SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934 (Amendment No. )
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for use by the Commission only (as permitted by Rule
14a-6(e)(2))
[ X ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
XPEDITE SYSTEMS, INC.
................................................................................
(Name of Registrant as Specified in its Charter)
................................................................................
(Name of Person(s) Filing Proxy Statement if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[ X ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
...............................................................
2) Aggregate number of securities to which transaction applies:
...............................................................
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was
determined):
...............................................................
4) Proposed maximum aggregate value of transaction:
...............................................................
5) Total fee paid:
...............................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount previously paid:
...............................................................
2) Form, Schedule or Registration Statement No.:
...............................................................
3) Filing Party:
...............................................................
4) Date Filed:
...............................................................
<PAGE>
XPEDITE SYSTEMS, INC.
---------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
MAY 15, 1997
---------------------
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of
XPEDITE SYSTEMS, INC., a Delaware corporation (the "Company"), will be held at
the Sheraton Eatontown Hotel and Conference Center, Route 35 & Industrial Way
East, Eatontown, New Jersey 07724, on Thursday, May 15, 1997, at 10:30 a.m.,
Eastern Standard Time, for the following purposes:
1. To elect two Class 1 Directors;
2. To ratify and approve the Company's independent public
accountants for fiscal 1997; and
3. To transact such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof.
The Board of Directors has fixed the close of business on April 4,
1997 as the record date for the determination of the holders of Common Stock
entitled to notice of and to vote at the Annual Meeting.
A list of stockholders entitled to vote at the Annual Meeting will be
open for examination by any stockholder for any purpose germane to the meeting
during ordinary business hours for a period of ten days prior to the Annual
Meeting at the offices of the Company, 446 Highway 35, Eatontown, New Jersey
07724, and will also be available for examination at the Annual Meeting until
its adjournment.
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING PROXY STATEMENT. WE
INVITE ALL STOCKHOLDERS TO ATTEND THE ANNUAL MEETING. TO ENSURE THAT YOUR SHARES
WILL BE VOTED AT THE ANNUAL MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED
PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE ANNUAL
MEETING, YOU MAY VOTE YOUR SHARES IN PERSON EVEN IF YOU HAVE PREVIOUSLY
SUBMITTED A PROXY.
By Order of the Board of Directors
Roy B. Andersen, Jr.
President and Chief Executive Officer
Eatontown, New Jersey
April 14, 1997
- --------------------------------------------------------------------------------
IMPORTANT
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU EXPECT TO ATTEND THE
MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND PROMPTLY RETURN
IT IN THE ENVELOPE PROVIDED TO THE COMPANY'S TRANSFER AGENT AT FIRST UNION
NATIONAL BANK OF NORTH CAROLINA, ATTENTION: PROXY TABULATION DEPARTMENT, TO BE
RECEIVED NO LATER THAN MAY 14, 1997. IN ORDER TO AVOID THE ADDITIONAL EXPENSE TO
THE COMPANY OF FURTHER SOLICITATION, WE ASK YOUR COOPERATION IN MAILING IN YOUR
PROXY PROMPTLY.
- --------------------------------------------------------------------------------
<PAGE>
PROXY STATEMENT
XPEDITE SYSTEMS, INC.
446 HIGHWAY 35
EATONTOWN, NEW JERSEY 07724
-----------------------
ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON
MAY 15, 1997
-----------------------
SOLICITATION AND REVOCATION OF PROXIES
The enclosed proxy is solicited by and on behalf of the Board of
Directors of XPEDITE SYSTEMS, INC., a Delaware corporation (the "Company"), for
use at the Company's 1997 Annual Meeting of Stockholders (the "Annual Meeting")
to be held on Thursday, May 15, 1997 at 10:30 a.m., Eastern Standard Time, at
the Sheraton Eatontown Hotel and Conference Center, Route 35 & Industrial Way,
Eatontown, New Jersey, and at any and all adjournments thereof, for the purposes
set forth in the accompanying Notice of Annual Meeting of Stockholders.
In addition to solicitation by mail, officers, directors and regular
employees of the Company, who will receive no additional compensation for their
services, may solicit proxies by mail, telegraph or personal calls. All costs of
solicitation will be borne by the Company. The Company has requested brokers and
nominees who hold stock in their name to furnish this proxy material to their
customers and the Company will reimburse such brokers and nominees for their
related out-of-pocket expenses. This Proxy Statement of the Company is being
mailed on or about April 14, 1997 to each stockholder of record as of the close
of business on April 4, 1997.
VOTING AT THE MEETING
The Company had 8,956,611 shares of Common Stock, par value $.01 per
share (the "Common Stock"), outstanding as of April 4, 1997. Holders of record
of shares of Common Stock at the close of business on April 4, 1997 will be
entitled to notice of and to vote at the Annual Meeting and will be entitled to
one vote for each such share so held of record.
Any stockholder has the power to revoke his or her proxy at any time
before it is voted. A proxy may be revoked by delivering written notice of
revocation to the Company at its principal office, 446 Highway 35, Eatontown,
New Jersey 07724, Attention: Corporate Secretary, by a subsequent proxy executed
by the person executing the prior proxy and presented at the meeting, or by
attendance at the Annual Meeting and voting in person by the person executing
the proxy. If not revoked, the proxy will be voted at the Annual Meeting in
accordance with the instructions indicated on the proxy card by the stockholder
or, if no instructions are indicated, will be voted FOR the slate of directors
nominated herein and FOR the ratification and approval of Ernst & Young LLP as
the Company's independent public accountants, and as to any other matter that
may properly be brought before the Annual Meeting, in accordance with the
judgment of the proxy holder. Abstentions and broker non-votes are each included
in the determination of the number of shares present and voting for the purpose
of determining whether a quorum is present, and each is tabulated separately. In
determining whether a proposal has been approved, abstentions are counted as
votes against a proposal and broker non-votes are not counted as votes for or
against a proposal or as votes present and voting on a proposal.
<PAGE>
NOMINATION AND ELECTION OF CLASS 1 DIRECTORS
(PROPOSAL 1)
The persons named in the enclosed proxy will vote to elect the two
nominees named below under "Nominees for Class 1 Director" unless instructed
otherwise in the proxy. The persons receiving the greatest number of votes, up
to the number of directors to be elected, shall be the persons elected as the
Class 1 Directors. Shares represented by proxies which are marked "withhold
authority" will have the same effect as a vote against the nominees. The Class 1
Directors are to hold office until the 2000 Annual Meeting of Stockholders and
until their respective successors are duly qualified and elected.
The names and certain information concerning the persons nominated to
be elected as Class 1 Directors by the Board of Directors at the Annual Meeting
are set forth below. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE FOR THE ELECTION OF THE NOMINEES NAMED BELOW UNDER "NOMINEES FOR CLASS 1
DIRECTOR". It is intended that shares represented by the proxies will be voted
FOR the election to the Board of Directors of the persons named below unless
authority to vote for the nominees has been withheld in the proxy. Although the
persons nominated have consented to serve as directors if elected, and the Board
of Directors has no reason to believe that the nominees will be unable to serve
as directors, if either nominee withdraws or otherwise becomes unavailable to
serve, the persons named as proxies will vote for any substitute nominee
designated by the Board of Directors. The following information regarding the
Company's directors and executive officers, including nominees, is relevant to
your consideration of the slate proposed by your Board of Directors:
DIRECTORS AND EXECUTIVE OFFICERS
The current Directors and executive officers of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
--------- ------ ---------------------------
<S> <C> <C>
Roy B. Andersen, Jr. 48 President, Chief Executive Officer and Director
Robert S. Vaters 36 Executive Vice President, Finance, Chief Financial
Officer and Secretary
Max A. Slifer 49 Executive Vice President, North American Operations
George Abi Zeid 44 Executive Vice President, International Operations
Dennis Schmaltz 49 Vice President, Operations and Engineering
John C. Baker(1) 47 Director
Philip A. Campbell(1) 60 Director
Robert Chefitz(2) 37 Director
David Epstein(2) 64 Director
</TABLE>
- ----------
(1) Member of Compensation Committee
(2) Member of Audit Committee
The Board of Directors is divided into three classes, with each class
holding office for staggered three-year terms. The terms of Class 1 Director
Robert Chefitz and Philip A. Campbell expire in 1997, the term of Class 2
Director Roy B. Andersen, Jr. expires in 1998 and the terms of Class 3 Directors
John C. Baker and David Epstein expire in 1999. All executive officers of the
Company are chosen by the Board of Directors and serve at the Board's
discretion. There are no family relationships among the Company's officers and
Directors.
2
<PAGE>
ATTENDANCE AT MEETINGS AND BOARD COMMITTEES
During the fiscal year ended December 31, 1996, the Board of Directors
held a total of eight meetings. Each member of the Board of Directors attended
more than 75% of the meetings of the Board and of the committees of which he was
a member.
The standing committees of the Board of Directors are the Compensation
Committee and the Audit Committee. The Board of Directors has no nominating
committee or committee performing a similar function.
The Compensation Committee, which met on one occasion in fiscal 1996,
is responsible for determining the compensation of executive officers and the
Company's non-executive officer employee compensation structure. The
Compensation Committee currently consists of John C. Baker and Philip A.
Campbell.
The Audit Committee, which met on one occasion in fiscal 1996, is
responsible for (i) reviewing the Company's financial results and the scope and
results of audits; (ii) evaluating the Company's system of internal controls and
meeting with independent auditors and appropriate Company financial personnel
concerning the Company's system of internal controls; (iii) recommending to the
Board of Directors the appointment of the independent auditors; and (iv)
evaluating the Company's financial reporting activities and the accounting
standards and principles followed. The Audit Committee currently consists of
Robert Chefitz and David Epstein.
NOMINEES FOR CLASS 1 DIRECTOR
The following persons' names will be placed in nomination for election
to the Board of Directors. The shares represented by the proxy cards returned
will be voted FOR the election of these nominees unless you specify otherwise.
PHILIP A. CAMPBELL has served as a director of the Company since April
1996. Mr. Campbell has served since April 1995 as Chairman of Tele-Resources
International, Inc., a telecommunications consulting and investment firm. Mr.
Campbell was engaged in private consulting from May 1994 to April 1995. From
July 1991 to May 1994, Mr. Campbell served as Chairman of CDC Communications,
Inc., a telecommunications consulting firm. From January 1988 to January 1991,
Mr. Campbell served as a Director, Vice Chairman and Chief Financial Officer of
Bell Atlantic Corporation. From February 1959 to January 1988, Mr. Campbell
served in a variety to positions with Bell Atlantic Corporation (including
service as a Director of Bell Atlantic Corporation and as President of Bell
Atlantic Network Services Inc. from July 1983 to January 1988), New Jersey Bell
Telephone Company, Indiana Bell Telephone Company, Illinois Bell Telephone
Company and AT&T.
ROBERT CHEFITZ has served as a director of the Company since June 1992.
Mr. Chefitz joined Patricof & Co. Ventures, Inc., a multinational venture
capital company, in 1987. He has been a Vice President of Patricof & Co.
Ventures, Inc. since 1991. Previously, Mr. Chefitz was a Senior Associate with
Golder, Thoma & Cressey, a leading venture capital fund firm. Mr. Chefitz is a
director of Protection One Services, as well as several private companies.
OTHER DIRECTORS AND EXECUTIVE OFFICERS
ROY B. ANDERSEN, JR. is the Company's Chief Executive Officer and has
been President and a Director of the Company since its formation in July 1988.
From February 1987 until July 1988, Mr. Andersen served as Executive Vice
President and Chief Operating Officer of Electronic Courier Systems, Inc. From
1980 to 1987, Mr. Andersen was employed by Western Union, where he helped
develop its EasyLink electronic mail service. At Western Union, Mr. Andersen
3
<PAGE>
served as Vice President of Telex and EasyLink marketing, from 1986 to 1987. Mr.
Andersen also served as the Vice Chairman of the Electronic Mail Association of
America, a professional electronic mail association, from 1985 to 1987.
ROBERT S. VATERS has served as Executive Vice President, Finance, Chief
Financial Officer and Secretary since June 1996. From April 1993 until June
1996, Mr. Vaters was employed by Young & Rubicam, Inc. where he served as a
Senior Vice President and Treasurer. From 1989 to 1993, Mr. Vaters served as
Vice President and Treasurer of Sequa Capital Corporation. Prior to 1989, Mr.
Vaters spent seven years as a commercial banker. Mr. Vaters is a director of
Rockford Industries, Inc.
DENNIS SCHMALTZ has served as Vice President, Operations and
Engineering, since the inception of the Company. Prior to joining the Company he
was employed by Telentry Systems, Inc. in 1985 and as director of development of
Electronic Courier Systems, Inc. from March 1986 to July 1988. Prior to joining
Telentry Systems, Inc., Mr. Schmaltz was employed by Onetix, Inc., which was
involved in the development of the original technology utilized by the Company
to convert word processing documents to fax documents.
MAX A. SLIFER has served as Executive Vice President of North American
Operations of the Company since June 1994. From 1989 to 1994, Mr. Slifer was the
Company's Vice President of Sales and Marketing. Prior to joining the Company,
he served in various sales management positions with Western Union. From 1987 to
1988, he served as Western Union's Vice President of sales and distribution and
prior to that was Western Union's national Vice President of cellular telephone
sales and regional Vice President of sales. He joined Western Union in 1974.
GEORGE ABI ZEID has served as the Company's Executive Vice President of
International Operations since November 1995. Mr. Abi Zeid founded Swift Global
Communications Inc. ("Swift") in 1980, and was its President and Chief Executive
Officer from its formation until its acquisition by the Company in November
1995. Mr. Abi Zeid served as the President and Chief Operating Officer of each
of ViTel International Holding Company, Inc. ("ViTel"), from January 1995, and
Comwave Communications AG ("Comwave"), from November 1994, until they were
acquired by the Company in November 1995.
JOHN C. BAKER has served as a director of the Company since June 1992.
In September 1995, Mr. Baker founded Baker Capital Corp., a private equity
investment management firm, and serves as its President. From 1981 to 1995, Mr.
Baker was employed by Patricof & Co. Ventures, Inc., a multinational venture
capital company, most recently as Senior Vice President. Mr. Baker is a director
of American Mobile Satellite Corporation, Intermedia Communications, Inc.,
Resource Bancshares Mortgage Group, Inc., FORE Systems, Inc. and of several
private companies, including AirNet Communications, Inc.
DAVID EPSTEIN has served as a director of the Company since June 1992.
Mr. Epstein has specialized in the commercial real estate industry since 1963.
Mr. Epstein is currently President and the controlling shareholder of Clarion
Capital Corp., a corporation engaged in the acquisition and syndication of
commercial real estate properties. Mr. Epstein is also a principal shareholder
of First Registry, Inc., a corporation engaged in the acquisition and
syndication of commercial real estate properties, as well as a general partner
in numerous limited partnerships. Mr. Epstein has acted as an advisor to
nationwide retail chains with respect to commercial real estate. Mr. Epstein
owns several shopping centers in Connecticut, New York and Michigan, in addition
to industrial properties.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 4, 1997, by all
persons known by the Company to own beneficially more than five percent (5%) of
4
<PAGE>
the Company's Common Stock, each director and officer of the Company, and all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-----------------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ----------------------------- ------------- -----------
<S> <C> <C> <C>
Robert Chefitz
Patricof & Co. Ventures, Inc.
445 Park Avenue
New York, NY 10022...................................................... 1,774,171(1)(3) 19.8%
APA Excelsior III, L.P.
Patricof & Co. Ventures, Inc.
445 Park Avenue
New York, NY 10022...................................................... 1,121,882(2) 12.5%
Finance Management Ltd.
2100-1066 West Hastings Street
Vancouver, BC V6E 3X1
Canada................................................................... 598,379 6.7%
David Epstein
830 Post Road East
Westport, CT 06880....................................................... 545,895(3) 6.1%
Roy B. Andersen, Jr...................................................... 304,131(4) 3.4%
George Abi Zeid.......................................................... 223,150 2.5%
Max A. Slifer............................................................ 169,652(5) 1.9%
Dennis Schmaltz.......................................................... 168,752(6) 1.9%
John C. Baker............................................................ 25,000(3) *
Philip A. Campbell....................................................... 17,666(7) *
Robert S. Vaters......................................................... 20,000(8) *
All officers and directors as a group (9 persons)........................ 3,248,417(9) 35.0%
</TABLE>
- ----------
* Less than one percent (1%).
(1) Includes shares owned by the Capital Funds, as follows: 1,121,882 shares
owned by APA Excelsior III, L.P.; 427,634 shares owned by Coutts & Co.
(Jersey), Ltd., Custodian for APA Excelsior III/Offshore, L.P.; 142,417
shares owned by APA/Fostin Pennsylvania Venture Capital Fund, L.P.; and
57,238 shares owned by CIN Venture Nominees, Ltd. Mr. Chefitz disclaims
beneficial ownership of such shares. Mr. Chefitz, a director of the Company,
is a general partner of, or an officer of the general partner of, each of
the Capital Funds.
(2) Does not include any shares owned by the other Capital Funds. APA Excelsior
III, L.P. is an affiliate of Patricof & Co. Ventures, Inc.
(3) Includes 25,000 shares of Common Stock issuable upon exercise of stock
warrants that are exercisable on or prior to June 4, 1997.
5
<PAGE>
(4) Includes 105,881 shares of Common Stock issuable upon exercise of stock
options that are exercisable on or prior to June 4, 1997.
(5) Includes 61,352 shares of Common Stock issuable upon exercise of stock
options that are exercisable on or prior to June 4, 1997.
(6) Includes 55,082 shares of Common Stock issuable upon exercise of stock
options that are exercisable on or prior to June 4, 1997.
(7) Includes 16,666 shares of Common Stock issuable upon exercise of stock
options that are exercisable on or prior to June 4, 1997.
(8) Includes 20,000 shares of Common Stock issuable upon exercise of stock
options that are exercisable on or prior to June 4, 1997.
(9) Includes 1,749,171 shares of Common Stock owned by the Capital Funds, as to
which Mr. Chefitz disclaims beneficial ownership. Also includes 333,981
shares of Common Stock issuable upon the exerciseof stock options and
warrants that are exercisable on or prior to June 4, 1997.
6
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table
provides certain summary information concerning compensation paid or accrued by
the Company to or on behalf of the Company's Chief Executive Officer, the four
most highly compensated executive officers of the Company and a former executive
officer of the Company who received an annual salary and bonus in excess of
$100,000 (the "Named Executive Officers") for the year ended December 31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------- -------------
SECURITIES
YEAR SALARY BONUS OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION ($) ($) COMPENSATION ($) OPTIONS (#)
- --------------------------- ------ ----------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Roy B. Andersen, Jr., President and
Chief Executive Officer ................ 1996 $ 273,659 $ 128,590 $ 65,626(4) 40,000
1995 204,908 134,531 348 80,000
1994 189,857 142,500 85,368(1) 37,500
George Abi Zeid, Executive Vice
President, International Operations .... 1996 $ 289,613 $ 60,000 $ 2,468 0
1995 (2)
Max A. Slifer, Executive Vice President -
North American Operations............... 1996 $ 204,220 $ 85,190 $ 33,485(4) 20,000
1995 164,289 83,225 4,548 14,000
1994 144,782 79,800 4,548 30,000
Dennis Schmaltz, Vice President -
Operations and Engineering ............. 1996 $ 174,335 $ 63,310 $ 33,579(4) 20,000
1995 140,234 73,780 1,188 13,000
1994 129,824 71,200 768 30,000
Robert S. Vaters, Executive Vice
President, Finance, and Chief Financial
Officer................................. 1996 $ 85,481(3) $ 63,310 $ 950 80,000
Stuart S.Levy (5)......................... 1996 $ 174,147 $ 0 $ 21,310(4) 27,500
1995 130,494 69,037 576 13,000
1994 120,789 66,800 576 37,500
</TABLE>
- ----------
(1) Includes relocation expenses in the amount of $84,600.
(2) Mr. Abi Zeid joined the Company in November 1995. His total compensation for
the period of November 20, 1995 through December 31, 1995, did not exceed
$100,000 and was therefore not included in the above table for such period.
(3) Mr. Vaters joined the Company in June 1996, and the salary information
reflects only the period from that date through December 31, 1996.
(4) Includes the taxable value of options vested under the Officers' Contingent
Stock Option Plan, as follows: Mr. Andersen - $63,172; Mr. Slifer - $31,
577; Mr. Schmaltz - $31, 577; Mr. Levy - $19,731.
(5) Mr. Levy was the Company's Vice President, Finance and Chief Financial
Officer until July 1996, and served in a general finance capacity with the
Company until March 31, 1997.
7
<PAGE>
The Named Executive Officers' salaries were determined in accordance
with such individuals' employment agreements. Bonus and option compensation were
determined by the Company's Board of Directors. Mr. Andersen did not participate
in the determination of his bonus or option compensation.
STOCK OPTIONS. The following table contains information concerning the
stock options granted during 1996 to the Named Executive Officers.
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION
OPTIONS EMPLOYEES OR BASE FOR OPTION TERM(2)
GRANTED IN PRICE EXPIRATION -----------------------------
NAME (#) FISCAL YEAR ($/SH)(1) DATE 5%($) 10%($)
- -------------- ----------- ----------- --------- ---------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Roy B. Andersen, Jr..... 40,000(3) 8.0% $ 0.00 4/22/06 $ 1,384,560 $ 2,204,681
George Abi Zeid......... 0 0.0% 0 -- 0 0
Max A. Slifer........... 20,000(3) 4.0% $ 0.00 4/22/06 $ 692,280 $ 1,102,341
Dennis Schmaltz......... 20,000(3) 4.0% $ 0.00 4/22/06 $ 692,280 $ 1,102,341
Robert S. Vaters........ 80,000(4) 16.0% $ 17.50 8/28/06 $ 488,668 $ 778,123
Stuart S. Levy.......... 15,000(5) 3.0% $ 16.25 4/08/06 $ 122,167 $ 194,531
12,500(3) 2.5% $ 0.00 4/22/06 $ 432,675 $ 688,963
</TABLE>
- ----------
(1) Incentive Stock Options were granted at market value at the date of
grant for a term of ten years, subject to vesting and to earlier
termination in certain instances. Officers' Contingent Stock Options
were granted with no cost to exercise, and vest to the officer in equal
48 monthly increments.
(2) Calculation of potential realizable value is based on the closing price
of the Common Stock at December 31, 1996 ($21.25) minus the exercise
price per share, times the number of options held by the named
executive officer, increased at the indicated rate and compounded
annually through the stated expiration date. These gains are based on
arbitrary compounded rates of growth of stock prices mandated by the
Securities and Exchange Commission of 5% and 10% per year from the date
the option was granted over the full option term. These rates do not
represent the Company's estimate or projection of future prices of the
Common Stock. There is no assurance that the value that may be realized
by any Named Executive Officer upon exercise of his options will be at
or near the value estimated in the foregoing table.
(3) Stock options were granted under the first tranche of the Company's
Officers' Contingent Stock Option Plan.
(4) Stock options were granted under the Company's 1996 Incentive Stock
Option Plan.
(5) Stock options were granted under the Company's 1993 Incentive Stock
Option Plan.
8
<PAGE>
OPTIONS EXERCISED AND HOLDINGS. The following table sets forth
information concerning the exercise of options during the last fiscal year and
unexercised options held as of December 31, 1996 by the Named Executive
Officers.
AGGREGATED OPTIONS EXERCISED IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE FISCAL YEAR-END (#) FISCAL YEAR-END ($)(2)
ACQUIRED ON REALIZED ------------------------- -----------------------------
NAME EXERCISE(#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------- ----------- ------------ ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Roy B. Andersen, Jr........... 0 0 180,216 109,284 $2,849,816 $1,522,311
George Abi Zeid............... 0 0 0 0 0 0
Max A. Slifer................. 50,100 $ 1,039,575 44,433 42,267 480,527 704,499
Dennis Schmaltz............... 65,355 $ 1,356,116 38,258 41,767 359,145 700,874
Robert S. Vaters.............. 0 0 10,000 70,000 37,500 262,500
Stuart S. Levy................ 10,260 $ 213,025 49,242 38,498 433,393 437,833
</TABLE>
- ----------
(1) Calculation of value realized is based on the closing price of the
Common Stock at December 31, 1996 ($21.25) minus the exercise price per
share, times the number of shares acquired upon the exercise of stock
options by the Named Executive Officer.
(2) Calculation of the value of unexercised in-the-money options at
December 31, 1996 is based on the closing price of the Common Stock at
December 31, 1996 ($21.25) minus the exercise price per share of the
options granted, times the number of options held by the Named
Executive Officer.
9
<PAGE>
EMPLOYMENT AGREEMENTS
As discussed more particularly below, the Company has entered into
employment agreements with each of the Named Executive Officers. Such employment
agreements prohibit the Named Executive Officers from competing with the Company
for a period of one year after termination of employment. Each of such
agreements provides that in the event the executive is unable, as a result of
mental or physical incapacity, to perform his duties on behalf of the Company,
his participation in the Company's benefit plans will continue for six months
after such incapacity occurs. Each of such agreements also provides that upon
the termination of such agreement by the Company under certain circumstances, or
upon the termination of such agreement by the executive under certain
circumstances (including upon a change in control of the Company), the executive
will continue to receive the benefits provided for under his agreement as well
as payments of salary and bonus, for a specified period following termination of
employment. Such agreements also provide for a monthly car allowance. The
agreements of Messrs. Andersen and Schmaltz also provide that, upon an event of
termination of employment, such executives' non-vested options may become
immediately exercisable.
Under the terms of Mr. Andersen's agreement, he is entitled to receive
an annual base salary in an amount equal to $130,000, or such greater amount as
may be fixed by the Board of Directors. As of December 31, 1996, Mr. Andersen
received a base salary of $275,000. The agreement also provides that Mr.
Andersen may receive a bonus at the discretion of the Board of Directors. Mr.
Andersen's employment agreement, entered into as of October 1, 1988, presently
expires on September 30, 1997, and has an automatic renewal provision for two
years. Mr. Andersen has been granted stock options under the Company's 1992
Incentive Stock Option Plan (the "1992 Plan") to purchase up to 235,000 shares
of the Company's Common Stock at an exercise price of $0.50 per share. In
addition, Mr. Andersen was granted stock options in 1994 under the Company's
1993 Incentive Stock Option Plan (the "1993 Plan") to purchase up to 37,500
shares of the Company's Common Stock at an exercise price of $15.00 per share.
Mr. Andersen was also granted Performance Options in 1996 under the Company's
Officers' Contingent Stock Option Plan to purchase up to 40,000 shares of the
Company's Common Stock at an exercise price of $0 per share. As of the date
hereof, Mr. Andersen has exercised options to purchase 209,250 shares of such
Common Stock.
Under the terms of Mr. Vaters' agreement, he is entitled to receive an
annual base salary in an amount equal to $175,000, or such greater amount as may
be fixed by the Board of Directors. As of December 31, 1996, Mr. Vaters received
a base salary of $175,000. The agreement also provides that Mr. Vaters may
receive a bonus at the discretion of the Board of Directors. Mr. Vaters'
employment agreement, entered into as of June 27, 1996, presently expires on
June 26, 1997, and has an automatic renewal provision of one year. Mr. Vaters'
employment agreement prohibits him from competing with the Company for a period
of one year after termination of employment. Such agreement also provides that
upon the termination of such agreement by the Company under certain
circumstances, or upon the termination of such agreement by Mr. Vaters under
certain circumstances (including upon a change in control of the Company), Mr.
Vaters will continue to receive salary and benefits as provided in his agreement
for a specified period following termination of employment. Mr. Vaters has been
granted stock options under the 1996 Incentive Stock Option Plan to purchase
80,000 shares of Common Stock at an exercise price of $17.50 per share. As of
the date hereof, Mr. Vaters has not exercised any options to purchase shares of
such Common Stock.
Under the terms of Mr. Slifer's agreement, he is entitled to receive an
annual base salary in an amount equal to $93,000, or such greater amount as may
be fixed by the Board of Directors. As of December 31, 1996, Mr. Slifer received
a base salary of $205,000. The agreement also provides that Mr. Slifer may
receive a bonus at the discretion of the Board of Directors. Mr. Slifer's
employment agreement, entered into as of May 1, 1990, presently expires on
December 31, 1997, and has an automatic renewal provision of one year. Mr.
Slifer has been granted stock options under the 1992 Plan to purchase 140,000
shares of Common Stock at an exercise price of $0.50 per share. In addition, Mr.
Slifer was granted stock options in 1994 under the Company's 1993 Plan to
purchase up to 30,000 shares of the Company's Common Stock at an exercise price
10
<PAGE>
of $15.00 per share. Mr. Slifer was also granted Performance Options in 1996
under the Company's Officers' Contingent Stock Option Plan to purchase up to
20,000 shares of the Company's Common Stock at an exercise price of $0 per
share. As of the date hereof, Mr. Slifer has exercised options to purchase
117,300 shares of such Common Stock.
Under the terms of Mr. Schmaltz's agreement, he is entitled to receive
an annual base salary in an amount equal to $86,000, or such greater amount as
may be fixed by the Board of Directors. As of December 31, 1996, Mr. Schmaltz
received a base salary of $175,000. The agreement also provides that Mr.
Schmaltz may receive a bonus at the discretion of the Board of Directors. Mr.
Schmaltz's employment agreement, entered into as of October 1, 1988, presently
expires on September 30, 1997, and has an automatic renewal provision of one
year. Mr. Schmaltz has been granted stock options under the 1992 Plan to
purchase 140,000 shares of Common Stock at an exercise price of $0.50 per share.
In addition, Mr. Schmaltz was granted stock options in 1994 under the Company's
1993 Plan to purchase up to 30,000 shares of the Company's Common Stock at an
exercise price of $15.00 per share. Mr. Schmaltz was also granted Performance
Options in 1996 under the Company's Officers' Contingent Stock Option Plan to
purchase up to 20,000 shares of the Company's Common Stock at an exercise price
of $0 per share. As of the date hereof, Mr. Schmaltz has exercised options to
purchase 122,975 shares of such Common Stock.
Under the terms of Mr. Abi Zeid's agreement, he is entitled to receive
an annual base salary in an amount equal to $250,000. In addition, Mr. Abi Zeid
is entitled to receive an annual bonus of up to eighty percent (80%) of his
annual salary, as may be determined by the Board of Directors of the Company or
a committee designated by the Board. Mr. Abi Zeid's employment agreement was
entered into as of November 20, 1995, and expires on November 19, 1998. Mr. Abi
Zeid's employment agreement prohibits him from competing with the Company for a
period of two years after termination of employment. Such agreement also
provides that upon the termination of such agreement by the Company under
certain circumstances, or upon the termination of such agreement by Mr. Abi Zeid
under certain circumstances (including upon a change in control of the Company),
Mr. Abi Zeid will continue to receive the benefits provided for under his
agreement as well as payments of salary and bonus, for a specified period
following termination of employment.
In April 1996, the Company issued warrants to each of Messrs. Baker,
Campbell, Chefitz and Epstein to purchase 25,000 shares of Common Stock, for an
aggregate of up to 100,000 shares of Common Stock, at an exercise price of
$17.50 per share (fair value at date of grant). In addition, in April 1996 the
Company reserved 200,000 shares of Common Stock for issuance pursuant to options
which may be granted to certain executive officers of the Company, pursuant to
an Officers' Contingent Stock Option Plan (the "Plan"), which were to be awarded
upon the achievement by the Company of certain performance targets based upon
the price per share of the Common Stock (the "Performance Options").
Specifically, under the first tranche of the Plan such executives were to be
awarded up to an aggregate of 100,000 Performance Options, if the average price
per share of the Company's Common Stock during a 90-day period commencing prior
to December 31, 1996 was greater than $22.50. Because such performance was
achieved during 1996, 92,500 of such Performance Options were granted on July
21, 1996. Performance Options vest over a four-year period from the date of
award. There is no exercise price for the Performance Options, and therefore
such options will result in a compensation charge over the vesting period. Under
the second tranche of the Plan, such executives were to have been awarded an
aggregate of 100,000 Performance Options, or the remainder of the total number
of Performance Options, if the average price per share of the Company's Common
Stock during a 90-day period commencing prior to December 31, 1997 was greater
than $30.00. In 1997, the Board adopted resolutions to amend the Plan to delete
the second tranche of the Performance Options and provide instead that, in the
event of a merger or consolidation of the Company, the sale of all or
substantially all of the assets of the Company, the acquisition by any party of
51% or more of the Common Stock or a liquidation or dissolution of the Company
following which the Company's business is conducted by another entity, the
holders of incentive stock options (including senior, mid-level and low-level
management and staff of the Company) are entitled to a bonus in the form of a
reduction of the total exercise price of the options held by each optionholder
11
<PAGE>
as of the date of the such sale to purchase Common Stock under the Company's
Incentive Stock Option Plans. Such amendment to the Plan and the details thereof
have not been finalized, and are subject to change.
NON-EMPLOYEE DIRECTOR COMPENSATION
Each member of the Board of Directors who is not an employee of the
Company receives compensation of $1,500 per meeting for serving on the Board of
Directors. The Company also reimburses Directors for any expenses incurred in
attending meetings of the Board of Directors and the committees thereof. In
addition, in April 1996 pursuant to the Non-Employee Directors' Warrant Plan,
each non-employee director of the Company was granted a warrant to purchase
25,000 shares of Common Stock at a purchase price of $17.50 per share, which was
the fair market value of the Common Stock on the date of grant. The shareholders
of the Company ratified and approved the Non-Employee Directors' Warrant Plan at
the Annual Meeting of Stockholders on October 1, 1996.
In 1997, the Board of Directors appointed a special committee,
consisting of Philip A. Campbell and Robert Chefitz, to evaluate the strategic
alternatives that may be available to the Company to enhance stockholder value.
Messrs. Campbell and Chefitz each received a $25,000 retainer and are each
entitled to receive $1,500 per eight hours worked for serving on the special
committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For the fiscal year ended December 31, 1996, the Compensation Committee
of the Company's Board of Directors consisted of John C. Baker and Philip A.
Campbell. Neither Mr. Baker nor Mr. Campbell is, nor has either of them ever
been, an executive officer of the Company.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee")
consists of John C. Baker and Philip A. Campbell. The Committee is charged with
reviewing and approving compensation of the Company's executives. The Company's
executive compensation program consists of three main components: base salary,
potential for an annual bonus based on performance, and the opportunity to
receive stock options exercisable for the purchase of Common Stock of the
Company. The Committee is charged with the responsibility of granting stock
options to employees.
The Company has previously entered into employment agreements with each
of the Named Executive Officers covered in the Summary Compensation Table above.
Each of such persons receives a base salary with increases at the discretion of
the Committee and is eligible to receive a bonus in accordance with such
contracts at the discretion of the Committee. In general, bonuses are calculated
using as criteria the Company's performance and the performance of the executive
during the relevant year.
The Company's executives are eligible to receive stock options in
accordance with the Company's stock option plans. The objectives of such
participation are to align the long-term interests of executives and
stockholders by encouraging executives to develop and maintain a significant,
long-term stock ownership position in the Company. The Committee has the
responsibility of granting stock options to executives and other employees. In
granting stock options, the Committee takes into account Company performance and
individual performance. Company performance is measured by increases in earnings
and, to a lesser extent, increases in revenues, and individual performance is
measured by the individuals' contributions to such enhanced performance.
12
<PAGE>
The Company's President and Chief Executive Officer, Roy B. Andersen,
Jr., received compensation in 1996 determined in accordance with the provisions
of his employment agreement with the Company. Mr. Andersen's base salary for
1996 was increased from the 1995 level based on the Committee's judgment as to
the appropriate amount to be paid to Mr. Andersen taking into consideration,
among other things, the achievement by the Company of increased operating
income, EBITDA and earnings for 1995. Mr. Andersen's bonus for 1996 was
determined by the Committee based on the Committee's judgment as to the
appropriate bonus to be paid to Mr. Andersen taking into consideration, among
other things, the overall increase in the Company's financial strength in 1996,
including, but not limited to, the fact that earnings per share increased to
$1.20 in 1996 from $0.92 in 1995 (after adjustment for the write-off of
in-process research and development) and EBITDA increased to $29.1 million in
1996 from $12.0 million in 1995. Mr. Andersen was also awarded stock options,
under the Officers' Contingent Stock Option Plan, to purchase 40,000 shares of
the Company's Common Stock.
John C. Baker
Philip A. Campbell
<PAGE>
PERFORMANCE GRAPH
The following graph compares the Company's cumulative total return to
stockholders since the closing of its initial public offering on February 14,
1994, with that of the Standard & Poor's 500 Stock Index (the "S&P 500 Index")
and a peer group index (the "Peer Group Index") consisting of those public
companies traded on an exchange and listed under the same standard industry
classification code as the Company (SIC No. 7379: Computer Related Services, Not
Elsewhere Classified). The total return calculations set forth below assume $100
invested on February 14, 1994, in each of the Company, the S&P 500 Index and the
Peer Group Index, with reinvestment of dividends into additional shares of the
same class of securities at the frequency with which dividends were paid on such
securities through December 31, 1996. Historical results are not necessarily
indicative of future performance.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, THE S&P 500 INDEX
AND THE PEER GROUP INDEX
[The following points represent a chart in the printed version]
XPEDITE SYSTEMS, INC. PEER GROUP S&P 500 INDEX
2/14/94 100.00 100.00 100.00
12/31/94 135.00 120.58 97.99
12/31/95 103.33 142.18 134.82
12/31/96 141.67 258.40 165.77
14
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), requires the Company's executive officers,
directors and 10% stockholders to file reports regarding initial ownership and
changes in ownership with the Securities and Exchange Commission and the Nasdaq
Stock Market. Executive officers, directors and 10% stockholders are required by
Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file. The Company's information regarding
compliance with Section 16(a) is based solely on a review of the copies of such
reports furnished to the Company by the Company's executive officers, directors
and 10% stockholders. The Company is not aware of any noncompliance with the
requirements of Section 16(a) to file reports during 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
RATIFICATION AND APPROVAL OF
THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS
(PROPOSAL 2)
The Board of Directors has selected Ernst & Young LLP to audit
the financial statements of the Company for the year ended December 31, 1997.
Ernst & Young LLP has audited the Company's financial statements since 1990.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE
FOR THE PROPOSAL TO RATIFY AND APPROVE THE SELECTION OF ERNST & YOUNG LLP AS THE
COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS FOR FISCAL 1997.
It is expected that a representative of Ernst & Young LLP will
be present at the Annual Meeting to respond to any questions and to make a
statement on behalf of his or her firm, if such representative so desires.
TRANSACTION OF OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors
is not aware of any matters other than those set forth herein and in the Notice
of Annual Meeting of Stockholders that will come before the meeting. Should any
other matters arise requiring the vote of stockholders, it is intended that
proxies will be voted in respect thereto in accordance with the best judgment of
the person or persons voting the proxies.
15
<PAGE>
FUTURE STOCKHOLDER PROPOSALS
The Company must receive at its principal office before
December 15, 1997, any proposal which a stockholder wishes to submit to the 1998
Annual Meeting of Stockholders, if the proposal is to be considered by the Board
of Directors for inclusion in the proxy materials for that annual meeting.
--------------------------------------
Please return your proxy as soon as possible. Unless a quorum
consisting of a majority of the outstanding shares entitled to vote is
represented at the meeting, no business can be transacted. Therefore, please be
sure to date and sign your proxy exactly as your name appears on your stock
certificate and return it in the enclosed prepaid return envelope. Please act
promptly to ensure that you will be represented at this important meeting.
THE COMPANY WILL PROVIDE WITHOUT CHARGE, ON THE WRITTEN REQUEST OF ANY
BENEFICIAL OWNER OF SHARES ENTITLED TO VOTE AT THE ANNUAL MEETING OF
STOCKHOLDERS, A COPY WITHOUT EXHIBITS OF THE COMPANY'S ANNUAL REPORT ON
FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1996. REQUESTS SHOULD BE MAILED TO THE
SECRETARY, XPEDITE SYSTEMS, INC., 446 HIGHWAY 35, EATONTOWN, NEW JERSEY
07724. THE ANNUAL REPORT ON FORM 10-K IS NOT SOLICITING MATERIAL AND IS
NOT INCORPORATED IN THIS DOCUMENT BY REFERENCE.
By Order of the Board of Directors
Roy B. Andersen, Jr.
President and Chief Executive Officer
April 14, 1997
16
<PAGE>
APPENDIX A
----------
Proxy card states the following:
XPEDITE SYSTEMS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS
MAY 15, 1997
Roy B. Andersen, Jr. and Robert S. Vaters and each of them, with full
power of substitution, are hereby authorized to represent and to vote as
directed on this proxy the shares of Common Stock of Xpedite Systems, Inc. held
of record by the undersigned on April 4, 1997 at the Annual Meeting of
Stockholders to be held on May 15, 1997, and at any adjournments, as if the
undersigned were present and voting at the meeting.
The shares represented by this proxy will be voted as directed by the
stockholder. Where no direction is given when the duly executed proxy is
returned, such shares will be voted FOR each of the proposals set forth on this
proxy.
Whether or not you expect to attend the meeting, you are urged to
execute and return this proxy, which may be revoked at any time prior to its
use.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE. VOTES MUST BE INDICATED (X) IN BLACK OR BLUE INK.
1. ELECTION OF NOMINEES PHILIP A. CAMPBELL AND ROBERT CHEFITZ AS CLASS 1
DIRECTORS OF THE COMPANY
FOR all nominees |_|
WITHHOLD AUTHORITY to vote for all nominees |_|
(Instruction: To withhold authority to vote for either nominee, write
his name in the space provided.)
----------------------------
2. RATIFICATION AND APPROVAL OF ERNST & YOUNG LLP AS INDEPENDENT PUBLIC
ACCOUNTANTS FOR FISCAL 1997
FOR |_| AGAINST |_| ABSTAIN |_|
NOTE: Signatures should agree with the names stencilled
hereon. When signing as executor, administrator, trustee,
guardian or attorney, please give the title as such. For
joint accounts or co-fiduciaries, all joint owners or
co-managers should sign.
Dated: ---------------------------------------, 1997
- ----------------------------------------------------
- ----------------------------------------------------
- ----------------------------------------------------
17
<PAGE>
APPENDIX B
XPEDITE SYSTEMS, INC.
1996 ANNUAL REPORT
18
<PAGE>
XPEDITE SYSTEMS, INC.
1996
ANNUAL REPORT
<PAGE>
XPEDITE SYSTEMS, INC.
1996 ANNUAL REPORT
TABLE OF CONTENTS
Business Activities of the Company.......................................1
President's Letter.......................................................2
Market for the Company's Common Stock and Related Security
Holder Matters........................................................4
Selected Financial and Operating Data....................................5
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................6
Report of Independent Auditors..........................................13
Consolidated Financial Statements.......................................14
Notes to Consolidated Financial Statements..............................20
Shareholder Information.................................................36
<PAGE>
[GRAPHIC FLOW CHART SHOWING CUSTOMER ACCESS AND XPEDITE DOCUMENT DISTRIBUTION
SYSTEM WHICH APPEARS IN THE PRINTED VERSION]
<PAGE>
BUSINESS ACTIVITIES OF THE COMPANY
Xpedite Systems, Inc. ("Xpedite" or the "Company") provides a wide
range of computer and fax- based services focused primarily on high volume
electronic document distribution. Based in Eatontown, New Jersey, the Company is
the leading independent worldwide provider of enhanced fax services ("Enhanced
Fax Services"), and now also offers discounted international fax services
("Discounted International Fax Services") via a worldwide network with points of
presence in over 70 cities in over 35 countries and over 10,000 fax lines. The
Company also provides telex, internet, e-mail and mailgram services.
In 1988, the Company was formed and began marketing Enhanced Fax
Services. From its inception, the Company's focus was on the provision of
value-added fax services to the United States market. The Company's growth plan
was comprised of three elements: to (1) identify new applications for the
Company's fax services and offer messaging capabilities beyond fax (e.g., telex
and e-mail); (2) export the Company's service business internationally by
operating service bureaus overseas; and (3) as the Enhanced Fax Services
business grew and justified domestic and international networks, add new
services to the product mix and leverage the Company's sales and marketing
distribution network. The tactical execution of this strategy involved the
continuous expansion of the Company's sales organization, acquisitions where
feasible, continuous development of the enhanced messaging service platform and
the selection of the Company's second major product offering: international
point-to-point fax service.
By expanding its sales organization and developing new applications
for its services, the Company has become the largest United States provider of
Enhanced Fax Services and now offers these services throughout Europe, North
America and the Pacific Rim. In many cases, applications that are well proven in
the United States are only in the early stages of adoption overseas. In
addition, the Company's United States sales and marketing organization continues
to identify new applications and expand upon those already established. The
international network justified by establishing these services overseas is also
being utilized to support the Company's launch and development of its
international point-to-point fax services.
The Company's current strategy is to expand from being primarily a
provider of Enhanced Fax Services in North America to become a provider of both
Enhanced and Discounted International Fax Services on a worldwide basis. The key
elements of the Company's strategic plan are to (1) leverage its proven
experience in the Enhanced Fax Services market by continuing to develop new
applications for its Enhanced Fax Services and by establishing a leadership
position in new markets through "exporting" proven Enhanced Fax Services to
geographic areas in which the Company has not historically offered such
services; (2) capitalize on the multi-billion dollar market for Discounted
International Fax Services by aggressively marketing both its "store and
forward" and "real-time" services through its direct sales force, sales agents,
resellers and affiliates, and by installing the infrastructure required for the
delivery of such services on a worldwide basis; (3) continue to expand and
develop its "solution-oriented" direct sales force which the Company believes is
one of the key elements of its success; (4) expand the Xpedite network by adding
new nodes and leased telecommunications lines in order to continue to lower its
fax delivery costs; and (5) increase market share, expand geographic coverage,
leverage the Xpedite network, and achieve economies of scale and operating
efficiencies through strategic acquisitions, alliances and other business
relationships.
<PAGE>
LETTER TO STOCKHOLDERS
To Our Stockholders:
Xpedite Systems, Inc. experienced very strong growth in 1996, both as a result
of acquisitions made in 1995 and due to continued strong performance of our
domestic sales and marketing organization. At the same time, we installed our
platform for enhanced fax and messaging services in six Pacific Rim countries
and launched a new "real time" fax service in 12 countries. This major expansion
was accomplished while maintaining strong growth in earnings per share and cash
flow.
The launch of our "real time" fax service became practical because of the
development of our network systems and sales personnel distributed throughout
North America, Europe and the Pacific Rim. This new service competes in the
market for regular, international fax calls with a product offering addressing
all the major requirements of the international fax user. One of the key
features of a "real time" fax is the sender receiving an immediate confirmation
of delivery - a very important capability in the point to point fax market. The
service further leverages our international network by using the same
international leased lines and operating centers as our enhanced services,
enabling us to offer customers a significant discount relative to the price they
are paying carriers to send faxes internationally. The market for international
fax transmissions around the world is about an order of magnitude larger than
the market for enhanced fax services. Entering this market brings significant
new growth opportunities as we continue to expand our initial business. During
1996, we also achieved very strong growth in volumes, revenues and earnings in
our traditional enhanced fax business here in the United States. This business
is dominated by our fax broadcast and gateway messaging services. Unit volumes
were up approximately 50% and revenues over 35%. The continuing identification
of new applications for our services makes us confident that future growth
prospects remain bright. Significant growth in the volumes and revenues of our
European affiliates also confirms the growing market for our enhanced services
overseas.
During 1996, we also continued to enhance our service as well as grow our
network. A major new capability added was our "XWEB" service which permits
access to our systems via the Internet using standard browser software. In
addition, customers can use this tool to retrieve job status information from
our system regardless of how the job actually entered the system. We have also
expended significant effort integrating the systems of the companies acquired in
1995 and expanding our system capacity. By the end of March 1997, the system in
the United States was delivering over 1.5 million fax pages per day.
Besides expanding the system, we have continued to expand our sales force. At
the end of 1994, we had only 98 full time sales people, all located in the
United States and Canada. By the end of 1996, we had 236 full time sales people,
with 80 of them located outside of the United States and Canada. This increase
demonstrates our continuing investment in future growth and our delivery on an
earlier promise to our shareholders to focus on overseas markets as well as the
United States.
All of these efforts contributed to a strong performance on the financial side
as well. Revenues increased by 133% from $55,684,000 to $129,848,000. Earnings
per share increased from $0.92 in 1995 (exclusive of the non-recurring charge of
$7.59 per share) to $1.20 in 1996. Operating cash flow (earnings before
interest, income taxes, depreciation and amortization, or EBITDA) increased by
142% to $29,145,000 from $12,030,000 (again the latter figure excludes the
non-recurring charge for 1995).
We feel the company has strong potential growth prospects well into the future.
During 1995 and 1996, many members of the financial community expressed the
opinion that the Internet will eliminate the need for fax. We do not believe
this will happen for many of the same reasons that the "paperless office" touted
in the early 1980's never became a reality. As we emerge from 1996, more and
more data is emerging to support our hypothesis that both fax and the Internet
will grow. For example, at the FaxWorld conference in San Francisco in December
1996, industry analysts estimated that six million standalone fax machines were
shipped in the United States and Europe alone in 1996. Hardly the sign of an
2
<PAGE>
industry in decline. In addition, the many millions of personal computer modems
shipped each year now include the ability to send and receive fax. Perhaps one
of the most telling indicators is that many Internet service providers are now
adding a fax capability. We believe that our set of service offerings and our
dedicated, well trained sales organization place Xpedite in a strong position to
compete both domestically and internationally. I think 1996 provides ample
confirmation that our company has significant growth opportunities and the
ability to exploit them. We appreciate your continued support.
Roy B. Andersen, Jr.
President and Chief Executive Officer
April 14, 1997
3
<PAGE>
MARKET FOR THE COMPANY'S COMMON
STOCK AND RELATED STOCKHOLDER MATTERS
MARKET PRICES
The Company's Common Stock was included in the Nasdaq National Market, and
commenced trading, beginning on February 14, 1994, under the symbol "XPED". On
April 4, 1997, the last sale price reported on the Nasdaq National Market for
the Common Stock was $19.25 per share. The number of stockholders of record at
April 4, 1997 was 181, which number includes certain registered holders who hold
Common Stock for an undetermined number of beneficial owners.
High and low stock prices for the most recent eight quarters were:
Quarter High Low
- ---------------- --------- --------
December 31, 1996 $ 23-1/4 $ 16-1/4
September 30, 1996 27-3/4 17-1/4
June 30, 1996 28-1/4 16-1/4
March 31, 1996 18-1/4 14-1/4
December 31, 1995 $ 17-7/8 $ 12-1/2
September 30, 1995 18-3/4 13-1/2
June 30, 1995 23-1/2 13-1/4
March 31, 1995 20-3/4 16-1/4
The Company has never declared or paid cash dividends on its Common Stock. The
Company intends to retain earnings for use in the operation and expansion of its
business. The Company's term loan prohibits the payment of dividends.
The transfer agent and registrar for the Common Stock is First Union National
Bank of North Carolina.
4
<PAGE>
SELECTED FINANCIAL DATA.
The selected Statement of Operations Data and Balance Sheet Data set forth
below are derived from the audited Consolidated Financial Statements of the
Company and the related notes thereto. 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
and Notes to Consolidated Financial Statements included elsewhere in this Annual
Report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1992 1993(1) 1994 1995(2) 1996
--------- ----------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues:
<S> <C> <C> <C> <C> <C>
Service revenues ................... $ 9,400 $ 28,341 $ 39,523 $ 51,840 $ 122,426
System sales and other ............. 629 731 1,906 3,844 7,422
--------- --------- --------- --------- ---------
Total net revenues .............. 10,029 29,072 41,429 55,684 129,848
Costs and expenses:
Cost of sales ..................... 4,731 14,000 16,992 21,602 59,977
Selling and marketing ............. 3,284 7,680 11,180 15,059 28,579
General and administrative ........ 982 1,942 2,746 3,964 8,332
Research and development .......... 569 1,695 2,834 3,415 4,888
Depreciation and amortization ..... 428 975 1,432 2,723 7,619
Write off of in-process research .. 3,000
and development costs (3) ...... -- -- -- 53,000 --
--------- --------- --------- --------- ---------
Operating income (loss) ............... 35 2,780 6,245 (44,079) 20,453
Interest income (expense) ............. (523) (373) 433 233 (3,155)
Other income .......................... -- -- -- 23 254
Income tax expense .................... -- 712 1,950 2,741 7,119
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ (488) $ 1,695 $ 4,728 $ (46,564) $ 10,433
========= ========= ========= ========= =========
Net income (loss) per common share (5) -- -- $ 0.71 $ (6.67) $ 1.20
Pro forma net income (loss) per common
share (5) .......................... $ (0.17) $ 0.34 -- -- --
Weighted average shares outstanding ... 2,826 4,599 6,600 6,982 8,716
OTHER DATA:
Earnings before interest, taxes,
depreciation and amortization, and
non-recurring charge ("EBITDA")(4) . $ 467 $ 3,967 $ 7,919 $ 12,030 $ 29,145
BALANCE SHEET DATA:
Cash, cash equivalents and short term . $ 1,906 $ 472 $ 16,139 $ 9,076 $ 6,680
investments
Total assets .......................... 5,019 13,962 34,352 72,883 88,391
Long-term debt, excluding current
maturities ......................... 4,201 3,098 13 36,323 27,473
Preferred Stock ....................... 6,663 7,262 -- -- --
Stockholders' equity (deficit) ........ (7,502) (6,599) 27,085 (1,116) 25,137
</TABLE>
- ----------
(1)The Company acquired certain assets from TRT Communications, Inc. as of
February 1, 1993.
(2)On November 20, 1995, the Company acquired Swift, ViTel and Comwave. See Note
2 of Notes to Consolidated Financial Statements.
(3)In connection with the acquisitions of Swift, ViTel and Comwave, the Company
wrote off $53.0 million of in-process research and development costs.
(4)EBITDA consists of operating income plus depreciation and amortization. For
1995, EBITDA was computed excluding the non-recurring charge resulting from
the write-off of in-process research and development. 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.
(5)Net income per share in 1994, and pro-forma net income per share in 1993,
were calculated after giving effect to dividends payable on outstanding
Preferred Stock, in the amounts $74,476, and $149,337, respectively.
5
<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, 1994, 1995 and
1996. It should be read in conjunction with the Selected Financial and Operating
Data and the Company's Consolidated Financial Statements, the related notes
thereto, and the other financial information included elsewhere herein.
OVERVIEW
The Company derives the large majority of its revenues from charges for
providing fax communications 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 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, to a lesser extent, electronic mail and Internet delivery of
electronic mail.
In addition to 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 enhanced fax communications services providers. System sales
generally have been structured to generate royalty income from the purchasers of
systems, based on the revenues received by the purchaser from such systems.
On November 20, 1995, the Company purchased (the "SVC Acquisition") all of the
outstanding capital stock 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 SVC
Companies provide Enhanced Fax services, including international store and
forward fax, gateway messaging, telex, and electronic mail services via a
worldwide network of Nodes connected by telecommunications lines leased from
common carriers.
Subsequent to the SVC Acquisitions, the Company has made significant
development efforts to integrate the systems of the SVC Companies into the
networking plans and architecture the Company deploys. In addition, the Company
intends to integrate certain development efforts of the SVC Companies which
address feature sets complementary to the Company's system and are intended to
minimize the need to have several systems.
6
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operating
data as a percent of net revenues:
YEARS ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------- ------- ------
Net revenues:
Service revenues ....................... 94.3% 93.1% 95.4%
System sales and other ................. 5.7 6.9 4.6
----- ----- -----
Total net revenues ............. 100.0 100.0 100.0
Costs and expenses:
Cost of sales ...................... 46.2 38.8 41.0
Selling and marketing .............. 22.0 27.0 27.0
General and administrative ......... 6.4 7.1 6.6
Research and development ........... 3.8 6.2 6.8
Depreciation and amortization ...... 5.9 4.9 3.5
Write off of in-process research -- 95.2 --
and development costs............
Operating income (loss) ................ 15.7% (79.2)% 15.1%
===== ===== =====
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net revenues increased by 133% to $129.8 million in 1996, from $55.7
million in 1995. Net service revenues for 1996 were $122.4 million compared to
$51.8 million in 1995, an increase of 136%. Net service revenues increased by
$70.6 million; of this amount the SVC Companies contributed net revenues of
$58.3 million. The remaining increase resulted primarily from the efforts of the
Company's expanded direct sales force both in penetrating new markets and
exploring expanded applications in existing markets. The increase in net service
revenues was partially offset by a reduction in the average price per minute
charged by the Company for fax deliveries in response to competition.
System sales and other net revenues were $7.4 million in 1996, compared
to $3.8 million in 1995, an increase of $3.6 million. The increase was the
result of an increased volume of sales of system upgrades and expansion
equipment, and related royalty revenue.
The Company's gross margins were 53.8% in 1996, compared to 61.2% in
1995. Service margins declined primarily as a result of the SVC acquisitions,
which had historically lower gross margins due to operating predominantly in the
international market, as compared with the Company's traditional domestic
business. The Company has successfully negotiated lower rates with its primary
telecommunications service providers in the past, and continues to pursue
further negotiations to improve its service margins. The Company also continues
its program to expand its network and utilize least cost routing to reduce its
telecommunications costs, including direct interconnections with local exchange
carriers. The Company's expansion of its world wide network will further enhance
it least cost routing capabilities. The benefits realized from such negotiations
have enabled the Company to respond to competition by providing preferential
pricing, including volume discounts, to its high volume customers. The Company
expects that successful future negotiations with telecommunication service
providers will mitigate the impact on gross margins of declining prices. Margins
on system sales and other revenues decreased slightly to 62.0% in 1996, compared
to 62.1% in 1995, primarily as a result of product mix.
7
<PAGE>
Selling and marketing expenses increased by 89.8% to $28.6 million in
1996, from $15.1 million in 1995. Selling and marketing expenses as a percentage
of net revenues decreased to 22.0% in 1996 from 27.0% in 1995, primarily as a
result of the SVC Acquisitions. The SVC Companies, which operated predominantly
in the international market, have historically higher ratios of revenue to
selling expenses than those typically experienced by the Company's in its
traditional domestic market. The Company has continued to expand its sales and
marketing organization, increasing its sales force by 71 salespersons to a total
of 236 at December 31, 1996; 156 of such salespersons were operating in North
America and 80 internationally. The Company has also expanded its customer care,
sales support, marketing, and product management functions to a total of 120
employees at December 31, 1996, in support of the significant increase in
revenues.
General and administrative expenses increased by 110.1% to $8.3 million
in 1996, from $4.0 million in 1995, both as a result of the additional
administrative overhead costs related to the Company's domestic growth, as well
as the SVC Companies. General and administrative expenses as a percentage of net
revenues decreased to 6.4% in 1996 from 7.1% in 1995, as a result of
consolidation of administrative and financial functions.
Research and development expenses increased by 43.1% to $4.9 million in
1996, from $3.4 million in 1995. 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
3.8% in 1996 from 6.2% in 1995, primarily due to the increased revenue base
resulting from the SVC Acquisitions.
EBITDA increased by 142.3% to $29.1 million in 1996, from $12.0 million,
excluding the write off of in-process research and development costs, in 1995.
EBITDA as a percentage of net revenues increased slightly to 22.4% in 1996, from
21.6%, excluding the write off of in-process research and development costs, in
1995. 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.
Depreciation and amortization increased to $7.6 million in 1996, from
$2.7 million in 1995, as a result of the SVC Acquisitions in November 1995, and
as a result of additional capital equipment purchased during 1996 and 1995 to
support the growth in revenue.
The Company had operating income of $20.5 million in 1996, or 15.7% of
net revenues, as compared to an operating loss of $44.1 million in 1995.
Operating income in 1995 exclusive of the write-off of in-process research and
development was $8.9 million, or 16.0% of net revenue.
Interest expense, net of interest income, was $3.2 million in 1996,
compared to net interest income of $0.2 million in 1995, related to bank debt
obtained, and subordinated notes issued, to finance the SVC Acquisitions.
Income tax expense in 1996 was $7.1 million or 40.6% of income before
income taxes, compared to $2.7 million, or 6.3% of the loss before income taxes
in 1995. The effective rate in 1995, exclusive of the write off of the
in-process research and development costs in connection with the SVC
Acquisitions (a non-deductible item) was 30%. For information concerning the
provision for income taxes as well as information regarding differences between
effective tax rates and statutory rates, see Note 6 of the Notes to the
Consolidated Financial Statements.
As a result of the factors discussed above, the Company's net income for
1996 was $10.4 million, as compared with net loss of $46.6 million in 1995.
8
<PAGE>
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 exploring expanded
applications in existing markets. Fax broadcast pages distributed by the Company
increased by 40.3% to 150.8 million pages in 1995, from 107.5 million pages in
1994. The increase in net service revenues and pages was partially offset by a
reduction in the average price charged by the Company to deliver a fax broadcast
page.
System sales and other net revenues were $3.8 million in 1995, compared
to $1.9 million in 1994, an increase of $1.9 million. The increase was the
result of an increased volume of sales of system upgrades and expansion
equipment, and related royalty revenue.
The Company's gross margins were 61.2% in 1995, compared to 59.0% in
1994. Service margin rates increased to 61.1% in 1995 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% in the
average price charged to customers to deliver a fax broadcast page, in response
to competition. System sales and other revenues margin rates increased to 62.1%
in 1995 compared to 49.3% in 1994, primarily as a result of an increase in
royalty revenue of approximately $700,000.
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 has continued to
expand its sales and marketing organization, increasing its sales force by 67
salespersons to total 165 at December 31, 1995, including 47 employees added as
a result of the SVC Acquisitions. The Company also expanded its customer care,
sales support, marketing, and product management functions by 26 employees to a
total of 70 at December 31, 1995, in support of the significant increase in
revenues, with the SVC Companies accounting for 13 of these additions.
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 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 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 to and new services and features on the Company's
systems. Research and development expenses as a percentage of net revenues
decreased to 6.1% in 1995 from 6.8% in 1994.
EBITDA, excluding the write off of in-process research and development
costs in 1995, increased by 51.6% to $12.0 million in 1995 from $7.9 million in
1994. EBITDA, excluding the 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 revenue.
9
<PAGE>
In connection with the acquisitions of ViTel, Swift and Comwave in 1995,
the Company wrote off $53.0 million of in-process research and development costs
since the technological feasibility of these costs had not yet been established
and the technology had no alternative future use at the SVC acquisition date.
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.
Interest income, net of interest expense, was $0.2 million in 1995,
compared to net interest income of $0.4 million in 1994. Interest expense was
$0.5 million in 1995, related to bank debt and subordinated notes issued to
finance the acquisitions.
Income tax expense in 1995 was $2.7 million or 6% of loss before income
taxes compared to 29% in 1994. The effective rate in 1995 exclusive of the write
off of the in-process research and development costs in connection with the
acquisitions (a non-deductible item) was 30%. For information concerning the
provision for income taxes as well as information regarding differences between
effective tax rates and statutory rates, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company entered into a credit facility with a commercial bank (the
"Credit Facility") in November 20, 1995, consisting of a $40.0 million term loan
and a $5.0 million revolving loan. As of December 31, 1996, the Company had no
outstanding balance on its revolving loan. The term loan is payable in quarterly
installments of $1.25 million increasing periodically to $2.25 million with a
final payment in August 2001. During the twelve months ended December 31, 1996,
the Company made principal payments on the term loan amounting to $8.25 million,
which included prepayments of $3.25 million. In connection with the acquisition
of ViTel, subordinated notes in the aggregate principal amount of $5.1 million
were issued to the sellers of ViTel. On June 14, 1996, the Company prepaid the
notes with 351,000 shares of the Company's Common Stock. The Company has notes
payable to banks and to a former owner of ViTel totaling $34.9 million at
December 31, 1996 and, in connection with the acquisition of certain assets from
PosData in September 1996, the Company obtained a $2.2 million loan from the
Korean branch of a U.S. bank, which was collateralized by a cash deposit of the
same amount in the domestic branch.
In August 1996, the Company completed an offering of 720,000 shares of
Common Stock sold by the Company and certain shareholders of the Company, at a
price of $18.75 per share, less underwriting discounts and commissions. Of the
total shares sold, the Company issued 632,500 shares of Common Stock (including
over-allotment shares). After deducting underwriting fees, the Company received
net proceeds from the offering of $11,207,900.
At December 31, 1996, the Company had $6.7 million in cash and cash
equivalents, and working capital of $4.5 million. Operations generated $12.1
million in cash in 1996, compared to $6.3 million and $5.0 million in 1995 and
1994, respectively.
The Company performs ongoing credit evaluations of customers. Reserves
are maintained for potential credit losses and allowances issued to customers
for pricing discrepancies. Such losses and allowances have been within
management's expectations. Provisions for allowances and doubtful accounts as a
percentage of net service revenue were 2.8%, 2.9%, and 3.3% in 1996, 1995, and
1994, respectively.
Included in the net deferred tax assets recorded at December 31, 1996,
is a deferred tax asset of $1.6 million reflecting the benefit of $4.4 million
in loss carryforwards, which expire in varying amounts between
10
<PAGE>
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 used in investing activities was $18.0 million in 1996,
compared to $45.9 million and $11.7 million in 1995 and 1994, respectively.
During the years ended December 31, 1996, 1995, and 1994, the Company made
capital expenditures of $9.0 million, $3.6 million, and $4.3 million,
respectively. The Company's primary capital expenditures are investments in
computer systems and equipment, and telecommunications systems. The Company
estimates that capital expenditures will be approximately $8.5 million in 1997.
The Company made additional loans to Xpedite Systems, GmbH ("Xpedite Germany")
in 1996 of $0.8 million, for total loans to Xpedite Germany of $3.5 million at
December 31, 1996. The Company invested approximately $1.6 million for an
additional 16.1% equity interest in Xpedite Systems, S.A. ("Xpedite France"),
increasing the Company's total equity ownership in Xpedite France to 18.8%.
The Company has "put" and "call" arrangements relating to the
outstanding shares of each of Xpedite Systems, Ltd. ("Xpedite UK"), Xpedite
Germany and Xpedite Systems, S.A. ("Xpedite France" and collectively with
Xpedite UK and Xpedite Germany, "the European Affiliates"). The purchase price
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 put and call agreements.
Because (i) Xpedite UK is likely to produce operating results in excess
of the minimum earnings required in order to enable the exercise of the put and
call option in the Xpedite UK agreement, and (ii) Xpedite Germany has recently
produced operating results indicating that Xpedite Germany may attain the
minimum earnings required in order to enable the exercise of the put and call
option in the Xpedite Germany agreement, and if the financial performance of
Xpedite UK and Xpedite Germany continues, it is reasonably likely that the
Company could exercise or be subject to the exercise of these options in early
1998 with respect to Xpedite UK and Xpedite Germany.
Assuming that Xpedite Germany achieves the minimum amount of earnings of
$1.1 million (at current exchange rates) contemplated by the Xpedite Germany
agreement and utilizing the Company's stock price and earnings at and as of the
twelve months ended December 31, 1996, the purchase price payable in connection
with the exercise of 100% of the put option with respect to Xpedite Germany
would be approximately $8.3 million, after exercise of a "special option"
granted to the Company to purchase approximately 17.5% of the outstanding shares
of Xpedite Germany from a current shareholder at a cost of approximately
$33,000. The actual amount of the purchase price will more than likely differ
from this amount due to the variable factors used to determine the purchase
price.
Assuming that Xpedite UK continues its current earnings trend, and
utilizing the Company's stock price and earnings at and as of the twelve months
ended December 31, 1996, the purchase price payable in connection with the
exercise of 100% of the put option with respect to Xpedite UK would be
approximately $89.0 million. The actual amount of the purchase price will more
than likely differ from this amount due to the variable factors used to
determine the purchase price.
Xpedite France has not met the minimum amount of earnings necessary for
the put or call option to be exercisable, and therefore, due to the
uncertainties as to the ability of Xpedite France to achieve the required
financial results in the future, and the uncertainty of future events, the
Company does not consider the exercise of these options to be probable during
the next eighteen months. However, assuming that Xpedite France achieves the
minimum amount of earnings of $1.1 million (at current exchange rates)
contemplated by the Xpedite France agreement and utilizing the Company's stock
price and earnings at and as of the twelve months ended December 31, 1996, the
purchase price payable in connection with the exercise of 100% of the put option
would be approximately $11.3 million. The actual amount of the purchase price
will more than likely differ from this amount due to the variable factors used
to determine the purchase price.
11
<PAGE>
If exercised, the purchase price payable in connection with the "put"
and "call" options with respect to either Xpedite UK or Xpedite France is
payable 80% in the Company's Common Stock and 20% in cash or negotiable
securities. The purchase price payable in connection with the "put" and "call"
options with respect to Xpedite Germany is payable in any combination of cash,
negotiable securities or Common Stock of the Company. In addition to the
foregoing, the Company may purchase one or more of the European Affiliates
pursuant to negotiations with the stockholders thereof (a "Negotiated
Purchase"). The Company has had preliminary discussions with each of the
European Affiliates regarding a Negotiated Purchase. The Company cannot predict
the purchase price payable in connection with any such Negotiated Purchase or
whether any such Negotiated Purchase will occur.
In conjunction with its analysis of its strategic alternatives to
enhance stockholder value, the Company is considering effecting a
recapitalization which could entail a substantial increase in the Company's
leverage and the distribution to the Company's stockholders of a special
dividend. The Company believes that such a leveraged recapitalization would
provide meaningful liquidity to its stockholders and also would have a
significant impact on the Company's stock price. Accordingly, because one
element of the formula utilized to calculate the purchase price payable pursuant
to any "put" or "call" option is the Company's stock price, the Company believes
that such a leveraged recapitalization would result in a substantial reduction
in the price paid in connection with any exercise of a "put" or "call" option.
There can be no assurance that the Company will effect any such leveraged
recapitalization.
The Company believes that its sources of capital, including internally
generated funds, and cash available pursuant to its 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. Further, if the
Company exercises or is subject to the exercise of the options described above,
or purchases one or more of the European Affiliates pursuant to a Negotiated
Purchase, and if the Company elects to finance such exercise or purchase using
cash, then the Company may be required to obtain additional equity or debt
financing. The Company cannot predict whether or not the purchase of all or any
portion of one or more of the European Affiliates will have a dilutive effect on
the Company's earnings, as such effect will be dependent upon purchase price
paid, the manner in which the purchase is financed and other variable factors.
HEDGING TRANSACTIONS
The Company has purchased forward contracts for 2.3 million German marks
to hedge the loans to an affiliate and amounts due from its subsidiaries at
December 31, 1996, reducing its risk to fluctuation in foreign exchange rates.
Contracts for German marks have maturity dates ranging from 1997 through
1999. The fair value of such contracts at December 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 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.
SEASONALITY
Generally, the Company's results are not significantly affected by
seasonal factors.
12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Xpedite Systems, Inc.
We have audited the accompanying consolidated balance sheets of Xpedite Systems,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Xpedite Systems,
Inc. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
MetroPark, New Jersey
February 27, 1997
13
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 6,679,970 $ 9,076,250
Accounts receivable, net of reserve for allowances and doubtful
accounts of $1,851,000 and $993,000 for 1996 and 1995,
respectively .......................................................... 25,749,334 16,567,118
Deferred income taxes..................................................... 1,903,694 2,406,663
Other current assets...................................................... 1,489,318 2,324,129
------------- -------------
Total current assets...................................................... 35,822,316 30,374,160
Property, plant and equipment, net............................................ 20,500,426 16,235,393
Customer lists, net of accumulated amortization of $2,004,000
and $897,000 for 1996 and 1995, respectively................................ 8,232,144 6,935,206
Purchased software, net of accumulated amortization of $2,027,000 and
$886,000 for 1996 and 1995, respectively.................................... 3,156,044 3,591,852
Costs in excess of fair value of net assets acquired, net of accumulated
amortization of $1,180,000 and $78,000 for 1996 and 1995,
respectively.................................................................. 10,609,687 8,226,593
Investments in affiliates, at cost............................................ 2,168,248 510,390
Loans to affiliate............................................................ 3,452,580 2,525,102
Deferred income taxes......................................................... 1,879,917 1,815,237
Other assets.................................................................. 2,569,510 2,668,838
------------- -------------
Total.............................................................. $ 88,390,872 $ 72,882,771
============= =============
</TABLE>
See accompanying notes.
14
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable......................................................... $ 10,067,510 $ 10,712,562
Accrued expenses......................................................... 5,921,085 7,127,162
Income taxes payable..................................................... 7,131,347 3,254,114
Other current liabilities................................................ 223,818 588,115
Current portion of long-term debt......................................... 7,763,459 10,652,747
Current portion of capital lease obligations............................. 241,995 307,232
------------- -------------
Total current liabilities......................................... 31,349,214 32,641,932
Long-term debt........................................................... 27,146,147 35,763,421
Long-term portion of capital lease obligations........................... 326,686 559,257
Deferred income taxes.................................................... 3,692,134 4,786,300
Other liabilities........................................................ 739,492 247,809
Commitments and contingencies............................................ -- --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, authorized 1,000,000 shares;
none issued and outstanding in 1996 and 1995...................... -- --
Common Stock, $.01 par value, authorized 15,000,000;
issued and outstanding 8,903,240 and 7,773,399 shares,
for 1996 and 1995, respectively................................... 89,032 77,734
Additional paid-in capital........................................... 64,782,539 48,921,115
Accumulated deficit.................................................. (39,518,372) (49,898,797)
Less: Treasury stock; 72,000 shares at 1996
and 1995; at cost ................................................ (216,000) (216,000)
------------- -------------
Total stockholders' equity (deficit).......................... 25,137,199 (1,115,948)
------------- -------------
Total......................................................... $ 88,390,872 $ 72,882,771
============= =============
</TABLE>
See accompanying notes.
15
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
------------- ------------- --------
<S> <C> <C> <C>
Net revenues:
Service revenues................................. $122,425,726 $51,840,379 $39,523,569
System sales and other........................... 7,421,925 3,843,583 1,905,766
Total net revenues........................... 129,847,651 55,683,962 41,429,335
Cost of sales:
Operations, line charges and
support engineering.......................... 57,155,734 20,144,082 16,025,855
Cost of sales of systems......................... 2,821,095 1,458,238 965,746
Total cost of sales.......................... 59,976,829 21,602,320 16,991,601
Gross margin......................................... 69,870,822 34,081,642 24,437,734
Operating expenses:
Selling and marketing............................ 28,578,884 15,059,118 11,180,076
General and administrative....................... 8,332,255 3,964,401 2,746,325
Research and development......................... 4,887,563 3,414,577 2,834,681
Depreciation and amortization.................... 7,619,330 2,722,930 1,432,079
Write off of in-process research and
development costs............................ -- 53,000,000 --
Total operating expenses..................... 49,418,032 78,161,026 18,193,161
Operating income (loss).............................. 20,452,790 (44,079,384) 6,244,573
Interest income...................................... 507,362 769,341 516,948
Interest expense..................................... (3,662,118) (535,889) (83,563)
Other income......................................... 254,599 22,878 --
Income (loss) before income taxes.................... 17,552,633 (43,823,054) 6,677,958
Income tax expense................................... 7,119,171 2,740,890 1,950,400
Net income (loss).................................... $10,433,462 $(46,563,944) $ 4,727,558
=========== ============ ===========
Net income (loss) per Common Share................... $ 1.20 $ (6.67) $ 0.71
Weighted average shares outstanding.................. 8,716,300 6,982,200 6,600,000
============ ============ ===========
</TABLE>
See accompanying notes.
16
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
----------------- PAID-IN ACCUMULATED ----------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 4,160,690 $ 41,607 $ 1,608,382 $ (8,024,149) (75,000) $(225,000) $ (6,599,160)
Exercise of stock options and
warrants.................... 191,272 1,912 133,273 -- -- -- 135,185
8% Redeemable Preferred Stock
dividends................... -- -- (74,476) -- -- -- (74,476)
Accretion of 8% Redeemable
Preferred Stock............. -- -- (288,791) -- -- -- (288,791)
Conversion of 8% Redeemable
Preferred Stock............. 478,600 4,786 7,174,214 -- -- -- 7,179,000
Issuance of Common Stock....... 1,650,000 16,500 21,989,195 -- -- -- 22,005,695
Net income..................... -- -- -- 4,727,558 -- -- 4,727,558
BALANCE, DECEMBER 31, 1994 6,480,562 64,805 30,541,797 (3,296,591) (75,000) (225,000) 27,085,011
Exercise of stock options and
warrants.................... 44,072 441 94,549 -- -- -- 94,990
Issuance of Common Stock ...... 1,249,000 12,490 18,254,135 -- -- -- 18,266,625
Cumulative translation
adjustment.................. -- -- -- (33,445) -- -- (33,445)
Treasury stock reissued........ -- -- 30,750 -- 3,000 9,000 39,750
Treasury stock acquired........ -- -- -- -- (235) (4,935) (4,935)
Retirement of treasury stock... (235) (2) (116) (4,817) 235 4,935 --
Net loss....................... -- -- -- (46,563,944) -- -- (46,563,944)
BALANCE, DECEMBER 31, 1995 7,773,399 77,734 48,921,115 (49,898,797) (72,000) (216,000) (1,115,948)
Exercise of stock options...... 146,341 1,463 271,895 -- -- -- 273,358
Issuance of Common Stock....... 632,500 6,325 10,305,823 -- -- -- 10,312,148
Issuance of performance stock
options........................ -- -- 2,036,474 -- -- -- 2,036,474
Deferred compensation cost..... -- -- (1,942,405) -- -- -- (1,942,405)
Conversion of Notes into Common
Stock.......................... 351,000 3,510 5,189,637 -- -- -- 5,193,147
Cumulative translation adjustment -- -- -- (53,037) -- -- (53,037)
Net income..................... -- -- -- 10,433,462 -- -- 10,433,462
BALANCE, DECEMBER 31, 1996 8,903,240 $89,032 $64,782,539 $(39,518,372) (72,000) $(216,000) $25,137,199
========= ======= =========== ============ ======= ========= ===========
</TABLE>
See accompanying notes.
17
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) .................................... $ 10,433,462 $(46,563,944) $ 4,727,558
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization .................... 8,437,697 3,060,801 1,674,189
Write-off of in-process research and development . -- 53,000,000 --
Accretion on subordinated debt ...................... 175,925 -- --
Deferred income taxes ............................ (656,400) (2,012,700) 157,000
Change in operating assets and liabilities:
Accounts receivable .......................... (9,182,216) (839,721) (477,246)
Other current assets ......................... 934,139 355,833 (461,046)
Other assets ................................. (131,453) -- 41,783
Accounts payable ............................. (645,052) (3,128,006) 1,147,423
Accrued expenses ............................. (1,206,077) 631,373 (1,926,770)
Deferred revenue ............................. -- -- (13,000)
Other liabilities ............................ 127,386 176,021 --
Income taxes payable ......................... 3,855,874 1,665,745 121,306
Net cash provided by operating activities ............ 12,143,285 6,345,402 4,991,197
INVESTING ACTIVITIES
Acquisition of property, plant and equipment ......... (8,964,368) (3,650,251) (4,280,337)
Acquisition of businesses ............................ -- (46,199,458) --
Acquisition of intangibles ........................... (6,193,052) -- --
Purchase of computer software ........................ (272,417) (252,327) (365,028)
Purchase of held-to-maturity securities .............. -- (11,692,002) (5,818,012)
Sale of held-to-maturity securities .................. -- 17,510,014 --
Investments in affiliates ............................ (1,693,893) (4,599) (339,700)
Loans to affiliate ................................... (842,594) (1,622,513) (902,589)
Net cash used in investing activities ................ (17,966,324) (45,911,136) (11,705,666)
FINANCING ACTIVITIES
Payments of acquisition liability .................... -- -- (600,000)
Proceeds from notes payable .......................... 2,915,516 40,000,000 1,495,701
Payment of debt issuance costs ....................... -- (1,402,500) --
Repayments of other loans and notes payable .......... (9,766,158) (292,892) (2,599,486)
Repayments of related party loans and notes payable .. -- -- (3,618,102)
Repayments of capital lease obligations .............. (289,924) (79,917) (39,502)
Net proceeds from issuance of Common Stock ........... 10,585,506 129,805 22,371,206
Redemption of Preferred Stock shares ................. -- -- (372,000)
Payment of Preferred Stock dividends ................. -- -- (74,476)
------------ ------------ ------------
Net cash provided by financing activities ............ 3,444,940 38,354,496 16,563,341
Effect of exchange rate changes on cash .............. (18,181) (33,445) --
(Decrease) increase in cash and cash equivalents ..... (2,396,280) (1,244,683) 9,848,872
Cash and cash equivalents at beginning of year ....... 9,076,250 10,320,933 472,061
Cash and cash equivalents at end of year ............. $ 6,679,970 $ 9,076,250 $ 10,320,933
============ ============ ============
</TABLE>
See accompanying notes.
18
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SUPPLEMENTAL STATEMENT OF CASH FLOWS DISCLOSURE
The Company entered into capital lease agreements for equipment in the
amount of $161,200 in 1995.
The Company made interest payments of $4,008,087, $31,011, and $104,973
during 1996, 1995 and 1994, respectively. The Company made income tax payments
of $5,149,000, $3,103,000 and $1,663,000 during 1996, 1995 and 1994,
respectively.
The Company declared Preferred Stock dividends of $74,476 in 1994. No
amounts were payable in additional shares of Preferred Stock and $74,476 was
payable in cash. The carrying value of the Preferred Stock was increased by
$288,791 during 1994, which represents the accretion of the difference between
the carrying value and the mandatory redemption value at the date of issue using
the interest method.
During 1995, the Company issued 3,000 treasury shares of Common Stock,
as part of a legal settlement with a former investor.
During 1994, 7,179 shares of Preferred Stock were converted into Common
Stock at a conversion price of $15.00 per share of Common Stock.
The purchase price for the businesses acquired in 1995 is allocated to
the assets acquired and liabilities assumed based on their estimated fair market
values as follows:
Fair Value of Assets Acquired:
Current assets excluding cash........... $11,466,998
Property, plant and equipment........... 7,956,162
In-process research and development..... 53,000,000
Customer lists.......................... 5,600,000
Purchased software...................... 2,700,000
Cost in excess of fair value of
net assets acquired ............... 8,304,201
Other assets............................ 1,561,401
Less Liabilities Assumed:
Current liabilities..................... (16,173,973)
Other liabilities....................... (5,040,388)
Common stock issued to sellers............. (18,266,625)
Subordinated debt issued to sellers........
(4,908,318)
Net Cash Paid.............................. $ 46,199,458
============
See accompanying notes.
19
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Xpedite Systems, Inc. (the "Company") was incorporated in Delaware in
July 1988. The Company develops and markets fax communication services
worldwide. The Company generates revenues from the following: (i) usage fees
charged for the Company's fax broadcast service ("Fax Broadcast"), gateway
messaging service ("Gateway Messaging") and international point-to-point fax
service ("Point-to-Point") to customers in diverse industries; (ii) sales of fax
message handling systems, including equipment; and (iii) royalties with respect
to the use of the Company's software. Revenues from the sales of systems are
recognized when risk of ownership and title passes to the customer. The Company
performs ongoing credit evaluations of customers and does not generally require
collateral. Reserves are maintained for potential credit losses and allowances,
and such losses and allowances have been within management's expectations.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements have been prepared on a
consolidated basis to include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany amounts have been eliminated in
consolidation.
FOREIGN CURRENCY TRANSLATION
The Company and each of its subsidiaries use their local currency as
their functional currency. Gains and losses from foreign currency transactions
are included in the determination of net income. Cumulative translation
adjustments, which result from the process of translating the consolidated
financial statements from the functional currencies of each subsidiary into the
reporting currency, are included as a component of stockholders' equity.
FOREIGN EXCHANGE FORWARD CONTRACTS
Foreign exchange forward contracts are legal agreements between two
parties to purchase and sell a foreign currency, for a price specified at the
contract date, with delivery and settlement in the future. The Company uses such
contracts to hedge risk of changes in foreign currency exchange rates associated
with certain obligations denominated in foreign currency. Such contracts are
designated as hedges; therefore, gains and losses are deferred until contracts
are settled and are included in interest income (expense) when the contracts are
settled.
The Company held contracts for German marks and Japanese yen of
approximately $3.4 million at December 31, 1995, and German marks of
approximately $2.3 million at December 31, 1996, associated with the loans to
affiliates (see Note 10) and intercompany balances with subsidiaries. Contracts
for German marks have maturity dates ranging from 1997 through 1999.
20
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN EXCHANGE FORWARD CONTRACTS (CONTINUED)
The fair value of such contracts at December 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 at the
prevailing exchange rates.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly-liquid investments with a maturity of
three months or less when purchased to be cash equivalents. The fair value of
these investments approximates cost.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation is
provided using the straight-line method over the following estimated useful
lives of the assets:
Years
Buildings 25
Equipment 5
Furniture and fixtures 7
Leasehold improvements are amortized using the straight-line method over
the lesser of the term of the lease or the estimated useful life of the related
improvement.
PURCHASED SOFTWARE AND CUSTOMER LISTS
Purchased software is being amortized on a straight line basis over the
estimated useful life of three to five years. Such amortization is greater than
the amount computed using the ratio that current gross revenues related to the
purchased software bear to the total of current and anticipated future gross
revenues related to the purchased software. Amortization of purchased software
amounted to $1,141,097, $337,871 and $242,110 during 1996, 1995 and 1994,
respectively.
21
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Customer lists are being amortized on a straight-line basis over the
estimated useful life of eight years. In the opinion of management, the customer
list assets will be recovered over a period of eight years based upon the
anticipated future revenue stream generated from the customer base existing on
the acquisition dates.
COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
Costs in excess of the fair value of the tangible net assets and
identifiable intangible assets of businesses acquired are amortized on a
straight-line basis over estimated useful life ranging from ten to twenty years.
The Company assesses the recoverability of costs in excess of the fair value of
the net assets acquired by determining whether the carrying value of these
assets can be recovered through undiscounted forecasted future cash flows over
their remaining lives.
IMPAIRMENT OF LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amounts. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 as of January 1, 1995, which did not have a
material effect on the Company's consolidated financial position or results of
operations.
INCOME TAXES
Deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
STOCK BASED COMPENSATION
As permitted by FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (FASB 123), the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations in accounting for its employee stock option
plans. Under APB 25, compensation expense is calculated at the time of option
grant based upon the difference between the exercise price of the option and the
fair market value of the Company's common stock at the date of grant, recognized
over the vesting period.
22
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
The Company expenses research and development costs related to existing
software and systems as incurred.
NET INCOME (LOSS) PER COMMON SHARE
The net income (loss) per Common Share for the three years ended
December 31, 1996, is computed using the weighted average number of common
shares and dilutive common share equivalents outstanding. The amount of
dilution, where appropriate, is computed by application of the treasury stock
method.
2. ACQUISITIONS
In September 1996, the Company purchased the assets of one of its Nodal
Partners in Korea, Posdata Company, Ltd. ("Posdata"), for a purchase price of
approximately $2.5 million. Further, in December 1996, a subsidiary of the
Company purchased from Pacific Star Services Pty Limited, a subsidiary of New
Zealand's national telephone company, Pacific Star Communications, Ltd.
("PacStar"), the assets of PacStar's "Fax 2000" enhanced facsimile services
business carried on in Australia. The purchase price for the Fax 2000 business
was approximately $1.3 million. The Company also purchased a customer list from
Xpedite Systems Limited (Note 10) for $1.3 million in March 1996.
The aforementioned acquisitions were accounted for as purchases.
Accordingly, the acquired assets (primarily customer lists) have been recorded
at their estimated fair market values at the date of acquisition.
On November 20, 1995, the Company purchased all of the outstanding
capital stock of Swift Global Communications, Inc. ("Swift"), ViTel
International Holding Company, Inc. ("ViTel") and Comwave Communications AG
("Comwave"). The purchase prices for the acquisitions, including transaction
costs, were approximately $23,195,000, $41,540,000 and $11,340,000,
respectively, which includes a total of $2,000,000 held in escrow for settlement
of certain representations and warrantees. A portion of the purchase prices were
paid through the issuance of 1,249,000 shares of the Company's Common Stock
valued at $18,267,000, and subordinated notes payable to the sellers of ViTel
with a carrying value of approximately $4,908,000 (see Note 5). The acquisitions
were accounted for as purchases. Accordingly, the acquired assets and
liabilities assumed through these purchases have been recorded at their
estimated fair market values at the date of acquisition. Identifiable intangible
assets acquired included $53,000,000 of in-process research and development
costs, customer lists of $5,600,000, and purchased software of $2,700,000. Since
the technological feasibility of the in-process research and development costs
had not yet been established and the technology had no alternative future use at
the acquisition date, the in-process research and development costs were
immediately written-off and included in the results of operations as a
non-recurring charge for the year ended December 31, 1995.
23
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
2. ACQUISITIONS (CONTINUED)
A stockholder of the Company received $348,000 of fees for services
provided in connection with the November 1995 transactions.
The results of operations of the 1995 purchased businesses are
included in the accompanying consolidated statements of operations from the date
of acquisition. Unaudited proforma results as if the acquisitions had occurred
on January 1, 1995 and 1994, which includes the $53,000,000 write off of
inprocess research and development costs, are as follows:
1995 1994
----------------- ----------------
Net revenues............................. $ 107,099,000 $ 88,164,000
Net loss................................. $ (50,797,000) $ (53,272,000)
Net loss per Common Share................ $ (6.28) $ (6.79)
The proforma results are not necessarily indicative of the results of
operations that would have occurred had the acquisitions taken place at the
beginning of the periods presented nor are they intended to be indicative of
results that may occur in the future.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
DECEMBER 31,
---------------------------------
1996 1995
-------------- ----------------
Land........................................... $ 75,753 $ 75,753
Building....................................... 103,977 103,977
Equipment...................................... 26,135,687 17,880,624
Furniture and fixtures......................... 3,537,759 1,681,859
Leasehold improvements......................... 1,559,932 884,940
----------- ------------
31,413,108 20,627,153
Less accumulated depreciation and amortization. 10,912,682 4,391,760
----------- ------------
$20,500,426 $16,235,393
=========== ===========
24
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
DECEMBER 31,
----------------------------------
1996 1995
--------------- --------------
Communication line charges................... $ 1,851,242 $ 1,434,367
Salaries and related benefits................ 3,281,096 3,213,181
Accrued interest ............................ 64,410 467,671
Other........................................ 724,337 2,011,943
------------ ------------
$ 5,921,085 $ 7,127,162
============ ============
5. LONG-TERM DEBT
Long-term debt consists of the following:
1996 1995
-------------- --------------
Term loan ............................... $ 31,750,000 $ 40,000,000
Subordinated notes to former owners ..... -- 4,957,450
Notes payable to banks .................. 2,951,057 989,930
Notes payable to former owners of ViTel.. 208,549 468,788
------------ ------------
34,909,606 46,416,168
Less current maturities ................. (7,763,459) (10,652,747)
------------ ------------
$ 27,146,147 $ 35,763,421
============ ============
The Company entered into a credit agreement with a commercial bank which
provided a $40,000,000 term loan to finance the acquisition of Swift, ViTel, and
Comwave in November 1995 (see Note 2). The term loan is payable in quarterly
installments of $1,250,000 increasing periodically to $2,250,000 with a final
payment in August 2001. During 1996, the Company made prepayments of principal
on the term loan amounting to $3,250,000. The credit agreement also provides for
a $5,000,000 revolving loan limited to 80% of eligible accounts receivable, as
defined. The credit agreement expires in August 2001. A commitment fee is
payable at a rate of 0.5% per annum of the unused portion of the revolving loan.
There were no amounts outstanding under the revolving loan at December 31, 1996
or 1995.
At the Company's option, the term loan and revolving loan bear interest
at either (a) the Bank's Base Rate, defined as the higher of (i) 0.5% ("Base
Margin") in excess of the Federal Funds rate or (ii) the bank's prime rate plus
1.5%; or (b) at a rate equal to the LIBOR rate plus 2.75%. The Base Margin was
adjusted in November 1996, and will be adjusted thereafter, until maturity based
on the Company's outstanding indebtedness and results of operations. The Company
has elected to be charged interest at LIBOR (5.7%) plus 2.75% at December 31,
1996. Substantially all of the assets of the Company collateralize the term and
revolving loans.
25
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
5. LONG-TERM DEBT (CONTINUED)
The credit agreement contains certain financial covenants which include
minimum levels of net worth, current ratio, earnings before interest, taxes,
depreciation and amortization ("EBITDA") and indebtedness as compared to EBITDA.
The principal amounts of the subordinated notes issued in connection
with the acquisition of ViTel were approximately $5,133,000. The notes did not
accrue interest until May 20, 1996. Accordingly, the notes were recorded at
their fair value of $4,908,000 at the date of acquisition. The notes were
prepaid in June 1996, with 351,000 shares of the Company's common stock.
The notes payable to banks consists of the following: (a) four notes in
the amount of $487,000 in the aggregate payable to Japanese banks bearing
interest at rates ranging from 2.4% to 3.8%. Principal and interest is payable
monthly or quarterly through September 1998, and (b) two notes in the amount of
$2.1 million in the aggregate payable to a Korean bank bearing interest at rates
ranging from 14% to 15%, which were repaid in January 1997, and (c) a
non-interest bearing note in the amount of approximately $300,000 payable to
PacStar in connection with the PacStar acquisition, which is payable in April
1997.
The note payable to a former owner of ViTel is non-interest bearing.
Principal is payable semi-monthly through April 2000.
Aggregate maturities of long-term debt for the next five years and
thereafter are as follows: 1997- $7,763,459; 1998- $6,146,147; 1999- $7,000,000;
2000- $8,000,000; 2001- $6,000,000; thereafter- $0.
The carrying amount of the Company's borrowings approximates the fair
value.
Costs incurred in connection with obtaining the term and revolving loans
totaled $1,419,000 and are included in Other Assets in the accompanying
consolidated balance sheet. These costs are amortized on a straight line basis
over the life of the credit agreement, which is six years. Accumulated
amortization totaled $260,000 and $26,000 at December 31, 1996 and 1995,
respectively.
26
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. INCOME TAXES
The components of income tax expense (benefit) for the years ended
December 31, 1996, 1995 and 1994 are:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ------------------ -----------------
<S> <C> <C> <C>
Federal:
Current.................................$ 6,616,571 $ 3,971,390 $ 1,493,000
Deferred................................ (582,493) (2,050,400) 122,000
State and local:
Current................................. 1,159,000 782,200 300,400
Deferred................................ (73,907) 37,700 35,000
----------------- ------------------ -----------------
$ 7,119,171 $ 2,740,890 $ 1,950,400
================= ================== =================
</TABLE>
Included in the December 31, 1996 federal current and deferred income
tax expense is approximately $1.4 million of foreign income tax expense.
The reconciliation of income taxes computed at the U.S. statutory
federal tax rate to income tax expense for the years ended December 31, 1996,
1995 and 1994 are:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ----------------------- ----------------------
Amount Percent Amount Percent Amount Percent
-------------- -------- ------------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Tax expense (benefit) at U.S. ...
statutory rate .................$ 6,143,421 35% $(14,900,000) (34%) $ 2,270,400 34%
Write-off of in process research
and development ................. 18,020,000 41
State income taxes, net of
federal income tax benefit ...... 753,023 4 541,000 1 221,000 3
Reduction in valuation
allowance ....................... (192,700) (1) (2,279,000) (5) (336,000) (5)
Other items ..................... 415,427 2 1,358,890 3 (205,000) (3)
----------- --- ------------ --- ----------- ---
Income tax expense .............$ 7,119,171 40% $ 2,740,890 6% $ 1,950,400 29%
=========== === ============ === =========== ===
</TABLE>
27
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
6. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 and 1995 are as follows:
1996 1995
------------ -----------
Reserve for allowances for doubtful
accounts......................................$ 944,000 $ 760,200
Accruals and reserves....................... 1,286,000 1,278,400
Future tax benefits of net operating
loss carryforwards.......................... 1,554,000 2,376,000
------------ -----------
Gross deferred tax asset.................... 3,784,000 4,414,600
------------ -----------
Deferred tax liabilities:
Fixed assets................................ 1,019,000 1,423,800
Intangibles................................. 2,614,000 3,320,000
Other liabilities........................... 59,000 42,500
------------ -----------
Gross deferred tax liability.................. 3,692,000 4,786,300
------------ -----------
Net deferred tax asset (liability)............ 92,000 (371,700)
Valuation allowance for deferred
tax assets.................................. - (192,700)
------------ -----------
Net deferred tax assets (liability)......... $ 92,000 $ (564,400)
============ ===========
The Company has recorded a deferred tax asset of $1,554,000 at December
31, 1996 reflecting the benefit of $4,441,000 in loss carryforwards, which
expire in varying amounts between 2004 and 2007. Realization is dependent on
generating sufficient taxable income prior to expiration of the loss
carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax asset will be realized.
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.
The Company has unremitted foreign earning of approximately $4.6 million
at December 31, 1996. It is the Company's intention to permanently reinvest
those earnings in its foreign operations. Accordingly, no federal deferred taxes
have been provided on those earnings. If such earnings were to be remitted, it
is possible there would be withholding taxes (although not readily determinable)
on such remittances.
28
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
7. COMMITMENTS AND CONTINGENCIES
The Company leases office space and office equipment under long-term
lease agreements. The obligations related to the leasing of equipment, are
classified as capital leases. Equipment under capital leases totaled $610,000
and $835,526, net of accumulated depreciation, at December 31, 1996 and 1995,
respectively.
The leases of real property are classified as operating leases and
expire through 2001. These leases are subject to increases in property taxes and
maintenance costs.
The following is a schedule of future minimum lease payments for capital
and operating leases as of December 31, 1996:
CAPITAL Operating
LEASES Leases
------------ ------------
1997 $ 283,636 $ 1,775,602
1998 211,285 1,339,672
1999 123,270 808,419
2000 9,776 562,154
2001 - 322,948
Thereafter - 15,700
------------ ------------
Total minimum lease payments 627,967 $ 4,824,495
============
Less amount representing interest 59,286
------------
Present value of minimum lease
payments 568,681
Less current portion 241,995
------------
$ 326,686
============
Rent expense totaled $3,257,102, $1,201,632 and $895,730 for 1996, 1995
and 1994, respectively.
The Company is involved in litigation, as a defendant, incidental to the
conduct of its business. It is the opinion of management, after consultation
with counsel, that the outcome of such litigation will not have a material
adverse effect on the accompanying financial statements.
8. BENEFIT PLANS AND EQUITY AWARDS
In January 1996, the Company established an incentive stock option plan
for its officers and employees (the "1996 Plan"). A total of 750,000 shares of
Common Stock were reserved for issuance pursuant to options granted under the
1996 Plan.
In November 1993, the Company established an incentive stock option plan
for its officers and employees (the "1993 Plan"). A total of 450,000 shares of
Common Stock were reserved for issuance pursuant to options granted under the
1993 Plan.
29
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
8. BENEFIT PLANS AND EQUITY AWARDS (CONTINUED)
The 1992 Incentive Stock Option Plan (the "1992 Plan") was approved by
the Board of Directors in 1992 and authorized the issuance of up to 715,696
options.
Additionally, in April 1996, the Company reserved 200,000 shares of
Common Stock for issuance pursuant to options which may be awarded to certain
executive officers of the Company under the Officers' Contingent Stock Option
Plan (the "Plan"), upon achievement of certain performance targets. In July
1996, the Company granted 92,500 of such options, at a purchase price of $0.00
per share. Compensation expense related to these grants, calculated at the fair
market value of the Company's Common Stock at the date of grant, to be
recognized over the vesting period of 48 months, will total $2,036,474. The
Company has recognized compensation expense in 1996 of $94,069. These options
expire on April 21, 2006. In January 1997, the Company's Board of Directors
resolved to replace the unawarded "second tranche" of 100,000 performance
options under the Plan with a combination of Incentive Stock Options and cash
bonus awards. Such amendment to the Plan and the details thereof have not been
finalized as yet.
During 1993, the Company issued 7,000 stock warrants to a consultant to
purchase shares of Common Stock at a purchase price of $0.50 per share. These
warrants expire December 31, 1999. Also during 1993, the Company issued 5,000
stock warrants to a stockholder of the Company to purchase shares of Common
Stock at a purchase price of $7.00 per share. These warrants expire November 16,
2003.
In February 1994, the Company granted warrants to purchase 10,000 shares
of Common Stock at a purchase price of $15.00 per share, to a new member of the
Board of Directors. During 1995, 3,334 of these warrants were exercised. The
remaining 6,666 warrants were canceled during 1995.
In April 1996, the Company issued warrants to members of the Board of
Directors to purchase 125,000 shares of Common Stock at a purchase price of
$17.50 per share. Subsequently, 8,334 warrants were forfeited due to the
resignation of a Board member. The remaining 116,666 warrants were all
outstanding at December 31, 1996.
FASB 123 requires pro forma information regarding net income and
earnings per share as if the Company has accounted for its employee stock
options and warrants ("equity awards") under the fair value method of FAS 123.
The fair value of these equity awards was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1995 and 1996, respectively: risk-free interest rates of between
6.07% and 6.17%; expected volatility of 0.55; expected option life of five
years, and an expected dividend yield of 0.0%.
For purposes of pro forma disclosures, the estimated fair value of the
equity awards is amortized to expense over the options vesting period. The
Company's pro forma information is as follows:
1996 1995
----------- -----------
Pro forma net income................................. $9,548,461 $(47,151,498)
Pro forma net income per share of common stock....... $ 1.11 $ (6.77)
30
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Stock option plans' activity is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ --------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
OPTIONS Price Options Price Options Price
----------- ----------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 803,963 $ 8.10 675,420 $ 6.23 604,450 $ 0.57
Canceled...................... 33,476 $ 16.04 (6,319) $ 13.46 (12,608) $ 3.96
Granted....................... 383,100 $ 12.62 170,600 $ 14.18 266,350 $ 15.10
Exercised..................... 146,340 $ 1.87 (35,738) $ 0.78 (182,772) $ 0.58
Outstanding at end of year .. 1,007,245 $ 10.46 803,963 $ 8.10 675,420 $ 6.23
=========== =========== ======== ========== ========== ==========
Exercisable at end of year 501,018 397,943 210,993
=========== ======== ==========
Weighted average fair value of
options granted during the year $ 13.35 $ 10.24 $ 11.48
=========== ========== ==========
</TABLE>
Stock options outstanding at December 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Weighted Average
Outstanding Options Remaining Weighted Average
RANGE OF EXERCISE PRICES at December 31, 1996 Contractual Life Exercise Price
- ------------------------- ---------------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
$ 0.00 92,500 8.3 $ 0.00
$ 0.50 237,628 5.7 $ 0.50
$ 3.00 - $ 3.42 3,270 6.6 $ 3.00
$ 7.00 1,189 6.8 $ 7.00
$ 13.75 - $17.50 672,658 8.4 $ 15.47
</TABLE>
The Company has a defined contribution 401(k) plan (the "Plan") which
allows all eligible employees to defer a portion of their income through
contributions to the Plan. Under the terms of the Plan, the Company contributes
an amount equal to 50% of the employee's elective deferrals up to 5% of the
total annual compensation paid to the Plan participant. The Company's expense
under the Plan for 1996, 1995 and 1994 was $629,054, $228,294 and $174,090,
respectively.
31
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
9. PUBLIC OFFERINGS
In February 1994, the Company issued 1,650,000 shares of Common Stock in
an initial public offering. The Company used a portion of the net proceeds of
the offering to repay all outstanding indebtedness (except indebtedness related
to capital lease obligations) and to redeem 227 shares of Preferred Stock. At
the closing of the offering, 7,179 shares of Preferred Stock were converted into
Common Stock at a conversion price equal to the initial public offering price
($15.00 per share of Common Stock).
In August 1996, the Company completed an offering of 720,000 shares of
its common stock, at a price of $18.75 per share, less underwriting discounts
and commissions. Of the total shares sold, the Company issued 550,000 shares and
certain stockholders of the Company ("Selling Stockholders") sold 170,000
shares. In September 1996, the underwriters exercised their over-allotment
option, resulting in the issuance by the Company of an additional 82,500 shares
of common stock, and the sale of an additional 25,500 shares by the Selling
Stockholders. Proceeds of this offering, net of underwriting fees, amounted to
$11.2 million, of which $3.4 million was used to repay debt, and the balance was
used for other expenses related to the offering, working capital, and general
and corporate purposes.
10. SYSTEM AND MARKETING AGREEMENTS
In connection with its international expansion, the Company has entered
into relationships in Europe with Xpedite Systems, GmbH ("XSG"), Xpedite
Systems, S.A. ("XSSA") and Xpedite Systems, Ltd. ("XSL," and collectively with
XSG and XSSA, the "European Affiliates"). At the time of formation of each of
these entities, the Company entered into a Systems and Marketing Agreement and a
Put and Call Option Agreement (collectively, the "Put/Call Agreements") with
each European Affiliate and, in the case of the Put/Call Agreements, each
affiliate's shareholders. These agreements provide for the sale by the Company
to each European Affiliate of the Company's document distribution system, along
with a license to the software used to operate such system, joint marketing
efforts, and "put" and "call" rights which, upon the achievement of specified
levels of financial performance by the relevant European Affiliate and
fulfillment of certain other conditions, would enable or require the Company to
purchase interests in the relevant European Affiliate. The Company currently
owns 18.8% of XSSA and 19% of XSG, and has an option to purchase an additional
17% of XSG held by a significant shareholder of XSG. The Company has no current
ownership stake in XSL. Loans to the aforementioned European Affiliates total
approximately $3.5 million and $2.5 million at December 31, 1996 and 1995,
respectively, and reflected in the Company's consolidated balance sheets.
Because (i) Xpedite UK is likely to produce operating results in excess
of the minimum earnings required in order to enable the exercise of the put and
call option in the Xpedite UK Put/Call Agreement, and (ii) Xpedite Germany has
recently produced operating results indicating Xpedite Germany may attain the
minimum earnings required in order to enable the exercise of the put and call
option in the Xpedite Germany Put/Call Agreement, and if the financial
performance of Xpedite UK and Xpedite Germany continues, it is reasonably likely
that the Company could exercise or be subject to the exercise of these options
in early 1998 with respect to Xpedite UK and Xpedite Germany.
32
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. SYSTEM AND MARKETING AGREEMENTS (CONTINUED)
Assuming that Xpedite Germany achieves the minimum amount of earnings of
$1.1 million (at current exchange rates) contemplated by the Xpedite Germany
Put/Call Agreement and utilizing the Company's stock price and earnings at and
as of the twelve months ended December 31, 1996, the purchase price payable in
connection with the exercise of 100% of the put option with respect to Xpedite
Germany would be approximately $8.3 million, after exercise of the "special
option" granted to the Company to purchase approximately 17.5% of the
outstanding share of Xpedite Germany from a current shareholder for $33,000. The
actual amount of the purchase price will more than likely differ from this
amount due to the variable factors used to determine the purchase price.
Assuming that Xpedite UK continues its current earnings trend, and
utilizing the Company's stock price and earnings at and as of the twelve months
ended December 31, 1996, the purchase price payable in connection with the
exercise of 100% of the put option with respect to Xpedite UK would be
approximately $89.0 million. The actual amount of the purchase price will more
than likely differ from this amount due to the variable factors used to
determine the purchase price.
Xpedite France has not met the minimum amount of earnings necessary for
the put or call option to be exercisable, and therefore, due to the
uncertainties as to the ability of Xpedite France to achieve the required
financial results in the future, and the uncertainty of future events, the
Company does not consider the exercise of these options to be probable during
the next eighteen months. However, assuming that Xpedite France achieves the
minimum amount of earnings of $1.1 million (at current exchange rates)
contemplated by the Xpedite France Put/Call Agreement and utilizing the
Company's stock price and earnings at and as of the twelve months ended December
31, 1996, the purchase price payable in connection with the exercise of 100% of
the put option would be approximately $11.3 million. The actual amount of the
purchase price will more than likely differ from this amount due to the variable
factors used to determine the purchase price.
If exercised, the purchase price payable in connection with the "put"
and "call" options is payable 20% in cash or negotiable securities and 80% in
common stock of the Company (in the case of Xpedite UK and Xpedite France), or a
combination of cash, common stock of the Company, or any negotiable security, at
the Company's option, in the case of Xpedite Germany. In addition to the
foregoing, the Company may purchase one or more of the European Affiliates
pursuant to negotiations with the stockholders thereof (a "Negotiated
Purchase"). The Company has had preliminary discussions with each of the
European Affiliates regarding a Negotiated Purchase. The Company cannot predict
the purchase price payable in connection with any such Negotiated Purchase or
whether any such Negotiated Purchase will occur.
In conjunction with its analysis of its strategic alternatives to
enhance stockholder value, the Company is considering effecting a
recapitalization which could entail a substantial increase in the Company's
leverage and the distribution to the Company's stockholders of a special
dividend. The Company believes that such a leveraged recapitalization would
provide meaningful liquidity to its stockholders and also would have a
significant impact on the Company's stock price. Accordingly, because one
element of the formula utilized to calculate the purchase price payable pursuant
to any "put" or "call" option is the Company's stock price, the Company believes
that such a leveraged
33
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
10. SYSTEM AND MARKETING AGREEMENTS (CONTINUED)
recapitalization would result in a substantial reduction in the price paid in
connection with any exercise of a "put" or "call" option. There can be no
assurance that the Company will effect any such leveraged recapitalization. See
Note 12 for additional discussion of the Company's analysis of its strategic
alternatives.
The Company believes that its sources of capital, including internally
generated funds, and cash available pursuant to its 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. Further, if the
Company exercises or is subject to the exercise of the options described above,
or purchases one or more of the European Affiliates pursuant to a Negotiated
Purchase, and if the Company elects to finance such exercise or purchase using
cash, then the Company may be required to obtain additional equity or debt
financing. The Company cannot predict whether or not the purchase of all or any
portion of one or more of the European Affiliates will have a dilutive effect on
the Company's earnings, as such effect will be dependent upon purchase price
paid, the manner in which the purchase is financed and other variable factors.
If and when the put and call options are exercised, the investments in
Xpedite Germany, Xpedite UK and Xpedite France will be accounted for either on
the equity method of accounting or will be consolidated, depending on the
Company's percentage of ownership.
11. SEGMENT DATA AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment. The following table
presents financial information based on the Company's geographic segments for
the years ended December 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE
1996 REVENUES INCOME ASSETS
- --------------------------------- -------------- ---------------- ------------------
<S> <C> <C> <C>
North America.................... $ 91,387,431 $ 17,242,174 $ 66,282,306
Far East......................... 25,505,348 435,326 14,401,049
Europe........................... 12,954,872 2,775,290 7,707,517
----------------- ---------------- ------------------
Total............................ $ 129,847,651 $ 20,452,790 $ 88,390,872
================= ================ ==================
</TABLE>
34
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
NET OPERATING IDENTIFIABLE
1995 REVENUES (LOSS) INCOME ASSETS
- --------------------------------- ---------------- ------------------ ------------------
<S> <C> <C> <C>
North America.................... $ 52,022,430 $ (44,020,454) $ 49,650,056
Far East......................... 2,198,893 (102,167) 11,994,268
Europe........................... 1,462,639 43,237 11,238,447
------------------- ------------------ ------------------
Total............................ $ 55,683,962 $ (44,079,384) $ 72,882,771
=================== ================== ==================
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
In February 1997, the Company retained Merrill, Lynch & Co. ("Merrill")
to assist the Board of Directors of the Company (the "Board") in evaluating the
strategic direction of the Company, including the evaluation of possible
business combinations, a leveraged recapitalization or other methods for
enhancing stockholder value. The Board also appointed a special committee,
consisting of Philip A. Campbell and Robert Chefitz, to evaluate the strategic
alternatives that may be available to the Company to enhance stockholder value.
The special committee, with the assistance of Merrill, is continuing to evaluate
the Company's strategic alternatives.
In a related development, on February 7, 1997, the Company announced
that it had received a proposal (the "Proposal") from a group which included UBS
Capital Partners (an affiliate of Union Bank of Switzerland), Fenway Partners
and members of the Company's senior management to acquire the Company in a
transaction in which the Company's shareholders would receive $22.50 per share
in cash for their shares of Common Stock. The Proposal was subject to the
satisfaction of a variety of material conditions, including the negotiation of
satisfactory arrangements with Xpedite's affiliates in the United Kingdom and
Germany.
The Proposal expired on March 7, 1997.
35
<PAGE>
SHAREHOLDER INFORMATION
LISTING OF COMMON STOCK
Xpedite's common stock is traded on the
NASDAQ National Market System (symbol:
"XPED"). At April 4, 1997 the Company had 181
common stockholders of record.
AVAILABILITY OF FORM 10-K ANNUAL REPORT
The Company's 1996 Form 10-K Annual Report is available without charge to
shareholders and may be obtained through contacting:
Robert S. Vaters
Chief Financial Officer
Xpedite Systems, Inc.
446 Highway 35
Eatontown, NJ 07724
(908) 389-3900
EXECUTIVE OFFICERS
Roy B. Andersen, Jr.
Chief Executive Officer and
President
Max A. Slifer
Executive Vice President,
North American Operations
George Abi Zeid
Executive Vice President,
International Operations
Robert S. Vaters
Executive Vice President, Finance,
Chief Financial Officer and
Secretary
Dennis Schmaltz
Vice President, Engineering and
Systems Operations
TRANSFER AGENT AND REGISTRAR FOR COMMON
STOCK
First Union National Bank of North Carolina
230 South Tryon Street, 10th Floor
Charlotte, North Carolina 28288-1154
(704) 383-0113
AUDITORS
Ernst & Young LLP
Metro Park
99 Wood Avenue South
Islein, NJ 08830
BOARD OF DIRECTORS
Roy B. Anderson, Jr.
Chief Executive Officer
President of the Company
John C. Baker**
President
Baker Capital Corp.
New York, New York
Philip A. Campbell**
Chairman
Tele-Resources International, Inc.
Naples, Florida
Robert Chefitz*
Vice President
Patricof & Co. Ventures, Inc.
New York, New York
David Epstein*
President, Clarion Capital Corp.
Principal, First Registry, Inc.
Westport, Connecticut
* Audit Committee Member
** Compensation Committee Member
36
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