hereunder, except
for (A) such as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters (as to which such counsel need express no opinion) and (B)
such as have been made or obtained under the Act.
(vi) To the knowledge of such counsel, except as described in the
Prospectus, there is no litigation or governmental proceeding to which the
Company or any of its subsidiaries is a party or to which any property of
the Company or any of its subsidiaries is subject or which is pending or
threatened against the Company or any of its subsidiaries which might
result in any material adverse change or any development involving a
material adverse change in the business, prospects, properties, operations,
condition (financial or other) or results of operations of the Company and
its subsidiaries taken as a whole or which is required to be disclosed in
the Registration Statement and the Prospectus.
(vii) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, required to register as an
"investment company" under the Investment Company Act.
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(viii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and the notes thereto and related schedules and other financial
data included or incorporated by reference therein, as to which no opinion
need be expressed) comply as to form in all material respects with the
requirements of the Act and the Regulations. The documents filed under the
Exchange Act and incorporated by reference in the Registration Statement
and the Prospectus and any amendment thereof or supplement thereto (other
than the financial statements and the notes thereto and related schedules
included or incorporated by reference therein, as to which no opinion need
be expressed) when they became effective or were filed with the Commission,
as the case may be, complied as to form in all material respects with the
requirements of the Act or the Exchange Act, as applicable, and the rules
and regulations thereunder; and they have no reason to believe that any of
such documents, when such documents became effective or were so filed, as
they case may be, contained, in the case of a registration statement which
became effective under the Act, an untrue statement of a material fact, or
omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, or, in the case of other
documents which were filed under the Exchange Act with the Commission, an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made when such documents were so filed,
not misleading.
(ix) The Registration Statement has been declared effective under
the Act, all filings required by Rule 424(b) of the Regulations have been
timely made and no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof has been
issued and, to the best knowledge of such counsel, no proceedings therefor
have been initiated or threatened by the Commission.
(x) The statements made in the Prospectus, as amended or
supplemented, under the captions "Management" and "Principal and Selling
Stockholders", insofar as they purport to constitute summaries or to
describe the provisions of the documents, transactions or legal matters
therein described, in summary form, are fair and accurate summaries in all
material respects.
(xi) Neither the Company nor any of its Material Subsidiaries is
in default (nor has any event occurred which, with notice or lapse of time
or both, would constitute a default) under any provisions of any agreement,
contract, lease, indenture, instrument, license or arrangement to which the
Company or any of its Material Subsidiaries is a party or by which it is
bound, where such default could have a material adverse effect on the
business, prospects, properties, condition (financial or otherwise) or
results of operations of the Company and its subsidiaries taken as a whole.
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In addition, such counsel shall also state that such counsel has
participated in conferences with officers and representatives of the Company,
representatives of the independent public accountants for the Company and the
Underwriters at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and, although such counsel is not
passing upon and does not assume responsibility for the accuracy, completeness
or fairness of the statements contained in the Registration Statement or the
Prospectus, on the basis of the foregoing, no facts have come to the attention
of such counsel which would lead such counsel to believe that either the
Registration Statement at the time it became effective (including the
information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) or Rule 434 of the Regulations, if
applicable), or any amendment thereof made prior to the Closing Date as of the
date of such amendment, contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus as of its date
(or any amendment thereof or supplement thereto made prior to the Closing Date
as of the date of such amendment or supplement) and as of the Closing Date
contained or contains an untrue statement of a material fact or omitted or omits
to state any material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
belief or opinion with respect to the financial statements and the notes thereto
and related schedules and other financial data included or incorporated by
reference therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdictions in which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an opinion
or opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; and (B) as to matters of fact, to the extent
they deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and its subsidiaries, provided that copies of any
such statements or certificates shall be delivered to Underwriters' Counsel.
The opinion of such counsel for the Company shall state that the opinion of any
such other counsel is in form satisfactory to such counsel and, in their
opinion, the Representatives and they are justified in relying thereon.
(c) At the Closing Date the Representatives shall have received the
favorable opinion of Paul, Hastings, Janofsky & Walker LLP, counsel for the
Selling Stockholders, dated the Closing Date, addressed to the Underwriters and
in form and substance satisfactory to Underwriters' Counsel, to the effect that:
(i) Each of this Agreement, the Custody Agreement and the Power of
Attorney has been duly and validly authorized, executed and delivered by or
on behalf of each Selling Stockholder and each of this Agreement, the
Custody Agreement and the Power of Attorney is a legal, valid and binding
obligation of each Selling Stockholder, enforceable against such Selling
Stockholder in accordance with its terms, subject to
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applicable bankruptcy, insolvency, reorganization, conservatorship,
receivership, fraudulent conveyance and similar laws affecting creditors'
rights generally and subject, as to enforceability, to general principles
of equity (regardless of whether enforcement is sought in a proceeding in
equity or at law), provided that no opinion need be expressed as to the
availability of injunctive relief.
(ii) To the best knowledge of such counsel, each Selling Stockholder
has all requisite power and authority, and all necessary consents,
approvals, authorizations, orders, registrations, filings, qualifications,
licenses and permits of and from all courts and all public, governmental or
regulatory agencies and bodies as are required for the execution, delivery
and performance by such Selling Stockholder of this Agreement, the Custody
Agreement, the Power of Attorney and the consummation of the transactions
contemplated hereby and thereby except for (1) such as may be required
under state securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such counsel
need express no opinion) and (2) such as have been made or obtained under
the Act.
(iii) Upon the delivery of and payment for the Shares to be sold
by each Selling Stockholder pursuant to this Agreement as herein
contemplated, the several Underwriters who have purchased such Shares in
good faith and without notice of any adverse claim or restriction on
transfer will own the Shares sold by the Selling Stockholders, free and
clear of any adverse claim or restriction on transfer.
(iv) The execution, delivery and performance of this Agreement, the
Custody Agreement and the Power or Attorney by each Selling Stockholder and
the consummation of the transactions contemplated hereby and thereby do not
and will not conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice or
lapse of time, or both, would constitute a default) under, if applicable,
(A) any provision of the certificate of incorporation, by-laws or
equivalent instruments of any Selling Stockholder, (B) any agreement,
contract, lease, arrangement, instrument, franchise, license or permit to
which any Selling Stockholder is a party (other than any such conflicts,
breaches or defaults which, individually or in the aggregate, would not
have a material adverse effect on any Selling Stockholder or on the
transactions contemplated by this Agreement) or (C) any statute or any
judgment (of which such counsel is aware), decree (of which such counsel is
aware), order (of which such counsel is aware), rule or regulation of any
court or any public, governmental or regulatory agency or body having
jurisdiction over any of the Selling Stockholders or any of their
respective properties or assets (other than any such conflicts, breaches or
defaults which, individually or in the aggregate, would not have a material
adverse effect on any Selling Stockholder or on the transactions
contemplated by this Agreement).
(v) The statements in the Prospectus under the caption "Principal and
Selling Stockholders," insofar as such statements constitute a summary of
the matters referred to therein, fairly present the information called for
with respect to such matters.
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<PAGE>
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States and
jurisdiction in which they are admitted, to the extent such counsel deems proper
and to the extent specified in such opinion, if at all, upon an opinion or
opinions (in form and substance reasonably satisfactory to Underwriters'
Counsel) of other counsel reasonably acceptable to Underwriters' Counsel,
familiar with the applicable laws; and (B) as to matters of fact, to the extent
they deem proper, on certificates of, or certificates of responsible officers
of, the Selling Stockholders, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The opinion of such
counsel for the Selling Stockholders shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their opinion, the
Representatives and they are justified in relying thereon.
(d) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to the Representatives and Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date, with respect to the issuance and sale of
the Shares, the Registration Statement and the Prospectus and such other related
matters as the Representatives may reasonably require, and the Company shall
have furnished to Underwriters' Counsel such documents as they reasonably
request for the purpose of enabling them to pass upon such matters.
(e) At the Closing Date, the Representatives shall have received a
certificate of the Chief Executive Officer and Chief Financial Officer of the
Company, dated the Closing Date, to the effect that (i) the condition set forth
in subsection (a) of this Section 6 has been satisfied, (ii) as of the date
hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1(a) hereof are accurate in all material respects,
(iii) as of the Closing Date the obligations of the Company to be performed
hereunder on or prior thereto have been duly performed in all material respects
and (iv) subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus, the Company and its subsidiaries
have not sustained any material loss or interference with their respective
businesses or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material adverse
change, or any development involving a material adverse change, in the business
prospects, properties, operations, condition (financial or otherwise), or
results of operations of the Company and its subsidiaries taken as a whole,
except in each case as described in or contemplated by the Prospectus.
(f) At the Closing Date, the Representatives shall have received a
certificate executed by an Attorney-in-Fact on behalf of each Selling
Stockholder, dated the Closing Date, to the effect that the representations and
warranties of such Selling Stockholder set forth in Section 1(b) hereof are
accurate, and that as of the Closing Date, the obligations of such Selling
Stockholder to be performed hereunder on or prior thereto have been duly
performed in all material respects.
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<PAGE>
(g) At the time this Agreement is executed and at the Closing Date,
the Representatives shall have received a letter from Ernst & Young LLP,
independent public accountants for the Company, dated, respectively, as of the
date of this Agreement and as of the Closing Date, addressed to the Underwriters
and in form and substance satisfactory to the Representatives, to the effect
that: (i) they are independent certified public accountants with respect to the
Company within the meaning of the Act and stating that no response to Item 10 of
Form S-3 is required with respect to them; (ii) in their opinion, the financial
statements and schedules of the Company included and incorporated by reference
in the Registration Statement and the Prospectus and covered by their opinion
therein (of which the Representatives shall have been provided with a manually
signed copy) comply as to form in all material respects with the applicable
accounting requirements of the Act and the Exchange Act and the applicable
published rules and regulations of the Commission thereunder; (iii) they consent
to the use of their report concerning the Company's consolidated financial
statements in the Prospectus and to all references to such accountants therein,
including their designation as experts under the caption "Experts" therein; (iv)
on the basis of (x) their limited review in accordance with standards
established by the American Institute of Certified Public Accountants of any
interim unaudited consolidated condensed financial statements of the Company and
its consolidated subsidiaries as indicated in their report included in the
Registration Statement and the Prospectus and (y) certain specified procedures
performed on the unaudited condensed consolidated balance sheet as of June 30,
1996 and the unaudited condensed consolidated statements of operations and of
cash flows for the six-month periods ended June 30, 1996 and 1995 included in
the Registration Statement and inquiries of officers and other employees of the
Company and its subsidiaries who have responsibility for financial and
accounting matters of the Company, nothing has come to their attention that
would cause them to believe that (A) such unaudited consolidated financial
statements do not comply as to form in all material respects with the applicable
accounting requirements of the Act and, if applicable, the Exchange Act and the
applicable published rules and regulations of the Commission thereunder or (B)
any material modifications should be made to such unaudited consolidated
financial statements for them to be in conformity with generally accepted
accounting principles; (v) on the basis of procedures (but not an examination
made in accordance with generally accepted auditing standards) consisting of a
reading of the latest available unaudited interim consolidated financial
statements of the Company and its subsidiaries, a reading of the minutes of
meetings and consents of the stockholders and boards of directors of the Company
and its subsidiaries and the committees of such boards subsequent to June 30,
1996, inquiries of officers and other employees of the Company and its
subsidiaries who have responsibility for financial and accounting matters of the
Company and its subsidiaries with respect to transactions and events subsequent
to June 30, 1996 and other specified procedures and inquiries to a date not more
than five days prior to the date of such letter, nothing has come to their
attention that would cause them to believe that: (A) with respect to the period
subsequent to June 30, 1996 there were, as of the date of the most recent
available monthly consolidated financial statements of the Company and its
subsidiaries, if any, and as of a specified date not more than five days prior
to the date of such letter, any changes in the capital stock or increases in
long-term indebtedness of the Company or any decrease in the net current assets
or stockholders' equity of the Company, in each case as compared with the
amounts shown in the most recent balance sheet of the Company presented in the
Registration Statement and the Prospectus, except for changes or decreases
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<PAGE>
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; (B) that during the period from
June 30, 1996 to the date of the most recent available monthly consolidated
financial statements of the Company and its subsidiaries, if any, and to a
specified date not more than five days prior to the date of such letter, there
was any decrease, as compared with the corresponding period in the prior fiscal
year, in total revenues, or total or per share net income, except for decreases
which the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; and (C) they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and the Prospectus, which
have been specified by the Representatives prior to the date of this Agreement,
to the extent that such amounts, numbers, percentages, and information may be
derived from the general accounting and financial records of the Company and its
subsidiaries or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries, and other
appropriate procedures specified by the Representatives and set forth in such
letter, and found them to be in agreement; and (vi) on the basis of a reading of
the unaudited pro forma consolidated condensed financial statements included in
the Registration Statement and Prospectus, carrying out certain specified
procedures that would not necessarily reveal matters of significance with
respect to the comments set forth in this paragraph (vi), inquiries of certain
officials of the Company and its consolidated subsidiaries who have
responsibility for financial and accounting matters and proving the arithmetic
accuracy of the application of the pro forma adjustments to the historical
amounts in the unaudited pro forma consolidated condensed financial statements,
nothing came to their attention that caused them to believe that the unaudited
pro forma consolidated condensed financial statements do not comply in form in
all material respects with the applicable accounting requirements of Rule 11-02
of Regulation S-X or that the pro forma adjustments have not been properly
applied to the historical amounts in the compilations of such statements.
(h) The Representatives shall have received from each of the
Company's officers and directors, each Selling Stockholder and such of the
Company's stockholders as have been heretofore designated by the Representatives
and listed on Schedule III attached hereto an agreement to the effect that such
person will not, without the prior written consent of Bear, Stearns & Co. Inc.,
on behalf of the Underwriters, directly or indirectly, offer, sell, pledge,
offer to sell, contract to sell or grant any option to purchase, or otherwise
sell or dispose (or announce any offer, sale, pledge, offer of sale, contract of
sale or grant of an option to purchase or other sale or disposition) of, any
shares of Common Stock or other capital stock of the Company (or any securities
convertible into, or exchangeable or exercisable for, any shares of Common Stock
or other capital stock of the Company), for a period of 90 days from the date of
the Prospectus.
(i) Prior to the Closing Date the Company and the Selling
Stockholders shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may reasonably
request.
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<PAGE>
(j) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq National Market.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to the
Representatives or to Underwriters' Counsel pursuant to this Section 6 shall not
be in all material respects reasonably satisfactory in form and substance to the
Representatives and to Underwriters' Counsel, all obligations of the
Underwriters hereunder may be cancelled by the Representatives at, or at any
time prior to, the Closing Date and the obligations of the Underwriters to
purchase the Additional Shares may be cancelled by the Representatives at, or at
any time prior to, the Additional Closing Date. Notice of such cancellation
shall be given to the Company and the Selling Stockholders in writing, or by
telephone or facsimile transmission, confirmed in writing.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to attorneys' fees and any and all expenses
reasonably incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
PROVIDED, HOWEVER, that this indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, liabilities, claims, damages or expenses
purchased Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any such amendments or supplements thereto, but excluding documents incorporated
or deemed to be incorporated by reference therein) was not sent or given by or
on behalf of such Underwriter to such person, if such is required by law, at or
prior to the written confirmation of the sale of such Shares to such person and
if the Prospectus (as so amended or supplemented, but excluding documents
incorporated or deemed to be incorporated by reference therein) would have
corrected the defect giving rise to such loss, liability, claim, damage or
expense, it being understood that this proviso shall have no application if such
defect shall have been corrected in a document which is incorporated or deemed
to be incorporated by reference in the Prospectus; and PROVIDED, FURTHER, that
the Company will not be liable in any such case to the extent, but only to the
extent, that any such loss, liability, claim, damage or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or omission
or alleged
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<PAGE>
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives expressly for use therein. This indemnity agreement will be
in addition to any liability which the Company may otherwise have, including
under this Agreement.
(b) Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against any and all losses, liabilities, claims,
damages and expenses whatsoever (including but not limited to attorneys' fees
and any and all expenses whatsoever reasonably incurred in investigating,
preparing or defending against any litigation, commenced or threatened, or any
claim whatsoever, and any and all amounts paid in settlement of any claim or
litigation), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration of
the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information relating to such Selling Stockholder
furnished to the Company by such Selling Stockholder expressly for use therein.
This indemnity agreement will be in addition to any liability which any Selling
Stockholder may otherwise have including under this Agreement.
(c) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each Selling Stockholder, each of the directors
of the Company, each of the officers of the Company who shall have signed the
Registration Statement, and each other person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, against any losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to attorneys' fees, and any and all expenses
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged
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<PAGE>
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives expressly for use therein; PROVIDED, HOWEVER, that in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company and
each Selling Stockholder acknowledge that the statements set forth in the last
paragraph of the cover page, in the stabilization and passive market making
legends set forth as the last two paragraphs on page 2 and in the third
paragraph under the caption "Underwriting" in the Prospectus constitute the only
information furnished in writing by or on behalf of any Underwriter expressly
for use in the registration statement for the registration of the Shares, as
originally filed or in any amendment thereof or supplement thereto, any related
preliminary prospectus or the Prospectus or in any amendment thereof or
supplement thereto, as the case may be.
(d) Promptly after receipt by an indemnified party under subsection
(a), (b), or (c) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7, except to the extent it has
been materially prejudiced by such failure). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect, by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel shall
have been authorized in writing by one of the indemnifying parties in connection
with the defense of such action, (ii) the indemnifying parties shall not have
employed counsel to have charge of the defense of such action within a
reasonable time after notice of commencement of the action, or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties. Anything in
this subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its written
consent; PROVIDED, HOWEVER, that such consent was not unreasonably withheld.
(e) The liability of each Selling Stockholder under the indemnity
agreements contained in this Section 7 shall not exceed an amount equal to the
price paid to such Selling Stockholder by the Underwriters for the Shares sold
by such Selling Stockholder to the Underwriters.
-28-
<PAGE>
8. CONTRIBUTION. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company, the Selling Stockholders
and the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provisions (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the case of
losses, claims, damages, liabilities and expenses suffered by the Company or any
Selling Stockholder any contribution received by the Company or such Selling
Stockholder, as the case may be, from persons, other than the Underwriters, who
may also be liable for contribution, including persons who control the Company
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act, officers of the Company who signed the Registration Statement and directors
of the Company) to which the Company, one or more of the Selling Stockholders
and one or more of the Underwriters may be subject, in such proportions as is
appropriate to reflect the relative benefits received by the Company and the
Selling Stockholders on the one hand and the Underwriters on the other hand from
the offering of the Shares or, if such allocation is not permitted by applicable
law or indemnification is not available as a result of the indemnifying party
not having received notice as provided in Section 7 hereof, in such proportion
as is appropriate to reflect not only the relative benefits referred to above
but also the relative fault of the Company, the Selling Stockholders and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other hand shall be deemed to be in the same proportion as (x) the total
proceeds from the offering (net of underwriting discounts and commissions but
before deducting expenses) received by the Company and the Selling Stockholders
and (y) the underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company, the Selling Stockholders and of
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Selling Stockholders or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Selling
Stockholders and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered
-29-
<PAGE>
to the public exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Section 8, each
person, if any, who controls an Underwriter within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as such Underwriter, each person, if any, who controls a Selling
Stockholder within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Selling
Stockholder, and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 8. Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section 8, notify such party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have under this Section 8 or otherwise. No party shall be liable
for contribution with respect to any action or claim settled without its
consent; PROVIDED, HOWEVER, that such consent was not unreasonably withheld.
The liability of each Selling Stockholder under the contribution agreement
contained in this Section 8 shall not exceed an amount equal to the price paid
to such Selling Stockholder by the Underwriters for the Shares sold by such
Selling Stockholder to the Underwriters.
9. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by the Representatives
pursuant to subsection (b) below) exceed in the aggregate 10% of the aggregate
number of Firm Shares or Additional Shares, as the case may be, which all
Underwriters have agreed to purchase hereunder, then such Firm Shares or
Additional Shares to which the default relates shall be purchased by the non-
defaulting Underwriters in proportion to the respective proportions which the
number of Firm Shares set forth opposite their respective names in Schedule I
hereto bear to the aggregate number of Firm Shares set forth opposite the names
of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, the Representatives may in
their discretion arrange for themselves or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so agree) to
purchase such Firm Shares or Additional Shares, as the case may be, to which
such default relates on the terms contained herein. In the event that within
five calendar days after such a default the Representatives do not arrange for
the purchase of the Firm Shares or Additional Shares, as the case may be, to
which such default relates as provided in this Section 9, this Agreement or, in
the case of a default with respect to the Additional Shares, the obligations of
the Underwriters to purchase and of the Company and the Selling Stockholders to
sell the Additional Shares shall thereupon terminate, without liability on the
part
-30-
<PAGE>
of the Company or the Selling Stockholders with respect thereto (except in each
case as provided in Sections 5, 7(a) and (c) and 8 hereof) or the several
Underwriters, but nothing in this Agreement shall relieve a defaulting
Underwriter or Underwriters of its or their liability, if any, to the other
several Underwriters and the Company and the Selling Stockholders for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, the
Representatives or the Company shall have the right to postpone the Closing Date
or Additional Closing Date, as the case may be, for a period not exceeding five
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus, as then amended or
supplemented, which in the Representatives' opinion may thereby be made
necessary or advisable. The term Underwriter as used in this Agreement shall
include any party substituted under this Section 9 with the like effect as if it
had originally been a party to this Agreement with respect to such Firm Shares
and Additional Shares.
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All representations and
warranties, covenants and agreements of the Underwriters, the Selling
Stockholders and the Company contained in this Agreement, including, without
limitation, the agreements contained in Section 5 hereof, the indemnity
agreements contained in Section 7 hereof and the contribution agreements
contained in Section 8 hereof, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any controlling person thereof or by or on behalf of the Company or any of
its officers and directors or any Selling Stockholder or any controlling person
thereof, and shall survive delivery of and payment for the Shares to and by the
several Underwriters. The representations contained in Section 1 hereof and the
agreements contained in Sections 5, 7, 8 and 11(d) hereof shall survive the
termination of this Agreement, including termination pursuant to Sections 9 or
11 hereof.
11. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective, upon the later of, when
(i) you and the Company shall have received notification of the effectiveness of
the Registration Statement or (ii) the execution of this Agreement. If the
purchase price per Share has not been agreed upon prior to 5:00 p.m., New York
time, on the fifth full business day after the Registration Statement shall have
become effective, this Agreement shall thereupon terminate without liability to
the Company, the Selling Stockholders or the Underwriters except as herein
expressly provided. Until this Agreement becomes effective as aforesaid, it may
be terminated by the Company by notifying the Representatives and the Attorneys-
in-Fact or by the Representatives notifying the Company and the Attorneys-in-
Fact. Notwithstanding the foregoing, the provisions of this Section 11 and
Sections 5, 7 and 8 hereof shall at all times be in full force and effect.
-31-
<PAGE>
(b) The Representatives shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of the
Underwriters to purchase the Additional Shares at any time prior to the
Additional Closing Date, as the case may be, if (A) any domestic or
international event or act or occurrence has materially disrupted, or in your
opinion will in the immediate future materially disrupt, the market for the
Company's securities or securities markets in general; or (B) trading in any of
the Company's securities has been suspended by the Commission or the Nasdaq
National Market; or (C) trading on the New York or American Stock Exchanges or
the Nasdaq National Market shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required, on the New York or American Stock Exchanges
or the Nasdaq National Market by the New York or American Stock Exchanges or the
Nasdaq National Market or by order of the Commission or any other governmental
authority having jurisdiction; or (D) a banking moratorium has been declared by
a state or federal authority; or (E) any new restriction materially adversely
affecting the distribution of the Firm Shares or the Additional Shares, as the
case may be, shall have become effective; or (F)(i) the United States becomes
engaged in hostilities or there is an escalation of hostilities involving the
United States or there is a declaration of a national emergency or war by the
United States or (ii) there shall have been a change in political, financial or
economic conditions, if the effect of any such event in (i) or (ii) as in your
judgment makes it impracticable or inadvisable to proceed with the offering,
sale and delivery of the Firm Shares or the Additional Shares, as the case may
be, on the terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone or facsimile transmission, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to notifications by you as provided
in Section 11(a) hereof or pursuant to Section 9(b) or 11(b) hereof), or if the
sale of the Shares provided for herein is not consummated because any condition
to the obligations of the several Underwriters set forth herein is not satisfied
or because of any refusal, inability or failure on the part of the Company or
any Selling Stockholder to perform any agreement herein or comply with any
provision hereof, the Company will, subject to demand by the Representatives,
reimburse the Underwriters for all reasonable out-of-pocket expenses (including
the reasonable fees and expenses of their counsel), incurred by the several
Underwriters in connection herewith.
12. NOTICE. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or sent by facsimile transmission and
confirmed in writing, to such Underwriter, c/o Bear, Stearns & Co. Inc., 245
Park Avenue, New York, New York 10167, Attention: Steven M. Parish (facsimile
number (212) 272-3485); if sent to the Company, shall be mailed, delivered, or
sent by facsimile transmission and confirmed in writing, to the Company at
Xpedite Systems, Inc., 446 Highway 35, Eatontown, New Jersey 07724, Attention:
Chief Executive Officer (facsimile number (908) 544-0407); and if sent to any
Selling Stockholder, shall be mailed, delivered, or sent by facsimile
transmission and confirmed in writing, to the Attorneys-in-Fact
-32-
<PAGE>
at Paul, Hastings, Janofsky & Walker LLP, 399 Park Avenue, 31st Floor, New York,
New York 10022, Attention: Neil A. Torpey, Esq. (facsimile number (212) 319-
4090).
13. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the several Underwriters, the Selling Stockholders and
the Company and the controlling persons, directors, officers, employees and
agents referred to in Sections 7 and 8, and their respective successors and
assigns, and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue of this
Agreement or any provision herein contained. The term "successors and assigns"
shall not include a purchaser, in its capacity as such, of Shares from any of
the Underwriters.
14. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, BUT WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
15. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one instrument.
-33-
<PAGE>
If the foregoing correctly sets forth the understanding among you, the
Company and the Selling Stockholders, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among us.
Very truly yours,
XPEDITE SYSTEMS, INC.
By: ____________________________
Name:
Title:
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE II HERETO
By: ____________________________
Attorney-in-Fact
Accepted as of the date
first above written.
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
By: BEAR, STEARNS & CO. INC.
By: ___________________________
Name:
Title:
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
-34-
<PAGE>
SCHEDULE I
Underwriters
<TABLE>
<CAPTION>
(1) (2) (3)
Number of Number of
Firm Shares Firm Shares Total
to be to be Number of
Purchased Purchased from the Firm Shares
from the Selling to be
Name Company Stockholders Purchased
---- ----------- ------------ -----------
<S> <C> <C> <C>
Bear, Stearns & Co. Inc. . . . . . . . . . . . . .
Prudential Securities Incorporated . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . 550,000 290,000 840,000
------- ------- -------
------- ------- -------
</TABLE>
I-1
<PAGE>
SCHEDULE II
Selling Stockholders
<TABLE>
<CAPTION>
(1) (2)
Maximum Number of
Additional Shares
Name of Selling Stockholder Firm Shares to be Sold to be Sold
- --------------------------- ---------------------- -----------------
<S> <C> <C>
Gold Chalet Overseas Ltd . . . . . . . . 90,000 13,500
Stuart Epstein . . . . . . . . . . . . . 200,000 30,000
------- ------
Total. . . . . . . . . . . . . . . . . 290,000 43,500
------- ------
------- ------
</TABLE>
II-1
<PAGE>
SCHEDULE III
LOCK-UP AGREEMENTS
APA Excelsior III, L.P.
Finance Management Ltd.
Stuart Epstein
Stuart A. Epstein, as
Trustee for The Stuart
A. Epstein Children's Trust
Coutts & Co. (Jersey), Ltd.
Custodian for APA Excelsior III/
Offshore, L.P.
Gold Chalet Overseas Ltd.
APA/Fostin Pennsylvania Venture
Capital Fund, L.P.
Barclay Holdings Corporation
CIN Venture Nominees, Ltd.
Computainer Systems (Global) Inc.
European Trading Corporation
City Trading Corporation
All Officers and Directors
III-1
<PAGE>
SCHEDULE IV
MATERIAL SUBSIDIARIES
Xpedite Systems Worldwide, Inc.
Xpedite Systems Canada, Ltd.
Xpedite Systems Canada, Inc.
Swift Global Communications Inc.
ViTel International Holding Company Inc.
Comwave Communications AG
IV-1
<PAGE>
EXH-5.1
PAUL, HASTINGS, JANOFSKY & WALKER LLP
A LIMITED LIABILITY PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
399 PARK AVENUE
NEW YORK, NEW YORK 10022-4697
TELEPHONE (212) 318-6000
FACSIMILE (212) 319-4090
INTERNET www.phjw.com
August 15, 1996
XPEDITE SYSTEMS, INC.
446 Highway 35
Eatontown, New Jersey 07724
Ladies and Gentlemen:
We have acted as counsel to Xpedite Systems, Inc., a Delaware corporation
(the "Company"), and to certain stockholders of the Company (the "Selling
Stockholders"), in connection with preparation of a Registration Statement on
Form S-3 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, covering
the sale in a public offering of up to an aggregate of 966,000 shares
(the "Shares") of the Company's Common Stock, par value $.01 per share. Of the
Shares, 550,000 are to be offered and sold by the Company and 290,000 are to be
offered and sold by the Selling Stockholders; the remaining 126,000 Shares are
subject to an option granted to the underwriters to cover over-allotments, if
any, of which 82,500 are to be offered and sold by the Company and 43,500 are
to be offered and sold by the Selling Stockholders.
In our capacity as counsel for the Company and the Selling Stockholders
in connection with the matters referred to above, we have examined the
Amended and Restated Certificate of Incorporation and Restated Bylaws of the
Company, and the originals or copies certified or otherwise identified, of
records of corporate action of the Company as furnished to us by the Company,
certificates of public
<PAGE>
XPEDITE SYSTEMS, INC.
August 15, 1996
Page 2
officials and of representatives of the Company, statutes and other instruments
and documents, as a basis for the opinions hereinafter expressed.
Based upon our examination as aforesaid, we are of the opinion that the
Shares, when purchased and paid for 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 of counsel as Exhibit 5.1
to the Registration Statement and to the reference to our Firm under the caption
"Legal Matters" in the prospectus included in the Registration Statement.
Very truly yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
<PAGE>
EX-23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 22, 1996, with respect to the consolidated
financial statements of Xpedite Systems, Inc. included in the Registration
Statement (Form S-3) and related Prospectus of Xpedite Systems, Inc. for the
registration of 966,000 shares of its common stock and to the incorporation by
reference therein of our reports dated March 22, 1996, with respect to the
consolidated financial statements and schedule of Xpedite Systems, Inc. included
in its Annual Report (Form 10-K) for the year ended December 31, 1995 filed with
the Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
--------------------------------------
ERNST & YOUNG LLP
MetroPark, New Jersey
August 12, 1996
<PAGE>
EX-23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference and inclusion in the
Prospectus constituting part of the Form S-3 Registration Statement of Xpedite
Systems, Inc. of our report dated October 25, 1995 (except for Notes 1, 6, 7, 8,
11, 12 and 13, as to which the date is May 31, 1996) relating to the financial
statements of Swift Global Communications, Inc. and Subsidiaries for the fiscal
years ended August 31, 1995 and 1994, which is incorporated in the Company's
Report on Amendment Nos. 1, 2, 3 and 4 thereto on Form 8-K/A filed with the
Securities and Exchange Commission. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
/s/ DAVID BERDON & CO. LLP
--------------------------------------
DAVID BERDON & CO. LLP
New York, New York
August 12, 1996
<PAGE>
EX-23.4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Xpedite Systems, Inc.
Eatontown, New Jersey
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement on Form S-3 of our report dated November 3, 1995,
relating to the consolidated financial statements of ViTel International Holding
Company, Inc. which is contained in that Prospectus of Xpedite Systems, Inc. and
to the incorporation by reference therein of our report dated November 3, 1995
included in Amendment Nos. 1, 2, 3, and 4 thereto on Form 8-K/A filed with the
Securities and Exchange Commission.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
--------------------------------------
BDO SEIDMAN, LLP
San Francisco, California
August 13, 1996
<PAGE>
EX-23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Xpedite Systems,
Inc. for the public offering of up to 1,725,000 shares of its common stock and
to the inclusion and to the incorporation by reference therein of our report
dated May 22, 1996, with respect to the consolidated financial statements of
Comwave Communications AG included in its Current Report on Form 8-K dated
November 20, 1995 and Amendment Nos. 1, 2, 3 and 4 thereto on Form 8-K/A filed
with the Securities and Exchange Commission.
Basel, Switzerland
August 13, 1996
Visura Treuhand-Gesellschaft
/s/ OSKAR HEINIGER /s/ DAVID CHRISTELLER
- ------------------
- ------------------------
Oskar Heiniger ppa. David Christeller
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<CASH> 4,528,300 9,076,250
<SECURITIES> 0 0
<RECEIVABLES> 21,465,510 17,560,118
<ALLOWANCES> 1,213,000 930,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 31,248,160 30,374,160
<PP&E> 25,053,348 20,627,153
<DEPRECIATION> 6,473,287 4,391,760
<TOTAL-ASSETS> 76,698,184 72,882,771
<CURRENT-LIABILITIES> 28,346,887 32,641,932
<BONDS> 33,424,869 36,322,678
0 0
0 0
<COMMON> 81,952 77,734
<OTHER-SE> 9,157,396 (1,193,682)
<TOTAL-LIABILITY-AND-EQUITY> 76,698,184 72,882,771
<SALES> 61,595,991 55,683,962
<TOTAL-REVENUES> 61,595,991 55,683,962
<CGS> 28,237,544 21,602,320
<TOTAL-COSTS> 51,538,634 99,763,346
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,002,891 535,889
<INCOME-PRETAX> 8,429,958 (43,823,054)
<INCOME-TAX> 3,460,817 2,740,890
<INCOME-CONTINUING> 4,969,141 (46,563,944)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,969,141 (46,563,944)
<EPS-PRIMARY> 0.61 (6.67)
<EPS-DILUTED> 0.61 (6,67)
</TABLE>