<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 JULY 26, 1996
PROSPECTUS
Filed pursuant to Rule 424(a)
Registration No. 333-08265
1,500,000 SHARES
XPEDITE SYSTEMS, INC.
COMMON STOCK
----------------
Of the 1,500,000 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 950,000 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 July 25, 1996 was $20.75. 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) STOCKHOLDERS
<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 225,000 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 , 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 Report on Form 10-Q for the
period ended March 31, 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 three months
ended March 31, 1996, net revenues increased 152.1% to $30.1 million, EBITDA
increased 155.0% to $6.9 million and net income increased 51.2% to $2.4 million,
as compared to the three months ended March 31, 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 183 salespeople
as of May 31, 1996; of such 183 salespeople, 140 were operating in North America
and 43 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, is currently negotiating to acquire
increased interests in two of the European Affiliates 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................... 950,000 shares
Total.................................... 1,500,000 shares(1)
Common Stock to be outstanding after the
Offering.................................... 8,673,163 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 1,135,383 shares of Common Stock reserved for issuance
upon the exercise of outstanding stock options and warrants, of which
614,493 shares may be exercised within 60 days after this Offering. Also
does not include 72,000 shares held in treasury.
(3) Reflects expected 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>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------- --------------------
<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 $ 10,979 $ 18,382
International service........................ -- -- -- -- 3,630 -- 9,877
System sales and other....................... 1,049 629 731 1,906 3,844 954 1,825
--------- --------- ----------- --------- --------- --------- ---------
Total net revenues......................... 6,101 10,029 29,072 41,429 55,684 11,933 30,084
Costs and expenses:
Cost of sales................................ 3,400 4,731 14,000 16,992 21,602 4,440 13,800
Selling and marketing........................ 1,738 3,284 7,680 11,180 15,059 3,279 6,452
General and administrative................... 628 982 1,942 2,746 3,964 816 2,054
Research and development..................... 645 569 1,695 2,834 3,415 771 1,210
Depreciation and amortization................ 344 428 975 1,432 2,723 499 1,688
Write-off of in-process research and
development costs (3)....................... -- -- -- -- 53,000 -- --
--------- --------- ----------- --------- --------- --------- ---------
Operating income (loss) (3).................... (654) 35 2,780 6,245 (44,079) 2,128 4,880
Interest income (expense)...................... (966) (523) (373) 433 233 208 (893)
Other income................................... -- -- -- -- 23 -- 100
Income tax expense............................. -- -- (712) (1,950) (2,741) (771) (1,720)
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) (3).......................... $ (1,620) $ (488) $ 1,695 $ 4,728 $ (46,564) $ 1,565 $ 2,367
--------- --------- ----------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) per common share (3)(4)...... -- $ (0.17) $ 0.34 $ 0.71 $ (6.67) $ 0.23 $ 0.29
Weighted average shares outstanding (4)........ -- 2,826 4,599 6,600 6,982 6,884 8,115
OTHER DATA:
EBITDA (5)..................................... $ (298) $ 467 $ 3,967 $ 7,919 $ 12,030 $ 2,701 $ 6,879
Average minutes of fax transmission
delivered per business day................... 45 98 273 463 667 572 1,134
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------
AS
ACTUAL ADJUSTED(6)(7)(8)
--------- -------------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 6,947 $ 13,847
Total assets........................................................................ 75,120 82,020
Long-term debt, excluding current maturities........................................ 34,842 31,457
Stockholders' equity................................................................ 1,117 16,472
</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) 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 $20.75
per share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds."
(7) Reflects expected 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."
(8) Assumes the Company uses approximately $3.4 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 $6,947, "Total assets" would be $75,120 and "Long-
term debt, excluding current maturities" would be $24,557. 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 by the Selling
Stockholders (assuming the Underwriters' over-allotment options are not
exercised), the Company's directors, executive officers and their affiliates
will control approximately 27.5% of the outstanding shares of Common Stock.
Accordingly, those stockholders will continue to have the ability, if
10
<PAGE>
acting in concert, to 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 July 10, 1996, the Company had
8,123,163 shares of Common Stock issued and outstanding. Immediately following
completion of the Offering, 8,673,163 shares of Common Stock will be issued and
outstanding, substantially all of which will be freely tradeable (including the
1,500,000 shares sold in this Offering and 1,485,000 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 4,067,177
shares of Common Stock (which includes 377,713 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 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 (as defined below). See "Principal and Selling Stockholders" and
"Underwriting."
11
<PAGE>
As of the date of this Prospectus, the Company has outstanding 312,860
options to purchase shares of Common Stock pursuant to the 1992 Incentive Stock
Option Plan (the "1992 Plan"), 418,507 options to purchase shares of Common
Stock pursuant to the 1993 Incentive Stock Option Plan (the "1993 Plan") and
175,900 options to purchase shares of Common Stock pursuant to the Company's
1996 Incentive Stock Option (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 137,000 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 "Mangement." 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 from the sale of the 550,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $20.75 per share (net of underwriting discounts and commissions and estimated
Offering expenses) are estimated to be $10.3 million ($11.9 million if the
Underwriters' over-allotment options are exercised in full).
The Company intends to use approximately $3.4 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 $3.4 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
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 two of the European Affiliates
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.
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
950,000 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 July 25, 1996)......................................... 27.75 19.25
</TABLE>
13
<PAGE>
On July 25, 1996, the last sale price reported on the Nasdaq National Market
for the Common Stock was $20.75 per share. On the same date, there were
approximately 176 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 March
31, 1996, on an actual basis and as adjusted to give effect to (i) the sale of
the 550,000 shares of Common Stock offered by the Company hereby at an assumed
public offering price of $20.75 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 and (ii) the
expected prepayment of certain indebtedness with shares of Common Stock.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
AS
ACTUAL ADJUSTED(2)(3)
---------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt(1).................................................................. $ 10,976 $ 5,906
---------- --------
---------- --------
Long-term debt, excluding current maturities........................................ $ 34,842 $ 31,457
Stockholders' equity:
Common stock, $0.01 par value per share; 15,000,000 shares authorized; 7,775,606
shares issued and outstanding; as adjusted, 8,676,606 shares issued and
outstanding (4).................................................................. 78 87
Additional paid-in capital........................................................ 48,927 64,273
Accumulated deficit............................................................... (47,672) (47,672)
Less: Treasury stock: 72,000 shares at cost....................................... (216) (216)
---------- --------
Total stockholders' equity.................................................... 1,117 16,472
---------- --------
Total capitalization.......................................................... $ 35,959 $ 47,929
---------- --------
---------- --------
</TABLE>
- ---------------
(1) Includes current maturities of long-term debt and capital lease
obligations.
(2) Reflects expected 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 $3.4 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 $24,557 and "Total Capitalization" would be $41,029.
See "Use of Proceeds."
(4) Does not include 800,190 shares of Common Stock issuable as of March 31,
1996 upon the exercise of outstanding stock options, of which 68,557 shares
were issued upon exercise subsequent to March 31, 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 three-month periods ended March 31,
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 three-month period ended
March 31, 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>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------------- --------------------
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 $ 10,979 $ 18,382
International service........................ -- -- -- -- 3,630 -- 9,877
System sales and other....................... 1,049 629 731 1,906 3,844 954 1,825
--------- --------- ----------- --------- --------- --------- ---------
Total net revenues......................... 6,101 10,029 29,072 41,429 55,684 11,933 30,084
Costs and expenses:
Cost of sales................................ 3,400 4,731 14,000 16,992 21,602 4,440 13,800
Selling and marketing........................ 1,738 3,284 7,680 11,180 15,059 3,279 6,452
General and administrative................... 628 982 1,942 2,746 3,964 816 2,054
Research and development..................... 645 569 1,695 2,834 3,415 771 1,210
Depreciation and amortization................ 344 428 975 1,432 2,723 499 1,688
Write-off of in-process research and
development costs (3)...................... -- -- -- -- 53,000 -- --
--------- --------- ----------- --------- --------- --------- ---------
Operating income (loss) (3).................... (654) 35 2,780 6,245 (44,079) 2,128 4,880
Interest income (expense)...................... (966) (523) (373) 433 233 208 (893)
Other income................................... -- -- -- -- 23 -- 100
Income tax expense............................. -- -- (712) (1,950) (2,741) (771) (1,720)
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) (3).......................... $ (1,620) $ (488) $ 1,695 $ 4,728 $ (46,564) $ 1,565 $ 2,367
--------- --------- ----------- --------- --------- --------- ---------
--------- --------- ----------- --------- --------- --------- ---------
Net income (loss) per common share (3) (4)..... -- $ (0.17) $ 0.34 $ 0.71 $ (6.67) $ 0.23 $ 0.29
Weighted average shares outstanding (4)........ -- 2,826 4,599 6,600 6,982 6,884 8,115
OTHER DATA:
EBITDA (5)..................................... $ (298) $ 467 $ 3,967 $ 7,919 $ 12,030 $ 2,701 $ 6,879
Average minutes of fax transmission delivered
per business day............................. 45 98 273 463 667 572 1,134
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------------- -----------
1991 1992 1993(1) 1994 1995(2) 1996
--------- --------- ----------- --------- ----------- -----------
(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 $ 6,947
Total assets........................................... 2,004 5,019 13,962 34,352 72,883 75,120
Long-term debt, excluding current maturities........... 1,330 4,201 3,098 13 36,323 34,842
Preferred Stock........................................ -- 6,663 7,262 -- -- --
Stockholders' equity (deficit)......................... (8,339) (7,502) (6,599) 27,085 (1,116) 1,117
</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.
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 was increased or decreased by 0.125%,
the effect on pro forma results of operations would be $50,000.
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% per
annum until November 20, 1996, and thereafter at the rate of 12% per annum
until maturity on January 1, 2002. The ViTel Notes were recorded at fair
value using a 9% effective interest rate.
18
<PAGE>
(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 non-recurring 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 three month periods ended March 31, 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
three months ended March 31, 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
revenues for the three months ended March 31, 1996 were $18.4 million in North
America and $9.9 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 effort
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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------------------- --------------------------
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% 92.0% 61.1%
International service................................ -- -- 6.5 -- 32.8
System sales and other............................... 2.5 4.6 6.9 8.0 6.1
----- ----- ----- ----- -----
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 37.2 45.9
Selling and marketing................................ 26.4 27.0 27.0 27.5 21.5
General and administrative........................... 6.7 6.6 7.1 6.8 6.8
Research and development............................. 5.8 6.8 6.2 6.5 4.0
Depreciation and amortization........................ 3.4 3.5 4.9 4.2 5.6
Write off of in-process research and development
costs............................................... -- -- 95.2 -- --
----- ----- ----- ----- -----
Operating income (loss)................................ 9.6 15.1 (79.2) 17.8 16.2
Interest income (expense)............................ (1.3) 1.0 0.5 1.7 (2.9)
Other income......................................... -- -- -- -- 0.3
Income tax expense................................... (2.5) (4.7) (4.9) (6.4) (5.7)
----- ----- ----- ----- -----
Net income (loss)...................................... 5.8% 11.4% (83.6)% 13.1% 7.9%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
OTHER DATA:
EBITDA (1)........................................... 13.6% 19.1% 21.6% 22.6% 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.
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995
For the three months ended March 31, 1996, net revenues increased by 152.1%
to $30.1 million, as compared to the same period in 1995. Net service revenues
increased by 157.4% to $28.3 million for the three months ended March 31, 1996,
as compared to the three months ended March 31, 1995. The SVC Acquisitions
contributed approximately $14.0 million in net service revenues for the three
months ended
21
<PAGE>
March 31, 1996; $4.1 million in domestic service revenue and $9.9 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 71.4 million minutes in the three months ended March
31, 1996, from approximately 36.1 million minutes in the three months ended
March 31, 1995.
System sales and other net revenues increased by 91.3% to $1.8 million for
the three months ended March 31, 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 54.1% and 62.8% for the three months ended
March 31, 1996 and 1995, respectively. Service margin rates decreased to 54.3%
for the first quarter of 1996, as compared to 63.4% 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
11.5% in the average price charged per minute to customers to deliver a fax
page, as compared with the first quarter of the prior year. This reduction was
in response to competition in the markets in which the Company operates. Margin
rates on system sales and other revenues also decreased slightly to 51.9% for
the three months ended March 31, 1996, as compared to 55.5% 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 96.8% to $6.5 million for the
three months ended March 31, 1996, as compared to the same period in 1995.
Expenses relating to the operations of the SVC Companies accounted for $2.4
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 21.5% for the three months ended March 31, 1996, as
compared to 27.5% for the three months ended March 31, 1995. As of March 31,
1996, the Company employed approximately 175 direct sales employees domestically
and internationally, as compared with 103 domestically at March 31, 1995.
General and administrative expenses increased by 151.7% to $2.1 million for
the three months ended March 31, 1996, as compared to the same period in 1995.
The operations of the SVC Companies accounted for $1.1 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 6.8% for both the
three months ended March 31, 1996 and the three months ended March 31, 1995.
Research and development expenses increased by 56.9% to $1.2 million for the
three months ended March 31, 1996, as compared to the same period in 1995. The
operations of the SVC Companies accounted for $0.3 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 three months ended March
31, 1996, as compared to 6.5% for the three months ended March 31, 1995.
Depreciation and amortization increased by 238.3% to $1.7 million for the
three months ended March 31, 1996, as compared to the same period in 1995. This
increase is attributable to the purchase of
22
<PAGE>
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 129.3% to $4.9 million for the three months
ended March 31, 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 16.2% for the three months ended March 31, 1996, as
compared with 17.8% for the three months ended March 31, 1995.
Interest income decreased by 45.2% to $0.1 million for the three months
ended March 31, 1996, as compared with $0.2 million for the three months ended
March 31, 1995, as a result of the Company utilizing available cash in
connection with the SVC Acquisitions. For the three months ended March 31, 1996,
the Company also incurred interest expense of $1.0 million, primarily related to
the Credit Facility entered into to finance the SVC Acquisitions.
Income tax expense for the three months ended March 31, 1996 was $1.7
million, or 42.1% 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 three
months ended March 31, 1996, exclusive of amortization of costs in excess of
fair value relating to the SVC Acquisitions (a non-deductible item), was 40.0%.
As a result of the factors discussed above, the Company's net income
increased by 51.2% to $2.4 million for the three months ended March 31, 1996, as
compared with $1.6 million for the same period in 1995. Net income per share of
Common Stock increased by 26.1% to $0.29 for the three months ended March 31,
1996, as compared to $0.23 for the three months ended March 31, 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.
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
23
<PAGE>
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
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
24
<PAGE>
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.
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.
25
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
The following table shows certain unaudited financial data of the Company
for each of the five 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 period
ended March 31, 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>
MARCH 31, JUNE 30, SEPT. 30 DEC. 31, MARCH 31,
1995 1995 1995 1995 1996
----------- --------- --------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues:
Domestic service.............................................. $ 10,979 $ 10,994 $ 11,418 $ 14,819 $ 18,382
International service......................................... -- -- -- 3,630 9,877
System sales and other........................................ 954 908 731 1,251 1,825
----------- --------- --------- ---------- ----------
Total net revenues.......................................... 11,933 11,902 12,149 19,700 30,084
Operating income (loss) (1)..................................... 2,129 2,050 2,170 (50,428) 4,880
Other Data:
EBITDA (2).................................................... 2,701 2,666 2,830 3,833 6,879
</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 $19.7 million and $30.1 million in the
quarters ending December 31, 1995 and March 31, 1996, respectively, reflecting
an increase of 62.2% and 52.7% over the preceding quarter, respectively. EBITDA
increased to $3.8 million and $6.9 million in the quarters ended December 31,
1995 and March 31, 1996, respectively, reflecting an increase of 35.4% and 79.5%
over the preceding quarter, respectively. Such increases are attributable
primarily to the effect of the SVC Acquisitions in November 1995.
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 March 31, 1996, there was no balance
outstanding with respect to the revolving loan portion of the Credit Facility
and $38.75 million amount 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 $3.4 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
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ViTel Notes will increase to approximately $7.4 million. The Company expects to
prepay the ViTel Notes prior to November 20, 1996 with 351,000 shares of Common
Stock. Such shares were placed in escrow in June 1996 pending approval by the
Company's stockholders of such prepayment.
At March 31, 1996, the Company had $6.9 million in cash and cash
equivalents. At March 31, 1996, the Company had a working capital deficit of
$2.0 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 three month period ended March 31, 1996, the Company
generated $2.5 million in cash from operations. For the comparable period ended
March 31, 1995, the Company generated $1.3 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 $3.2
million as of March 31, 1996. The Company has agreed to provide up to an
additional $0.8 million 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."
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<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 has purchased forward contracts for 3.4 million German marks,
and 110 million Japanese yen, in order to hedge its loans to Xpedite Germany and
amounts due from its subsidiaries at March 31, 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 March 31, 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.
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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 three months
ended March 31, 1996, net revenues increased 152.1% to $30.1 million, EBITDA
increased 155.0% to $6.9 million and net income increased 51.2% to $2.4 million,
as compared to the three months ended March 31, 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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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 183 salespeople
as of May 31, 1996; of such 183 salespeople, 140 were operating in North America
and 43 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.
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- 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, is currently negotiating to acquire
increased interests in two of the European Affiliates 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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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 May 31, 1996, the Company had approximately 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.
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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
May 31, 1996, the sales force had grown to 140
35
<PAGE>
salespeople in North America and 43 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 is currently negotiating to increase its ownership interest in
two of the European Affiliates (such increases are not related to the "put" and
"call" arrangements related to 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 518 persons as of May 31, 1996, substantially
all of whom were full-time employees, and none of whom was covered by a
collective bargaining arrangement. Of these employees, 216 were engaged in sales
and marketing; 195 in operations and customer support; 53 in research and
development; and 54 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-
38
<PAGE>
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.
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 March 31, 1996, the Company has invested
approximately $0.8 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 three months
ended March 31, 1996, the Company incurred approximately $1.0 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 July 10, 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) each 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).......................... 1,774,171(4) 21.4% 440,000(5) 1,334,171(6) 15.3%
APA Excelsior III, L.P.(7)................. 1,121,882(8) 13.8 282,207 839,675 9.7
Finance Management Ltd.(9)................. 598,379 7.4 -- 598,379 6.9
David Epstein(3)(10)....................... 545,895 6.7 165,000 380,895 4.4
Stuart Epstein(10)(11)..................... 463,363 5.7 115,000 348,363 4.0
Coutts & Co. (Jersey), Ltd., Custodian for
APA Excelsior III/ Offshore, L.P.(7)..... 427,634(12) 5.3 107,570 320,064 3.7
Robert A. Epstein(3)(10)................... 388,734 4.8 115,000 273,734 3.2
Roy B. Andersen, Jr.(13)................... 257,450 3.1 -- 257,450 2.9
George Abi Zeid(9)......................... 223,150 2.7 -- 223,150 2.6
Gold Chalet Overseas Ltd.(9)............... 146,907 1.8 90,000 56,907 *
Max A. Slifer(13).......................... 142,775 1.8 -- 142,775 1.6
APA/Fostin Pennsylvania Venture Capital
Fund, L.P.(7)............................ 142,417(14) 1.8 35,825 106,592 1.2
Dennis Schmaltz(13)........................ 142,020 1.7 -- 142,020 1.6
Barclay Holdings Corporation(9)............ 100,000 1.2 25,000 75,000 *
CIN Venture Nominees, Ltd.(7).............. 57,238(15) * 14,398 42,840 *
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)................................. 3,118,794(16) 36.4% 605,000(17) 2,513,794(18) 27.5%
</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; Robert A.
Epstein--5,000 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) These shares are being sold by the Capital Funds.
(6) Includes 1,309,171 shares of Common Stock owned by the Capital Funds, as to
which Mr. Chefitz disclaims beneficial ownership.
(7) Robert Chefitz, a director of the Company, is a general partner of, or an
officer of the general partner of, such entity.
(8) Does not include any shares owned by any of the other Capital Funds. APA
Excelsior III, L.P. is an affiliate of Patricof & Co.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
43
<PAGE>
(FOOTNOTES CONTINUED FROM PRECEDING PAGE)
(9) 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; Gold Chalet Overseas Ltd.-- 146,907
shares; and Barclay Holdings Corporation--100,000 shares.
(10) David Epstein, Stuart Epstein and Robert Epstein have been significant
stockholders of the Company since its formation in 1988. David Epstein is a
director of the Company.
(11) Includes 50,000 shares held in trust for the benefit of Mr. Epstein's
children, as to which he disclaims beneficial ownership.
(12) 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.
(13) 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.
(14) Does not include any shares owned by any of the other Capital Funds.
APA/Fostin Pennsylvania Venture Capital Fund, L.P. is an affiliate of
Patricof & Co.
(15) Does not include any shares owned by any of the other Capital Funds. CIN
Venture Nominees, Ltd. is an affiliate of Patricof & Co.
(16) 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.
(17) Includes a total of 440,000 shares of Common Stock owned by the Capital
Funds.
(18) Includes 1,309,171 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........................................................................ 1,500,000
----------
----------
</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 142,500 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, 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 March 31, 1996................................. F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and for the
three months ended March 31, 1995 and 1996............................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1993, 1994
and 1995 and the three months ended March 31, 1996.................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and for the
three months ended March 31, 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.
ERNST & YOUNG LLP
MetroPark, New Jersey
March 22, 1996
F-2
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1994 1995
------------ ------------ MARCH 31,
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents........................................... $ 10,320,933 $ 9,076,250 $ 6,947,115
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 $1,075,000 for 1994, 1995 and
1996, respectively................................................ 6,887,425 16,567,118 18,670,463
Deferred income taxes............................................... 16,000 2,406,663 2,406,663
Other current assets................................................ 670,485 2,324,129 3,402,677
------------ ------------ ------------
Total current assets............................................ 23,712,855 30,374,160 31,426,918
Property, plant and equipment, net.................................... 6,369,068 16,235,393 16,622,673
Customer lists, net of accumulated amortization of $535,000, $897,000
and $1,172,000 for 1994, 1995 and 1996, respectively................ 1,697,587 6,935,206 7,447,621
Purchased software, net of accumulated amortization of $489,000,
$886,000 and $1,114,000 for 1994, 1995 and 1996, respectively....... 1,036,845 3,591,852 3,450,131
Costs in excess of fair value of net assets acquired, net of
accumulated amortization of $78,000 and $286,000 for 1995 and 1996,
respectively........................................................ -- 8,226,593 8,018,624
Investments in affiliates, at cost.................................... 339,700 510,390 494,187
Loans to affiliate.................................................... 902,589 2,525,102 3,220,485
Deferred income taxes................................................. 100,000 1,815,237 1,815,237
Other assets.......................................................... 193,232 2,668,838 2,623,994
------------ ------------ ------------
Total........................................................... $ 34,351,876 $ 72,882,771 $ 75,119,870
------------ ------------ ------------
------------ ------------ ------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable.................................................... $ 2,303,222 $ 10,712,562 $ 12,672,152
Accrued expenses.................................................... 4,095,789 7,127,162 6,586,000
Current portion of long-term debt................................... -- 10,652,747 10,683,403
Current portion of capital lease obligations........................ 30,511 307,232 292,483
Income taxes payable................................................ 274,306 3,254,114 3,092,183
Other current liabilities........................................... 550,000 588,115 95,280
------------ ------------ ------------
Total current liabilities....................................... 7,253,828 32,641,932 33,421,501
Long-term debt........................................................ -- 35,763,421 34,292,952
Long-term portion of capital lease obligations........................ 13,037 559,257 548,962
Deferred income taxes................................................. -- 4,786,300 4,789,117
Other liabilities..................................................... -- 247,809 950,360
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 7,775,606 shares, for 1994,
1995 and 1996, respectively....................................... 64,805 77,734 77,756
Additional paid-in capital.......................................... 30,541,797 48,921,115 48,927,676
Accumulated deficit................................................. (3,296,591) (49,898,797) (47,672,454)
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) 1,116,978
------------ ------------ ------------
Total........................................................... $ 34,351,876 $ 72,882,771 $ 75,119,870
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31, 31,
----------------------------------------- --------------------------
<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 $ 10,978,892 $ 28,258,629
System sales and other............... 731,326 1,905,766 3,843,583 953,900 1,824,981
------------ ------------ ------------- ------------ ------------
Total net revenues............... 29,072,192 41,429,335 55,683,962 11,932,792 30,083,610
Cost of sales:
Operations, line charges and support
engineering........................ 13,655,152 16,025,855 20,144,082 4,015,882 12,922,236
Cost of sales of systems............. 344,472 965,746 1,458,238 424,083 877,343
------------ ------------ ------------- ------------ ------------
Total cost of sales.............. 13,999,624 16,991,601 21,602,320 4,439,965 13,799,579
------------ ------------ ------------- ------------ ------------
Gross margin........................... 15,072,568 24,437,734 34,081,642 7,492,827 16,284,031
Operating expenses:
Selling and marketing................ 7,680,497 11,180,076 15,059,118 3,278,537 6,452,363
General and administrative........... 1,942,194 2,746,325 3,964,401 815,478 2,054,120
Research and development............. 1,694,632 2,834,681 3,414,577 771,229 1,209,686
Depreciation and amortization........ 975,458 1,432,079 2,722,930 499,249 1,688,161
Write-off of in-process research and
development costs.................. -- -- 53,000,000 -- --
------------ ------------ ------------- ------------ ------------
Total operating expenses......... 12,292,781 18,193,161 78,161,026 5,364,493 11,404,330
------------ ------------ ------------- ------------ ------------
Operating income (loss)................ 2,779,787 6,244,573 (44,079,384) 2,128,334 4,879,701
Interest income........................ 17,191 516,948 769,341 207,957 114,350
Interest expense....................... (389,940) (83,563) (535,889) -- (1,006,663)
Other income........................... -- -- 22,878 -- 100,126
------------ ------------ ------------- ------------ ------------
Income (loss) before income taxes...... 2,407,038 6,677,958 (43,823,054) 2,336,291 4,087,514
Income tax expense..................... 712,000 1,950,400 2,740,890 771,000 1,720,200
------------ ------------ ------------- ------------ ------------
Net income (loss)...................... $ 1,695,038 $ 4,727,558 $ (46,563,944) $ 1,565,291 $ 2,367,314
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
Net income (loss) per Common Share..... $ 0.71 $ (6.67) $ 0.23 $ 0.29
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Pro forma net income per Common
Share................................ $ 0.34
------------
------------
Weighted average shares outstanding.... 4,598,500 6,600,000 6,982,200 6,884,000 8,115,000
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
</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.................... 2,207 22 6,561 -- -- -- 6,583
Cumulative translation adjustments........... -- -- -- (140,971) -- -- (140,971)
Net income................................... -- -- -- 2,367,314 -- -- 2,367,314
--------- ----------- ---------- ------------ --------- --------- ----------
BALANCE, MARCH 31, 1996 (Unaudited).......... 7,775,606 $ 77,756 $48,927,676 ($47,672,454) 72,000 $(216,000) $1,116,978
--------- ----------- ---------- ------------ --------- --------- ----------
--------- ----------- ---------- ------------ --------- --------- ----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
---------------------------------------- -------------------------
<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) $ 1,565,291 $ 2,367,314
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization.............. 1,187,520 1,674,189 3,060,801 573,065 1,899,434
Write-off of in-process research and
development.............................. -- -- 53,000,000 -- --
Other non-cash losses...................... -- -- -- -- 65,838
Deferred income taxes...................... (273,000) 157,000 (2,012,700) -- 12,972
Change in operating assets and liabilities:
Accounts receivable.................... (4,665,989) (477,246) (839,721) (768,323) (2,139,187)
Other current assets................... (179,667) (461,046) 355,833 285,009 (1,061,127)
Other assets........................... (170,249) 41,783 -- (78,200) (50,382)
Accounts payable....................... 578,820 1,147,423 (3,128,006) (978,134) 1,396,854
Accrued expenses....................... 5,145,920 (1,926,770) 631,373 459,802 139,171
Deferred revenue....................... 13,000 (13,000) -- -- --
Other liabilities...................... -- -- 176,021 -- 147,414
Income taxes payable................... 153,000 121,306 1,665,745 237,750 (271,092)
----------- ------------ ------------- ------------ -----------
Net cash provided by operating activities.... 3,484,393 4,991,197 6,345,402 1,296,260 2,507,209
INVESTING ACTIVITIES
Acquisition of property, plant and
equipment.................................. (2,290,559) (4,280,337) (3,650,251) (1,188,649) (1,646,943)
Acquisition of businesses.................... (500,000) -- (46,199,458) -- (756,996)
Purchase of computer software................ (57,622) (365,028) (252,327) -- --
Purchase of held-to-maturity securities...... -- (5,818,012) (11,692,002) (3,899,352) --
Sale of held-to-maturity securities.......... -- -- 17,510,014 -- --
Investments in affiliates.................... -- (339,700) (4,599) -- --
Loans to affiliate........................... -- (902,589) (1,622,513) (332,131) (695,383)
----------- ------------ ------------- ------------ -----------
Net cash used in investing activities........ (2,848,181) (11,705,666) (45,911,136) (5,420,132) (3,099,322)
FINANCING ACTIVITIES
Payments of acquisition liability............ (1,200,000) (600,000) -- -- --
Proceeds from notes payable.................. -- 1,495,701 40,000,000 -- --
Payment of debt issuance costs............... -- -- (1,402,500) -- --
Repayments of other loans and notes
payable.................................... (11,025) (2,599,486) (292,892) -- (1,518,007)
Repayments of related party loans and notes
payable.................................... (633,429) (3,618,102) -- -- --
Repayments of capital lease obligations...... (26,990) (39,502) (79,917) (9,983) (17,804)
Net proceeds from issuance of Common Stock... (178,221) 22,371,206 129,805 8,212 6,583
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 (1,771) (1,529,228)
Effect of exchange rate changes on cash...... -- -- (33,445) (340) (7,794)
----------- ------------ ------------- ------------ -----------
(Decrease) increase in cash and cash
equivalents................................ (1,433,488) 9,848,872 (1,244,683) (4,125,983) (2,129,135)
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 $ 6,194,950 $ 6,947,115
----------- ------------ ------------- ------------ -----------
----------- ------------ ------------- ------------ -----------
</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, $0
(unaudited) and $1,247,050 (unaudited) during the years ended December 31, 1993,
1994 and 1995 and the three months ended March 31, 1995 and 1996, respectively.
The Company made income tax payments of $832,000, $1,663,000, $3,103,000,
$570,000 (unaudited) and $1,128,000 (unaudited) during the years ended December
31, 1993, 1994 and 1995, and the three months ended March 31, 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 MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 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 three month period ended March 31, 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 three-month period ended March 31, 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 March 31, 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 MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 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 March 31, 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 March 31, 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, $73,816, and $244,486 during the years
ended December 31, 1993, 1994 and 1995, and the three months ended March 31,
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 MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 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 three months ended March 31, 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 MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 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 a subordinated note 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 MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 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,
--------------------------- MARCH 31,
1994 1995 1996
------------ ------------- -------------
<S> <C> <C> <C>
Land....................................................... $ -- $ 75,753 $ 75,753
Building................................................... -- 103,977 99,840
Equipment.................................................. 8,075,058 17,880,624 18,970,299
Furniture and fixtures..................................... 945,193 1,681,859 1,824,730
Leasehold improvements..................................... 193,992 884,940 1,133,515
------------ ------------- -------------
9,214,243 20,627,153 22,104,137
Less accumulated depreciation and amortization............. 2,845,175 4,391,760 5,481,464
------------ ------------- -------------
$ 6,369,068 $ 16,235,393 $ 16,622,673
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
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 1,297,777
Salaries and related benefits................................. 1,261,631 3,213,181 3,305,280
Accrued interest.............................................. -- 467,671 159,177
Other......................................................... 549,960 2,011,943 1,823,766
------------ ------------ ------------
$ 4,095,789 $ 7,127,162 $ 6,586,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-12
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 1995 AND 1996 ARE UNAUDITED)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
-------------- --------------
<S> <C> <C>
Term loan............................................................... $ 40,000,000 $ 38,750,000
Subordinated notes to former owners..................................... 4,957,450 5,069,831
Notes payable to banks.................................................. 989,930 781,928
Notes payable to former owners of ViTel................................. 468,788 374,596
-------------- --------------
46,416,168 44,976,355
Less current maturities................................................. (10,652,747) (10,683,403)
-------------- --------------
$ 35,763,421 $ 34,292,952
-------------- --------------
-------------- --------------
</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 are no amounts
outstanding under the revolving loan at December 31, 1995 and March 31, 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 is
adjusted in November 1996, 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 March 31, 1996.
Substantially all of the assets of the Company collateralize the term 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 do not begin
to accrue interest until May 20, 1996. Beginning on May 20, 1996, the notes
accrue interest 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 $162,000 has been accreted through
December 31, 1995 and March 31, 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. It is the Company's intention
to prepay the notes prior to November 20, 1996.
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
$23,000 at December 31, 1995 and March 31, 1996, respectively. Principal and
interest is payable monthly through September 1997, and is collateralized by
liens
F-13
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 1995 AND 1996 ARE UNAUDITED)
5. LONG-TERM DEBT--(CONTINUED)
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 $759,000 in the aggregate at December 31, 1995 and March 31, 1996,
respectively, payable to Japanese banks bearing interest at rates ranging from
2.8% to 3.6%. 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 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 $84,000 at December 31, 1995 and March 31,
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>
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>
F-14
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 1995 AND 1996 ARE UNAUDITED)
6. INCOME TAXES--(CONTINUED)
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.
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.
F-15
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 1995 AND 1996 ARE UNAUDITED)
7. LEASES--(CONTINUED)
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, $262,249 and $634,793
for the years ended December 31, 1993, 1994 and 1995 and the three months ended
March 31, 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.
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.
F-16
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 1995 AND 1996 ARE UNAUDITED)
8. BENEFIT PLANS--(CONTINUED)
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, $52,043 and $86,273 for the years ended
December 31, 1993, 1994 and 1995 and the three months ended March 31, 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 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
F-17
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 1995 AND 1996 ARE UNAUDITED)
10. SYSTEM AND MARKETING AGREEMENTS--(CONTINUED)
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.
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
F-18
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 1995 AND 1996 ARE UNAUDITED)
10. SYSTEM AND MARKETING AGREEMENTS--(CONTINUED)
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 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.
F-19
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994 AND 1995 AND MARCH 31, 1995 AND 1996
(AMOUNTS AND DISCLOSURE APPLICABLE TO MARCH 31, 1995 AND 1996 ARE UNAUDITED)
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>
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>
1,500,000 SHARES
XPEDITE SYSTEMS, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
BEAR, STEARNS & CO. INC.
PRUDENTIAL SECURITIES INCORPORATED
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------