<PAGE>
Filed pursuant to Rule 424(b)(2)
Registration No. 333-08259
PROSPECTUS
1,600,000 SHARES
XPEDITE SYSTEMS, INC.
[LOGO]
COMMON STOCK
SEE "RISK FACTORS" COMMENCING ON PAGE 4 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
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE
-------------
This Prospectus is being used in connection with the offering from time to
time of up to 1,600,000 shares of common stock, $0.01 par value per share (the
"Common Stock"), of Xpedite Systems, Inc., a Delaware corporation (the
"Company"), by certain stockholders of the Company identified herein (the
"Selling Stockholders"). The Selling Stockholders acquired the Common Stock in
connection with the acquisition by the Company 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").
The Common Stock may be offered by the Selling Stockholders from time to
time on terms to be determined at the time of sale, in transactions in the
over-the-counter market, in negotiated transactions, or by a combination of
these methods, at fixed prices that may be changed, at market prices prevailing
at the time of the sale, at prices related to such market prices or at
negotiated prices. The Selling Stockholders may effect such transactions by
selling the shares of Common Stock to or through securities broker-dealers or
other agents, and such broker-dealers or other agents may receive compensation
in the form of discounts, concessions or commissions from the Selling
Stockholders and/or the purchasers of the Common Stock for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). Additionally, agents or dealers may acquire Common Stock
or interests therein as a pledgee and may, from time to time, effect
distributions of the Common Stock or interests in such capacity. See "Selling
Stockholders" and "Plan of Distribution." The Selling Stockholders and any
brokers, dealers or agents through whom sales of the Common Stock are made may
be deemed "underwriters" within the meaning of the Securities Act of 1933, as
amended (the "Securities Act"), and any profits realized by them on the sale of
the Common Stock may be considered to be underwriting compensation.
The Company is not selling any of the shares of Common Stock offered hereby
and will not receive any of the proceeds from sales of Common Stock by the
Selling Stockholders. The Company has agreed to bear all of the expenses in
connection with the registration and sale of the shares offered hereby by the
Selling Stockholders (other than underwriting discounts and selling
commissions).
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "XPED." The closing sale price per share of the Company's Common Stock on
the Nasdaq National Market on July 25, 1996, was $20.75.
THE DATE OF THIS PROSPECTUS IS JULY 26, 1996.
<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 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.
2
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No person has been authorized to give any information or to make any
representations in connection with this offer 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. This Prospectus does
not constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the registered securities to which it relates or an offer
to, or solicitation of, any person in any jurisdiction where such an offer or
solicitation would be unlawful. 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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information...................................................................................... 2
Incorporation of Certain Documents By Reference............................................................ 2
Risk Factors............................................................................................... 4
Use of Proceeds............................................................................................ 7
Selected Consolidated Financial and Operating Data......................................................... 8
Pro Forma Condensed Combined Statement of Operations....................................................... 10
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 13
Business................................................................................................... 22
Selling Stockholders....................................................................................... 34
Plan of Distribution....................................................................................... 35
Legal Matters.............................................................................................. 36
Experts.................................................................................................... 36
</TABLE>
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3
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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
4
<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
indirect 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. As of the date of this Prospectus, the
Company's directors, executive officers and their affiliates control
approximately 36.4% of the outstanding shares of Common Stock. Accordingly, such
stockholders have the ability, if 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.
5
<PAGE>
In connection with the acquisitions of the SVC Companies in November 1995,
the Company and certain of the Selling Stockholders (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.
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 "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. Assuming the completion
by the Company of a public offering of 1,500,000 shares of Common Stock covered
by a Registration Statement filed by the Company on July 17, 1996 (the
"Underwritten Offering Registration Statement"), 8,673,163 shares of Common
Stock will be issued and outstanding, substantially all of which will be freely
tradeable (including 1,485,000 shares the resale of which is covered by this
Registration Statement and not included in the Underwritten Offering
Registration Statement, and 1,500,000 shares covered by the Underwritten
Offering Registration Statement). 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 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 effective
date of the Underwritten Offering Registration Statement, except in certain
limited circumstances.
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
6
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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. 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.
------------------------
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.
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
1,600,000 shares of Common Stock offered by the Selling Stockholders hereby. See
"Selling Stockholders."
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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, which are incorporated
herein by reference.
<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>
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(1) The Company acquired certain assets from TRT/FTC Communications, Inc. on
February 1, 1993. See "Business--Strategic Acquisitions and Relationships"
and Note 2 of Notes to Consolidated Financial Statements.
8
<PAGE>
(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) Earnings before interest, taxes, depreciation and amortization ("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.
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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 incorporated by reference 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.
10
<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.
11
<PAGE>
The ViTel Notes did not accrue interest until May 20, 1996. Beginning on May
20, 1996, the Vitel Notes began to accrue interest at the rate of 17% 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.
(c) To adjust federal and state income taxes for the effect of the pro forma
adjustments. See "Selected Consolidated Financial and Operating Data -- Note
(3)."
(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.
(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).
12
<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 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 fax services ("Basic Fax Services") and
enhanced fax services ("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.
13
<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.
Additional information regarding the financial statements for the SVC
Companies and the pro forma condensed combined financial statements of the
Company is set forth in Amendments Nos. 1, 2, 3 and 4 on Form 8-K/A to the
Company's Current Report on Form 8-K. See "Available Information" and
"Incorporation of Certain Documents by Reference."
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.
14
<PAGE>
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 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
15
<PAGE>
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 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
16
<PAGE>
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
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
17
<PAGE>
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 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.
18
<PAGE>
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.
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.
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
19
<PAGE>
amount equal to the interest payment. In the event that all unpaid principal and
accrued interest is not paid in full on or prior to November 20, 1996, the
aggregate principal amount of the ViTel Notes will increase to 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 Systems GmbH
("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 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"). 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
20
<PAGE>
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."
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.
21
<PAGE>
BUSINESS
OVERVIEW
The Company is a leading worldwide provider of enhanced fax services
("Enhanced Fax Services"), and now also offers basic fax services ("Basic Fax
Services") via a worldwide network with points of presence in over 70 cities in
38 countries. Through internal growth and strategic acquisitions, the Company
has significantly increased its net revenues, EBITDA and net income in recent
years. For the year ended December 31, 1995, net revenues increased 34.4% to
$55.7 million, EBITDA (before non-recurring charges) increased 51.9% to $12.0
million and net income (before non-recurring charges) increased 36.1% to $6.4
million, as compared to the year ended December 31, 1994. For the 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
("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.
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 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 "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.
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
22
<PAGE>
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.
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/FTC Communications, Inc. ("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.
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
23
<PAGE>
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.
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 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
24
<PAGE>
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 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.
25
<PAGE>
MARKETS
The Company provides Enhanced and Basic Fax Services on a worldwide basis.
ENHANCED 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 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 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:
[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.
26
<PAGE>
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
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 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.
27
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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.
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.
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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 Services, the Company believes that a direct
field sales organization is the most effective distribution channel in
addressing the Basic 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 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).
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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 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.
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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.
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
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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-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
32
<PAGE>
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.
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<PAGE>
SELLING STOCKHOLDERS
Set forth below is information as of July 10, 1996, regarding the number of
shares of Common Stock beneficially owned, and the number of such shares which
may be offered hereby from time to time, by each Selling Stockholder. The
Company had 8,123,163 shares of Common Stock issued and outstanding as of July
10, 1996. It is not possible to predict the number of shares of Common Stock
that will be sold hereby, and consequently it is not possible to predict the
number of shares that will be owned by each Selling Stockholder following
completion of sales of the securities offered hereby.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY COMMON STOCK NUMBER OF SHARES
NAME OWNED OUTSTANDING OFFERED HEREBY
- ----------------------------------------------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C>
Finance Management Ltd..................................... 598,379 7.4% 598,379
George Abi Zeid............................................ 223,150 2.7 223,150
Computainer Systems (Global) Inc.(1)....................... 164,970 2.0 164,970
Gold Chalet Overseas Ltd.(2)............................... 146,907 1.8 146,907
Barclay Holdings Corporation(3)............................ 100,000 1.2 100,000
European Trading Corporation(1)............................ 94,770 1.2 94,770
City Trading Corporation(1)................................ 91,260 1.1 91,260
Fortune Partner Investments Ltd............................ 63,074 * 63,074
Swiss Bank Corporation..................................... 22,451 * 22,451
Craig and Margaret Roer.................................... 18,571 * 18,571
Phyllis Jubran............................................. 14,860 * 14,860
Peter Bollmann............................................. 11,730 * 11,730
Herman Bader............................................... 11,206 * 11,206
Associated Growth Investors, L.P........................... 9,804 * 9,804
J. Jesse Lev............................................... 7,564 * 7,564
Stefano Pascucci........................................... 6,527 * 6,527
Robert Harbeck............................................. 4,201 * 4,201
James P. O'Day............................................. 3,843 * 3,843
Eric Kirsten............................................... 1,475 * 1,475
Jubran L. Jubran........................................... 1,400 * 1,400
Jerome Neidich............................................. 1,400 * 1,400
All American Funding Corp.................................. 983 * 983
L.H. Dubrow, Trustee under Deed of Trust dated March 26,
1980..................................................... 983 * 983
CPJ International.......................................... 492 * 492
----------------- -----------------
Total...................................................... 1,600,000 1,600,000
----------------- -----------------
----------------- -----------------
</TABLE>
- ---------------
* Less than one percent (1%).
(1) Represents shares to be issued in prepayment of the ViTel Notes held by
such entity, subject to approval by the stockholders of the Company.
(2) 90,000 shares of Common Stock held by Gold Chalet Overseas Ltd. are being
sold pursuant to the Underwritten Offering Registration Statement.
(3) 25,000 shares of Common Stock held by Barclay Holdings Corporation are
being sold pursuant to the Underwritten Offering Registration Statement.
34
<PAGE>
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds from the sale of the Common
Stock offered hereby. The Selling Stockholders may sell all or a portion of the
shares of Common Stock held by them from time to time while the registration
statement of which this Prospectus is a part remains effective. By agreement
with the Selling Stockholders, the Company is obligated to maintain the
effectiveness of such registration statement until the earlier of November 20,
1998, or the date all of the shares of Common Stock offered hereby have been
sold or withdrawn from registration by them. To the extent required, the number
of shares of Common Stock to be sold, the names of the Selling Stockholders, the
purchase price, the name of any agent or dealer and any applicable commissions
with respect to a particular offer will be set forth in an accompanying
Supplement to this Prospectus. The aggregate proceeds to the Selling
Stockholders from the sale of Common Stock offered hereby will be the prices at
which such securities are sold, less any commissions. There can be no assurance
that the Selling Stockholders will sell any or all of the shares of Common Stock
offered hereby.
The Common Stock may be sold by the Selling Stockholders in transactions on
the Nasdaq National Market, in negotiated transactions, or by a combination of
these methods, at fixed prices that may be changed, at market prices prevailing
at the time of sale, at prices related to such market prices or at negotiated
prices. A Selling Stockholder may elect to engage a broker or dealer to effect
sales in one or more of the following transactions: (a) block trades in which
the broker or dealer so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to facilitate the
transaction, (b) purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this Prospectus, and (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers.
In effecting sales, brokers and dealers engaged by Selling Stockholders may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from Selling Stockholders in amounts to be
negotiated (and, if such broker-dealer acts as agent for the purchaser of such
shares, from such purchaser). Broker-dealers may agree with the Selling
Stockholders to sell a specified number of such shares at a stipulated price per
share, and, to the extent such broker-dealer is unable to do so acting as agent
for a Selling Stockholder, to purchase as principal any unsold shares at the
price required to fulfill the broker-dealer commitment to such Selling
Stockholder. Broker-dealers who acquire shares as principal may thereafter
resell such shares from time to time in transactions (which may involve crosses
and block transactions and sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of sale, at prices
then related to the then-current market price or in negotiated transactions and,
in connection with such resales, may pay to or receive from the purchasers of
such shares commissions as described above. The Selling Stockholders may also
pledge their shares to banks, brokers or other financial institutions as
security for margin loans or other financial accommodations that may be extended
to such Selling Stockholders, and any such pledgee institution may similarly
offer, sell and effect transactions in such shares.
The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in sales of shares of Common Stock may be deemed
to be "underwriters" within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares of Common Stock purchased by
them may be deemed to be underwriting commissions or discounts under the
Securities Act.
Pursuant to the registration agreements entered into with the Selling
Stockholders, the Company has agreed to indemnify the Selling Stockholders
against certain liabilities, including liabilities under the Securities Act.
The Company will pay all expenses incident to the offering and sale of the
Common Stock to the public other than selling commissions and fees.
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<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby have been passed upon for the Company by Paul, Hastings, Janofsky &
Walker, New York, New York.
EXPERTS
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 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, 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, 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.
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, 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.
36
