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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___________ to ____________
Commission File No.: 0-23394
XPEDITE SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-2903158
- ------------------------------------ -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
446 Highway 35
Eatontown, New Jersey 07724
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(Address of Principal Executive (Zip Code)
Offices)
(908) 389-3900
-------------------------------
(Registrant's Telephone Number,
Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
The aggregate market value of the shares of Registrant's Common Stock held
by non-affiliates of Registrant as of March 19, 1997 was $127,670,987, based
upon the last reported bid price of $21.125 per share of Common Stock on March
19, 1997, as reported in the NASDAQ National Market.
The number of shares outstanding of Registrant's Common Stock as of March
19, 1997 was 8,958,033.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Registrant's definitive Proxy Statement to be filed
pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended,
in connection with the Annual Meeting of Stockholders of the Registrant are
incorporated by reference into Part III of this report.
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PART I
ITEM 1. BUSINESS.
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 Nodal Partners (as
defined below), 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 (as defined below)
by adding new Nodes (as defined below) 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.
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PRODUCTS AND SERVICES
The Company's services provide customers with a lower cost, more reliable
and more time efficient information delivery method than most other document
distribution alternatives. The Company's Enhanced Fax Services consist primarily
of its "fax broadcast" and "gateway messaging" services. The fax broadcast
services enable a customer to rapidly distribute the same document to multiple
recipients by sending a single transmission through the Company's system to a
list of fax addresses. The appeal of the fax broadcast service is the
significant cost and time savings as compared to internally printing and mailing
documents or managing the fax process. Examples of the types of communications
delivered via fax broadcast services include the dissemination of research
reports by financial services organizations and the transmission of campaign
information by political groups. In addition, a portion of the Company's fax
broadcast revenues are attributable to customers utilizing the Company's
proprietary "PC Xpedite" software, which enables a customer to input the
document to be broadcast and transmit it to the Company, and supports the
customer's capability to maintain lists of fax addresses. Gateway messaging, the
Company's other primary Enhanced Fax Service, enables a customer to send
information from the customer's computer through the Company's system to a
recipient's fax or telex machine, or to a recipient via the Internet or X.400
electronic mail networks or other electronic media. The Company's gateway
messaging service typically involves the processing of a large volume of
individual communications (i.e., a single document to a single recipient), each
of which is in the same format but contains different information. Examples of
the types of communications delivered via gateway messaging services include the
delivery of confirmations of reservations by hotels and airlines and the
delivery of invoices, purchase orders and shipping documents by manufacturing
and shipping companies.
In connection with its Enhanced Fax Services, the Company offers a number
of applications which increase the attractiveness of its products and
differentiates the Company in the marketplace. Examples of these applications
include: (1) "Fax on Demand" which allows callers to select information through
a touch tone phone which is sent directly to their fax machine; (2) "Enhanced
Fax Merging" which permits senders to personalize information which can be
inserted into original text at any point in a standard multi-address document;
and (3) "Toll-Free Fax Response" which allows senders to receive responses by
fax to a toll-free 800 number.
The Company's Discounted International Fax Service allows a customer to use
an automatic dialing device attached to the customer's fax machine (at a cost of
less than $100) to direct international faxes to the Company's document
distribution network for delivery to the recipient at a discount of
approximately 15% to 25% to standard international toll calls. The Company's
initial Discounted International Fax Service was a "store and forward" service,
in which the fax is transmitted by the sender to and stored in the Company's
system for subsequent delivery. In response to demand in the market for a
discounted international fax service which would enable the sender to obtain
immediate confirmation that the fax had been delivered, the Company launched its
"real-time" service in the second half of 1996. With real-time service, the
customer uses the same automatic dialing device as is used in the store and
forward service, but rather than store the fax for subsequent delivery, the
Company connects the sender's fax machine directly to the recipient's fax
machine, thereby delivering the fax immediately.
CUSTOMER BASE
The Company has achieved significant growth in its customer base.
Applications for the Company's fax services are utilized by a broad array of
customers including those in the publishing, public relations and investor
relations, commercial banking, manufacturing, travel, electronics, legal and
pharmaceutical industries. The Company's customer base is broadly diversified,
with no single domestic industry group accounting for greater than 15% of
revenues. The Company believes that this diversification provides it with
assurance that its revenues will not be greatly affected by the cyclicality of
any particular industry or a general business
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downturn in any particular sector. The Company's international network and
capabilities have also attracted customers from additional industries such as
the global freight industry.
THE XPEDITE NETWORK
In order to offer high quality Enhanced and Discounted International Fax
Services cost effectively, the Company has established a worldwide document
distribution network (the "Xpedite Network"). The Xpedite Network consists of
the Company's document distribution system, the systems of the SVC Companies
which are connected to the Company's system, the Company's "Nodal Partners" and
the leased telecommunications lines which connect all of these systems. "Nodal
Partners" are certain independent entities which have purchased an electronic
document distribution system from the Company and which sell Discounted
International Fax Services. A "Node" is an element of the Xpedite Network
located at a geographically distinct "point of presence" which allows access to
or egress from the Xpedite Network via a local telephone call. The Company's
Nodes allow it to deliver a larger number of faxes using inexpensive local calls
rather than higher priced long distance or international fax calls and provide
customers with significant discounts and cost savings on its international fax
traffic. The Company's leased telecommunications lines, which connect the Nodes,
provide secure, high quality connections and minimize third-party
telecommunications expenses. In addition, the Company's leased
telecommunications lines provide the reliable, continuous, high-speed throughput
required for delivery of real-time services. The Company currently leases
telecommunications lines from a variety of the major telecommunications carriers
both in the U.S. and overseas. These lines are leased on a one- to two-year
basis with an option to upgrade to higher speed lines and are generally billed
on a monthly basis.
The Company has experienced significant growth in fax traffic since 1993,
with average daily fax minutes increasing from approximately 0.3 million in 1993
to 1.4 million (1.0 million excluding acquisitions) in 1996; this increase
represents a compound annual growth rate of approximately 67%.
The Company charges for its fax services both on a per minute and a per
page basis, with the bulk of its sales occurring on a per minute basis. A
substantial portion of the Company's fax traffic terminates in cities where the
Company or its affiliates have Nodes. The Company estimates that approximately
40% of its domestic fax deliveries in 1996 were routed over the Xpedite Network.
The Company purchases long- services from MCI Communications Corp., Cable and
Wireless Communications, Inc., LDDS (WorldCom) and a number of national post,
telephone and telegraph companies ("PTTs") around the world, among others, to
carry fax traffic that is routed to destinations where the Company does not have
Nodes. In the future, the Company expects its total telecommunications costs per
minute of fax traffic to decrease as an increasing amount of traffic is routed
over the Xpedite Network.
SALES AND MARKETING
The markets for the Company's services are large and growing. The Company
believes that the market for Enhanced Fax Services is annually at least $300
million in North America and $800 million worldwide. The target market for the
Company's Discounted International Fax Services is the global fax transmission
market, which the Company believes is annually in excess of $3 billion in North
America and $10 billion worldwide. The Company believes that its markets will
continue to grow, fueled by growth in international trade and continued growth
in the utilization of fax machines and computer fax devices.
The Company's business has grown as a result of, among other things, the
development of a highly- trained sales organization. The Company's full-time
direct sales force has increased from 41 people at the end of 1992 to 236 people
at year-end 1996. These full-time sales personnel are deployed throughout the
Company's 48 sales offices in 14 countries today with approximately 150
operating in North America. The Company also utilizes a significant network of
third party distributors (sales agents and resellers) both in countries where it
has a direct sales presence and in locations where it does not currently have
such a
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presence. These third party distributors accounted for approximately 20% of the
Company's net revenues in 1996.
STRATEGIC RELATIONSHIPS AND ACQUISITIONS
To complement its organic sales growth and expand internationally, the
Company has completed six acquisitions since 1993. In February 1993, the Company
acquired certain enhanced fax and messaging services assets from TRT/FTC
Communications, Inc. In November 1995, the Company acquired 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") which together had points of presence in 35
countries and a 45 person direct sales force. This acquisition significantly
expanded the Company's North American and international businesses and allowed
the Company to accelerate its entry into the international fax market. On a pro
forma basis, the acquisition of the SVC Companies, which had revenues of over
$55 million in 1995, approximately doubled the Company's net revenues for the
year ended December 31, 1995. More recently, the Company continued its expansion
in the Pacific Rim through the acquisition in September 1996 of the fax service
business of PosData Company Ltd., the Company's Nodal Partner in Korea, and the
acquisition in December 1996 of the enhanced fax service business of Pacific
Star, known as Fax 2000, an Australian fax service provider.
In connection with its international expansion, the Company has also
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, XSI 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 (for which the European
Affiliate pays royalties) 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 17.5% of XSG held by a significant shareholder
of XSG. The Company has no current ownership stake in XSL.
The Company believes that XSL will achieve the (pound)1.5 million
annualized net profit, and that XSG may achieve the DM 1.7 million net profit,
required for the relevant calculation period for the respective "put" and "call"
rights regarding XSL and XSG, respectively, to be exercised at or after the end
of 1997. The Company does not believe that XSSA will achieve the 6.0 million FF
required for the relevant calculation period for the "put" and "call" rights
regarding XSSA to be exercised at the end of 1997. See "Item 8. Financial
Statements and Supplementary Data" for additional discussion of the "put" and
"call" arrangements.
COMPETITION
The Company competes based on a number of factors, such as customer service
and support, service features and price. Of these factors, the Company believes
that service and support are the most important for Enhanced Fax Services, while
price is the critical competitive component with respect to Basic Fax Services
in developed countries with high quality long distance networks. In a service
industry in which a broad range of optional features are offered, the Company's
competitive strategy emphasizes a sales and support network that is well-versed
in the capabilities of the services offered to customers. The Company believes
that, while it continues to expand its development activity in order to add a
broad range of features to its services, it is the focus of its sales and
support organizations on customers' needs that enables the Company to compete
effectively.
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AT&T, MCI and Sprint, as well as other long distance carriers and national
PTTs, provide certain enhanced fax communications services in competition with
the Company. The Company believes it can compete effectively with its
competitors because of its focus on the enhanced fax communications services
market, its broad array of service features and its cost-effective worldwide
Xpedite Network. The Company believes that, while AT&T and Sprint have begun to
expand the number of international Nodes employed by them, they have not
committed to the direct deployment of targeted sales personnel to focus on the
international fax markets, and that AT&T and Sprint currently are relying
primarily on worldwide partners and agents in marketing their enhanced fax
services outside of the United States.
In addition to the long distance carriers and PTTs, the Company competes
with a number of service bureaus based on the factors described above. Many
service bureaus face considerable obstacles in developing a business competitive
with the Company's. While it may be easy to begin service with a small personal
computer-based system, considerable system development expenditures are required
to enable such a system to grow to support the volumes and features needed to be
an effective competitor in the marketplace. Further, a small service bureau
typically will not have a sufficient volume of traffic to develop the economic
leverage necessary to obtain telecommunications services at rates enabling it to
compete cost-effectively with the Company. In addition, considerable investment
in a sales and marketing organization is required to develop a substantial
business base. As a result of the Company's investment in its sales and
marketing organization, the Company believes that the size of its sales force
significantly exceeds that of any service bureau in the United States, and the
Company knows of no other service bureau with as many sales personnel and Nodes
in as many countries as the Company.
Immediately prior to the acquisition of the SVC Companies, the Company had
approximately 5,000 telecommunication lines dedicated to fax transmission, which
the Company believes was more than twice as many dedicated lines as its nearest
competitor. Since such acquisition, the Company has added approximately 5,000
lines as a result of acquisitions and through internal expansion, and the
Company intends to continue to add dedicated lines as its volume of fax
transmissions makes the installation of such lines cost effective to support the
growth of the Company's business.
The Company believes that its major advantages in addressing the
international market is that it is offering both basic and Enhanced Fax Services
and already has operating centers and full time sales personnel in the major
telecommunications centers around the world, and that its network of Nodal
Partners extends this presence beyond such major centers. Another major
advantage is that the Company's basic Fax Services include both Real-Time and
Store and Forward options, while the Company's competitors may only offer one of
such options.
Another alternative to using the Company's services is for a potential
customer to fulfill its own needs for fax communications services. The "home
grown" solution may simply be an individual at a fax machine or may involve the
customer acquiring its own computerized fax communications system (sometimes
known as "customer premise equipment" or "CPE"). The Company believes that the
CPE solution is suitable in some applications, but is generally not feasible for
the Company's customers, who require the capacity to effect a significant volume
of electronic document deliveries in a short period of time. The Company
believes that the CPE solution for a fax broadcast application would require the
customer to obtain and maintain a large number of telephone transmission lines
which would remain idle for significant periods of time. Further, for
international fax traffic, the customer would be required to set up a worldwide
nodal network; the Company believes that this is only practical for large
multinational firms and even these firms would be unlikely to develop a network
which would reach as many countries as the Xpedite Network. As a fax
communications services provider with many customers, the Company is able to
spread the costs of operating the Xpedite Network over a large number of users.
In addition to being concerned with the irregular nature of demand, a customer
selecting a CPE solution must consider the total cost of system acquisition,
ongoing technical support, reliability, technological obsolescence and
accountability. Based on the foregoing, the Company believes that a substantial
percentage of customers in the market for fax communications services will elect
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a service provider rather than CPE. In fact, as the Company's prices have fallen
over time in the United States, a number of customers who tried to implement CPE
solutions have returned as service customers.
Similarly, delivery of electronic information via the Internet provides an
alternative to the Company's fax services. However, Internet delivery does not
offer prompt confirmation of receipt of information in "real time" and has the
additional risks of limited security and confidentiality of information
delivered over a worldwide network easily accessed by third parties. Finally,
while a fax transmission alerts the recipient that information has been
delivered, information delivered via e-mail often relies on the recipient
inquiring whether information has been delivered. Delivery by the Internet
cannot be an alternative if a sender or recipient of information does not have
access to the Internet. While the Company currently has the capability to
deliver information using the Internet, for the foregoing reasons the Company
does not utilize the Internet as an element of its document delivery system. In
the event the issues identified above relating to use of the Internet as part of
a document delivery system are resolved, the Company may expand its use of the
Internet as part of its document delivery system.
ADDITIONAL INFORMATION
EMPLOYEES. The Company considers its relationship with its employees to be
satisfactory. The Company employed 610 persons as of December 31, 1996,
substantially all of whom were full-time employees, and none of whom was covered
by a collective bargaining arrangement. Of these employees, 281 were engaged in
sales and marketing; 228 in operations and customer support; 48 in research and
development; and 53 in general and administrative activities. Approximately 30%
of the Company's employees are located in the Company's Eatontown, New Jersey
headquarters; none of the Company's remaining offices employs more than 10% of
the Company's employees.
PATENTS AND PROPRIETARY INFORMATION. The Company regards certain of its
computer software as proprietary and seeks to protect such software with common
law copyrights, trade secret laws and internal nondisclosure agreements and
safeguards. The Company currently holds no United States or foreign patents, but
has several United States patent applications pending. The Company does not
believe that patent protection of any of its intellectual property is material
to its business.
On July 31, 1996, the Company received a letter from counsel for AudioFAX
IP LLC ("AudioFAX"), which informed the Company that AudioFAX is the owner of
certain United States and Canadian patents in the fax processing business
entitled "Facsimile Telecommunications Systems and Method" (the "Patents"), and
inquired as to the Company's interest in obtaining a license of the Patents. The
Company has reviewed the Patents and has determined that it is not necessary to
obtain a license of the Patents. The Company cannot predict whether AudioFAX
will continue to pursue the licensing of the Patents to the Company.
INSURANCE. The Company has insurance covering risks incurred in the
ordinary course of business, including general liability, special and business
property coverage (including coverage of electronic data processing equipment
and media), and business interruption insurance. The Company believes its
insurance coverage is adequate.
RECENT DEVELOPMENTS
SHAREHOLDERS AGREEMENT.
On January 31, 1997, the Company entered into a shareholders agreement (the
"Shareholders Agreement") with certain shareholders of the Company owning
approximately 34% of the issued and outstanding Common Stock. The Shareholders
Agreement provides, among other things, that in connection with any sale of more
than 25% of the issued and outstanding shares of Common Stock by certain of the
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larger shareholders of the Company, all shareholders of the Company must be
given an opportunity to participate in such sale.
EXPLORATION OF STRATEGIC ALTERNATIVES.
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 also 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 XSG and XSL. The Proposal expired on March 7,
1997.
In connection with the Proposal, a purported shareholder class action was
filed against the Company, its directors and its officers in the State of
Delaware. The complaint seeks injunctive relief and unspecified damages and
alleges, among other things, that the directors and officers of the Company have
breached their fiduciary duties in connection with the Proposal. See "Item 3.
Legal Proceedings."
ASSET ACQUISITIONS.
In September 1996, the Company purchased the assets of one of its Nodal
Partners in Korea, 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, 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.
ITEM 2. PROPERTIES.
The Company's headquarters facility, which includes its principal
administrative, sales, marketing, management information systems and product
development offices and its operations center, is located in approximately
30,000 square feet of leased space in Eatontown, New Jersey. The lease on this
facility terminates on September 30, 1998 (excluding a five-year renewal option
exercisable by the Company). The Company also maintains a development facility,
located in approximately 9,000 square feet of leased space, in Ft. Lauderdale,
Florida. The lease on this facility expires December 31, 2001. The Company owns
an office building located in London, consisting of approximately 4,000 square
feet of office space.
The Company also maintains approximately 20,000 square feet of leased space
for the principal administrative, sales, and management information systems
offices and operations center of its international division in Glen Head, New
York. The lease covering approximately 75% of this space expires on December 30,
1999, and the lease covering the remaining space expires on September 30, 2001,
subject, in each case, to extension or earlier termination in certain
circumstances.
Since 1994, the Company has leased approximately 4,900 square feet of space
in a Piscataway, New Jersey facility, where the Company has established an
additional operations center which is substantially identical, in terms of
capability, to its current operations center at its headquarters in Eatontown,
New Jersey.
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This facility provides the Company with another level of protection in its
operational systems, and is expected to enable the Company to continue its
operations in the event of a disaster at either facility. The lease on this
facility terminates February 28, 2001. The additional facility is designed to
enable the Company to more easily expand its systems, will provide additional
processing and transmission capacity and will be linked with the Company's
facilities at its headquarters. As of December 31, 1996, the Company has
invested approximately $0.9 million acquiring and equipping this facility.
As of December 31, 1996, the Company leased an additional 31 sales and
support offices across the United States and Canada, consisting of approximately
36,000 square feet in the aggregate, pursuant to the terms of various short-term
lease agreements. The Company also leased 17 sales and support offices in other
countries around the world, consisting of approximately 30,000 square feet in
the aggregate, pursuant to the terms of various short-term lease agreements. The
Company believes that its existing facilities are adequate to meet current
requirements and that suitable additional space in close proximity to its
existing headquarters will be available as needed to accommodate growth of its
operations and additional sales and support offices through the foreseeable
future.
For the year ended December 31, 1996, the Company incurred approximately
$3.3 million for facilities rental expense.
ITEM 3. LEGAL PROCEEDINGS.
On February 20, 1997, a purported class action, EPHRIAIM RODRIGUEZ AND
JEROME SYKES V. ROY B. ANDERSEN, JR., ET AL., was filed against the Company, its
directors and its officers, in the Court of Chancery of the State of Delaware in
and for New Castle County. The suit was purportedly brought on behalf of the
shareholders of the Company. The complaint alleges, among other things, that the
directors and officers of the Company have breached their fiduciary duties in
connection with the Proposal (as defined above). The complaint requests, among
other things, that the Court enjoin the Proposal and award unspecified amounts
of compensatory damages, attorneys' fees and costs. The Company believes the
allegations set forth in the complaint to be without merit and intends to
vigorously contest this lawsuit. In light of the fact that the Proposal expired
on March 7, 1997, attorneys for the plaintiffs have agreed to extend the time
for which the defendants must answer the complaint.
The Company is a party to certain license agreements dated August 1, 1986
(the "Licenses") with certain related limited partnerships which are not
affiliated with the Company (collectively, the "Licensors") relating to certain
technology which enables the exchange of documents or data between incompatible
work processors or computers (the "Technology"). The Licenses, which expire in
July 1998, entitle the Licensors to 4.0% of the Company's gross revenues
generated from the Company from the use of the Technology. While at its
inception the Company intended to use certain of the Technology in its business,
the Company's business strategy changed and the Company made only minimal use of
the Technology. The Company ceased all use of the Technology in June 1991, and
paid the Licensors an aggregate of approximately $3,000 under the Licenses.
Attorneys for variously limited partners in the Licensors have informed the
Company in writing that they have been asked to bring a claim for unspecified
amounts against the Company pursuant to certain purported agreements under which
trade secrets were allegedly improperly disclosed by individuals who were in a
fiduciary relationship with the Licensors and later became involved with the
Company. Similar claims have been made in the past by representatives of the
Licensors. No lawsuit has ever been commenced by any party with respect to any
such claims. The Company believes that the present claim is without merit.
The Company is involved from time to time in routine legal matters
incidental to its business. Management believes that the resolution of such
matters will not have a material adverse effect on the Company's financial
position or results of operations.
8
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS.
During the fourth quarter ended December 31, 1996, the Company held the
Annual Meeting of the Stockholders of the Company for the following purposes:
(1) to elect two Class 3 Directors, (2) to ratify and approve the Officers'
Contingent Stock Option Plan, (3) to ratify and approve the Non-Employee
Directors' Warrant Plan, and (4) to ratify and approve the Company's independent
public accountants for fiscal 1996.
On October 1, 1996, at the Annual Meeting of Stockholders, the stockholders
of the Company approved the following:
1. Election of nominee John C. Baker as Class 3 Director of the Company:
6,604,058 votes for, 0 votes against, 9,848 abstentions and 11,525 broker votes
for.
2. Election of nominee David Epstein as Class 3 Director of the Company:
6,604,058 votes for, 0 votes against, 9,848 abstentions and 11,525 broker votes
for.
3. Ratification and approval of Officers' Contingent Stock Option Plan:
5,596,522 votes for, 526,433 votes against, 6,238 abstentions and 925 broker
votes for.
4. Ratification and approval of Non-Employee Directors' Warrant Plan:
5,652,486 votes for, 468,119 votes against, 7,488 abstentions and 925 broker
votes for.
5. Ratification and approval of Ernst & Young LLP as independent public
accountants for fiscal 1996: 6,565,226 votes for, 45,930 votes against, 1,650
abstentions and 11,525 broker votes for.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
MARKET PRICES
The Company's Common Stock was included in the Nasdaq Stock Market's National
Market, and commenced trading, beginning on February 14, 1994, under the symbol
"XPED". The number of stockholders of record at March 19, 1997 was 179, 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 ENDED HIGH LOW
------------- ---- ---
December 31, 1996 $ 23-1/4 $ 16-1/4
September 30, 1996 27-3/4 17
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
9
<PAGE>
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.
10
<PAGE>
ITEM 6. 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)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues:
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 amortizati 428 975 1,432 2,723 7,619
Write off of in-process research
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
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1992 1993 1994 1995 (2) 1996
----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash , cash equivalents and short term
investments................................ $ 1,906 $ 472 $ 16,139 $ 9,076 $ 6,680
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.
12
<PAGE>
ITEM 7. 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.
13
<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
and development costs.............. -. 95.2 -.
------- ------- ------
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
14
<PAGE>
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.
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.
15
<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.
16
<PAGE>
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.
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.
17
<PAGE>
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 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
18
<PAGE>
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 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.
19
<PAGE>
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.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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
21
<PAGE>
XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
ASSETS
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.
22
<PAGE>
XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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.
23
<PAGE>
XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
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.
24
<PAGE>
XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCK
----------------- ------------------
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.
25
<PAGE>
XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
1996 1995 1994
------------- ------------- --------
OPERATING ACTIVITIES
<S> <C> <C> <C>
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.
26
<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.
27
<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.
28
<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.
29
<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.
30
<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.
31
<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 in-
process 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
=========== ============
32
<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.
33
<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.
34
<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:
1996 1995 1994
-------------- -------------- --------------
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
============== ============== ==============
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>
35
<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.
36
<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.
37
<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)
38
<PAGE>
XPEDITE SYSTEMS, INC.
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
Stock option plans' activity is summarized as follows:
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:
OUTSTANDING WEIGHTED AVERAGE
RANGE OF EXERCISE OPTIONS AT REMAINING WEIGHTED AVERAGE
PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE
- --------------------- ------------------- ---------------- ---------------
$ 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
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.
39
<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.
40
<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
41
<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:
NET OPERATING IDENTIFIABLE
1996 REVENUES INCOME ASSETS
- ------------------- -------------- ---------------- ------------------
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
============== ================ ==================
42
<PAGE>
XPEDITE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
11. SEGMENT DATA AND GEOGRAPHIC INFORMATION (CONTINUED)
NET OPERATING IDENTIFIABLE
1995 REVENUES (LOSS) INCOME ASSETS
- ------------------- -------------- --------------- ---------------
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
============== =============== ===============
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.
43
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 10, 11, 12 and 13 will be contained in
the Company's Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended, in connection with the Annual
Meeting of Stockholders of the Company and is incorporated herein by reference.
44
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) List of documents filed as part of this report.
(1) FINANCIAL STATEMENTS
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.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II: Valuation and Qualifying Accounts.
Schedules other than the schedule listed above have been omitted
because they are not applicable or not required, or because the
information is shown in the Consolidated Financial Statements or the
Notes thereto.
(3) EXHIBITS.
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--------- ----------------------
2.1 Agreement and Plan of Merger, dated as of November 20, 1995, among
the Registrant, SGC Acquisition Corp., a Delaware corporation, and
Swift Global Communications Inc., a Delaware corporation.(*)
2.2 Stock Purchase Agreement, dated as of November 20, 1995, among the
Registrant, ViTel International Holding Company, Inc., a Delaware
corporation ("ViTel"), and the stockholders of ViTel identified
therein.(*)
2.3 Stock Purchase Agreement, dated as of November 20, 1995, among the
Registrant, Comwave Communications AG, a Swiss corporation
("Comwave"), and Computainer Systems (Global) Inc., a British
Virgin Islands corporation which was the sole shareholder of
Comwave.(*)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.(****)
3.2 Amended and Restated By-laws of the Registrant.(**)
4.1 Specimen Certificate for Common Stock.(**)
10.1 Lease Agreement, dated August 3, 1988, between the Registrant and
Mid-Atlantic Industrial Co.(**)
45
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--------- ----------------------
10.2 Lease Agreement, dated June __, 1990, as modified on August 3,
1990, between the Registrant and Mid-Atlantic Industrial Co.(**)
10.3 Form of Lease Extension Agreement between the Registrant and
Mid-Atlantic Industrial Co.(**)
10.4 Agreement of Lease, dated as of June 25, 1986, between Swift
Global Communications Inc. and 997 Partners.(****)
10.5 Sublease Agreement, dated as of March 1, 1991, between Swift
Global Communications Inc. and Essilor of America, Inc.(****)
10.6 Office Building Lease, dated as of March 2, 1987, between ViTel
International, Ltd. and Shoreline Office Center Limited
Partnership ("Shoreline"), together with (i) Lease Amendment,
dated as of November 1, 1990, between ViTel International, Inc.
and Shoreline, and (ii) Second Amendment, dated as of December 2,
1993, between ViTel International, Inc. and Shoreline.(****)
10.7 Employment Agreement, dated October 1, 1988, between the
Registrant and Roy B. Andersen, Jr.(**)
10.8 Employment Agreement, dated October 1, 1988, between the
Registrant and Dennis Schmaltz.(**)
10.9 Employment Agreement, dated May 1, 1990, between the Registrant
and Max Slifer.(**)
10.10 Employment Agreement, dated June 27, 1996, between the Registrant
and Robert S. Vaters.(*****)
10.11 Employment Agreement, dated as of November 20, 1995, between the
Registrant and George Abi Zeid.(****)
10.12 1992 Incentive Stock Option Plan.(**)
10.13 1993 Incentive Stock Option Plan.(**)
10.14 1996 Incentive Stock Option Plan.(****)
10.15 Stock Purchase Agreement, dated as of June 12, 1992, among the
Registrant, Robert A. Epstein, Stuart Epstein, David Epstein, APA
Excelsior III, L.P., Coutts & Co. (Jersey), Ltd., Custodian for
APA Excelsior III/Offshore, L.P., CIN Venture Nominees, Ltd. and
APA/Fostin Pennsylvania Venture Capital Fund.(**)
46
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--------- ----------------------
10.16 Shareholders Agreement, dated as of November 20, 1995, among the
Registrant, David Epstein, Stuart Epstein, Robert Epstein, APA
Excelsior III, L.P., a Delaware limited partnership, Coutts & Co.
(Jersey), Custodian for APA Excelsior III/Offshore, L.P., a
Channel Islands corporation, CIN Venture Nominees, Ltd., a United
Kingdom corporation, APA/Fostin Pennsylvania Venture Capital Fund,
L.P., a New York limited partnership, 11313 Yukon Ltd., a Yukon
corporation, George Abi Zeid, Fortune Partner Investments Ltd., a
British Virgin Islands corporation, Gold Chalet Overseas Ltd., a
British Virgin Islands corporation, Barclay Holdings Corporation,
a British Virgin Islands corporation, Zeev Remez, Ian Wilder, Paul
Leslie Hammond, Roy B. Andersen, Jr., Stuart S. Levy, Max A.
Slifer and Dennis Schmaltz.(*)
10.17 System Agreement, dated May 2, 1992, between the Registrant,
Eurofax and David Epstein.(**)
10.18 Put and Call Option Agreement, dated as of December 15, 1993,
among the Registrant, APAX, Olivier de Puymorin and Xpedite,
S.A.(**)
10.19 System and Marketing Agreement, dated as of January 29, 1993,
between the Registrant and Xpedite Systems, Ltd. ("Xpedite
UK").(**)
10.20 Put and Call Option Agreement, dated as of January 29, 1993
("Xpedite UK Option Agreement"), among the Registrant, APAX
Partners & Co. Ventures Limited ("APAX"), David Proctor
("Proctor") and Xpedite UK.(**)
10.21 Amendment to Xpedite UK Option Agreement, dated as of July 6,
1995, among the Registrant, APAX, Proctor and Xpedite UK.(****)
10.22 Letter Agreement, dated as of March 1, 1996, between Xpedite UK
and the Registrant.(****)
10.23 Form of Indemnification Agreement between the Registrant and its
Directors and Officers.(**)
10.24 System and Marketing Agreement, dated as of June 24, 1994, between
the Registrant and Xpedite Systems GmbH ("Xpedite Germany").(***)
10.25 Shareholder Agreement, dated June 24, 1994, among the Registrant,
APA Expert Beteiligungsgesellschaft GmbH ("APA Expert"), Dr.
Norbert Posch, Rudolph Achhammer, Horst Waltemathe, Nigel Hall and
Xpedite Vertriebs GmbH (to be renamed Xpedite Systems, GmbH).(***)
10.26 Option Agreement, dated June 24, 1994 ("Xpedite Germany Option
Agreement"), among the Registrant, APA Expert, APA German European
Ventures L.P., Dr. Norbert Posch, Xpedite Vertriebs GmbH, Rudolph
Achhammer, Horst Waltemathe, and Nigel Hall.(***)
47
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
--------- ----------------------
10.27 Amendment to Option Agreement, dated November 16, 1995, among the
Registrant, APA Expert, APA German European Ventures L.P., Dr.
Norbert Posch, Xpedite Germany, Rudolf Achhammer, Horst
Waltemathe, Nigel Hall, Hermann J. Karbaum, Holger Martens, Dieter
Naudert and Heinz Schon.(****)
10.28 Settlement Agreement, Release and Sixth Amendment to System Supply
Agreement, dated as of July 13, 1994, between the Registrant and
Cable & Wireless, Inc. (formerly known as Cable & Wireless
Communications, Inc.). (***)
10.29 Credit Agreement, dated as of November 20, 1995, among the
Registrant, Banque Indosuez, New York Branch ("Indosuez") and the
other lending institutions listed in Exhibit I thereto, and
Indosuez, as Agent.(****)
10.30 Form of Officers' Contingent Stock Option Plan.
10.31 Form of Non-Employee Directors' Warrant Plan.
10.32 Shareholders Agreement, dated January 31, 1997, among the
Registrant and certain shareholders of the Company owning
approximately 34% of the issued and outstanding common stock of
the Company.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Report of Ernst & Young LLP.
27 Financial Data Schedule
- -------------------------
(*) Incorporated by reference to the Registrant's Current Report on Form
8-K, dated as of November 20, 1995, as amended.
(**) Incorporated by reference to the Registrant's Registration Statement
on Form S-1, Registration No. 33-73258, originally filed with the
Securities and Exchange Commission on December 22, 1993, as
subsequently amended, and declared effective on February 11, 1994.
(***) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
(****) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
(*****) Incorporated by reference to the Registrant's Registration Statement
on Form S-3, Registration No. 333-08265, originally filed with the
Securities and Exchange Commission on July 17, 1996, as subsequently
amended, and declared effective on August 15, 1996.
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K have been filed during the fourth quarter of 1996.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
28, 1997.
XPEDITE SYSTEMS, INC.
By: /S/ ROY B. ANDERSEN, JR.
Roy B. Andersen, Jr.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
---------- ------ -------
/S/ ROY B. ANDERSEN, JR. President, Chief March 28, 1997
- ------------------------------- Executive Officer and
Roy B. Andersen, Jr. Director (Principle
Executive Officer)
/S/ ROBERT S. VATERS Executive Vice President, March 28, 1997
- ------------------------------- Finance, Chief Financial
Robert S. Vaters Officer and Secretary
(Principal Accounting and
Financial Officer)
/S/ JOHN C. BAKER Director March 28, 1997
- -------------------------------
John C. Baker
/S/ DAVID EPSTEIN Director March 28, 1997
- -------------------------------
David Epstein
/S/ ROBERT CHEFITZ Director March 28, 1997
- -------------------------------
Robert Chefitz
/S/ PHILIP A. CAMPBELL Director March 28, 1997
- -------------------------------
Philip A. Campbell
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
SUPPLEMENTAL SCHEDULES
II. Valuation and qualifying accounts for the years ended December 31, 1994,
1995 and 1996.
- ---------------------------
Schedules other than the schedule listed above have been omitted because they
are not applicable or not required, or because the information is shown in the
Consolidated Financial Statements or the Notes thereto.
S-1
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD
------------ ----------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Reserve for Allowances and Doubtful Accounts $ (993,374) $ (3,434,032) $ 2,576,834 $ (1,850,572)
=========== ============== ============ =============
YEAR ENDED DECEMBER 31, 1995:
Reserve for Allowances and Doubtful Accounts $ (548,593) $ (1,605,752) $ 1,160,971 $ (993,374)
=========== ============== ============ =============
YEAR ENDED DECEMBER 31, 1994:
Reserve for Allowances and Doubtful Accounts $ (401,657) $ (1,377,314) $ 1,230,378 $ (548,593)
=========== ============== ============ =============
</TABLE>
- ---------------------------
(1) These deductions relate to the write-off of accounts and credits issued to
customers.
S-2
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------- ---------------------
2.1 Agreement and Plan of Merger, dated as of November 20,
1995, among the Registrant, SGC Acquisition Corp., a
Delaware corporation, and Swift Global Communications
Inc., a Delaware corporation.(*)
2.2 Stock Purchase Agreement, dated as of November 20,
1995, among the Registrant, ViTel International Holding
Company, Inc., a Delaware corporation ("ViTel"), and
the stockholders of ViTel identified therein.(*)
2.3 Stock Purchase Agreement, dated as of November 20,
1995, among the Registrant, Comwave Communications AG,
a Swiss corporation ("Comwave"), and Computainer
Systems (Global) Inc., a British Virgin Islands
corporation which was the sole shareholder of
Comwave.(*)
3.1 Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Amended and Restated By-laws of the Registrant.(**)
4.1 Specimen Certificate for Common Stock.(**)
10.1 Lease Agreement, dated August 3, 1988, between the
Registrant and Mid-Atlantic Industrial Co.(**)
10.2 Lease Agreement, dated June __, 1990, as modified on
August 3, 1990, between the Registrant and Mid-Atlantic
Industrial Co.(**)
10.3 Form of Lease Extension Agreement between the
Registrant and Mid-Atlantic Industrial Co.(**)
10.4 Agreement of Lease, dated as of June 25, 1986, between
Swift Global Communications Inc. and 997
Partners.(****)
10.5 Sublease Agreement, dated as of March 1, 1991, between
Swift Global Communications Inc. and Essilor of
America, Inc.(****)
10.6 Office Building Lease, dated as of March 2, 1987,
between ViTel International, Ltd. and Shoreline Office
Center Limited Partnership ("Shoreline"), together with
(i) Lease Amendment, dated as of November 1, 1990,
between ViTel International, Inc. and Shoreline, and
(ii) Second Amendment, dated as of December 2, 1993,
between ViTel International, Inc. and Shoreline.(****)
10.7 Employment Agreement, dated October 1, 1988, between
the Registrant and Roy B. Andersen, Jr.(**)
10.8 Employment Agreement, dated October 1, 1988, between
the Registrant and Dennis Schmaltz.(**)
10.9 Employment Agreement, dated May 1, 1990, between the
Registrant and Max Slifer.(**)
E-1
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------- ---------------------
10.10 Employment Agreement, dated June 27, 1996, between
the Registrant and Robert S. Vaters.(*****)
10.11 Employment Agreement, dated as of November 20, 1995,
between the Registrant and George Abi Zeid.(****)
10.12 1992 Incentive Stock Option Plan.(**)
10.13 1993 Incentive Stock Option Plan.(**)
10.14 1996 Incentive Stock Option Plan.(****)
10.15 Stock Purchase Agreement, dated as of June 12, 1992,
among the Registrant, Robert A. Epstein, Stuart
Epstein, David Epstein, APA Excelsior III, L.P.,
Coutts & Co. (Jersey), Ltd., Custodian for APA
Excelsior III/Offshore, L.P., CIN Venture Nominees,
Ltd. and APA/Fostin Pennsylvania Venture Capital
Fund.(**)
10.16 Shareholders Agreement, dated as of November 20,
1995, among the Registrant, David Epstein, Stuart
Epstein, Robert Epstein, APA Excelsior III, L.P., a
Delaware limited partnership, Coutts & Co. (Jersey),
Custodian for APA Excelsior III/Offshore, L.P., a
Channel Islands corporation, CIN Venture Nominees,
Ltd., a United Kingdom corporation, APA/Fostin
Pennsylvania Venture Capital Fund, L.P., a New York
limited partnership, 11313 Yukon Ltd., a Yukon
corporation, George Abi Zeid, Fortune Partner
Investments Ltd., a British Virgin Islands
corporation, Gold Chalet Overseas Ltd., a British
Virgin Islands corporation, Barclay Holdings
Corporation, a British Virgin Islands corporation,
Zeev Remez, Ian Wilder, Paul Leslie Hammond, Roy B.
Andersen, Jr., Stuart S. Levy, Max A. Slifer and
Dennis Schmaltz.(*)
10.17 System Agreement, dated May 2, 1992, between the
Registrant, Eurofax and David Epstein.(**)
10.18 Put and Call Option Agreement, dated as of December
15, 1993, among the Registrant, APAX, Olivier de
Puymorin and Xpedite, S.A.(**)
10.19 System and Marketing Agreement, dated as of January
29, 1993, between the Registrant and Xpedite Systems,
Ltd. ("Xpedite UK").(**)
10.20 Put and Call Option Agreement, dated as of January
29, 1993 ("Xpedite UK Option Agreement"), among the
Registrant, APAX Partners & Co. Ventures Limited
("APAX"), David Proctor ("Proctor") and Xpedite
UK.(**)
10.21 Amendment to Xpedite UK Option Agreement, dated as of
July 6, 1995, among the Registrant, APAX, Proctor and
Xpedite UK.(****)
10.22 Letter Agreement, dated as of March 1, 1996, between
Xpedite UK and the Registrant.(****)
10.23 Form of Indemnification Agreement between the
Registrant and its Directors and Officers.(**)
10.24 System and Marketing Agreement, dated as of June 24,
1994, between the Registrant and Xpedite Systems GmbH
("Xpedite Germany").(***)
E-2
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- -------- ---------------------
10.25 Shareholder Agreement, dated June 24, 1994, among the
Registrant, APA Expert Beteiligungsgesellschaft GmbH
("APA Expert"), Dr. Norbert Posch, Rudolph Achhammer,
Horst Waltemathe, Nigel Hall and Xpedite Vertriebs
GmbH (to be renamed Xpedite Systems, GmbH).(***)
10.26 Option Agreement, dated June 24, 1994 ("Xpedite
Germany Option Agreement"), among the Registrant, APA
Expert, APA German European Ventures L.P., Dr.
Norbert Posch, Xpedite Vertriebs GmbH, Rudolph
Achhammer, Horst Waltemathe, and Nigel Hall. (***)
10.27 Amendment to Option Agreement, dated November 16,
1995, among the Registrant, APA Expert, APA German
European Ventures L.P., Dr. Norbert Posch, Xpedite
Germany, Rudolf Achhammer, Horst Waltemathe, Nigel
Hall, Hermann J. Karbaum, Holger Martens, Dieter
Naudert and Heinz Schon.(****)
10.28 Settlement Agreement, Release and Sixth Amendment to
System Supply Agreement, dated as of July 13, 1994,
between the Registrant and Cable & Wireless, Inc.
(formerly known as Cable & Wireless Communications,
Inc.). (***)
10.29 Credit Agreement, dated as of November 20, 1995,
among the Registrant, Banque Indosuez, New York
Branch ("Indosuez") and the other lending
institutions listed in Exhibit I thereto, and
Indosuez, as Agent.(****)
10.30 Form of Officer's Contingent Stock Option Plan.
10.31 Form of Non-Employee Directors' Warrant Plan.
10.32 Shareholders Agreement, dated January 31, 1997, among
the Registrant and certain shareholders of the
Company owning approximately 34% of the issued and
outstanding common stock of the Company.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP.
23.2 Report of Ernst & Young LLP.
27 Financial Data Schedule
- -------------------------
(*) Incorporated by reference to the Registrant's Current Report on Form
8-K, dated as of November 20, 1995, as amended.
(**) Incorporated by reference to the Registrant's Registration Statement
on Form S-1, Registration No. 33-73258, originally filed with the
Securities and Exchange Commission on December 22, 1993, as
subsequently amended, and declared effective on February 11, 1994.
(***) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994.
(****) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995.
(*****) Incorporated by reference to the Registrant's Registration Statement
on Form S-3, Registration No. 333-08265, originally filed with the
Securities and Exchange Commission on July 17, 1996, as subsequently
amended, and declared effective on August 15, 1996.
E-3
XPEDITE SYSTEMS, INC.
NONQUALIFIED STOCK OPTION AGREEMENT ("Agreement"), dated as
of 22nd day of April, 1996, between Xpedite Systems, Inc., a Delaware
corporation (the "Company"), and ---------------- (the "Executive").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Compensation Committee (the "Committee") of the
Board of Directors (the "Board") has determined that it is in the best interests
of the Company and its stockholders to provide an incentive for key executive
officers of the Company to devote their utmost effort and skill to the
advancement and betterment of the Company by permitting them to participate,
upon the achievement of certain financial performance targets established by the
Committee, in the ownership of the Company and thereby in the success and
increased value of the Company; and
WHEREAS, to give effect to the foregoing, the Committee
believes it to be in the best interests of the Company and its stockholders to
grant to the Executive options (the "Options") to purchase shares of Common
Stock of the Company (the "Stock"), at the price and subject to the terms
herein;
NOW, THEREFORE, IN CONSIDERATION of the promises and the
mutual covenants and agreements hereinafter set forth, the Company and the
Executive agree as follows:
1. OPTION.
(a) GRANT OF OPTION. The Company hereby grants the Executive
an Option to receive an aggregate of up to ----------------------------- shares
of Stock, subject to the achievement by the Company of certain performance
targets as set forth in this Section 1(a) and otherwise in accordance with the
terms and conditions of this Agreement.
(i) The Executive shall be granted Options to
purchase ------------------- shares (50% of the amount in Section
1(a) above) (the "First Tranche") in the event that either (x) the
average of the last sale price of the Stock reported in the Nasdaq
National Market for each trading day during any consecutive period
of ninety (90) calendar days commencing on or after the date
hereof but no later than December 31, 1996 is greater than $22.50
per share, as adjusted for any stock splits, stock dividends and
combinations of shares occurring after the date hereof, or (y)
there occurs prior to December 31, 1996
<PAGE>
the closing of an offering and sale of Stock for the account of
the Company in an underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933,
as amended, in which the price to the public is at least equal to
$22.50 per share.
(ii) The Executive shall be granted Options to
purchase --------------- shares (50% of the amount in Section 1(a)
above) (the "Second Tranche") in the event that the average of the
last sale price of the Stock reported in the Nasdaq National
Market for each trading day during any consecutive period of
ninety (90) calendar days commencing on or after the date hereof
but no later than December 31, 1997 is greater than $30.00 per
share, as adjusted for any stock splits, stock dividends and
combinations of shares occurring after the date hereof; provided,
however, that fifty percent (50%) of the Second Tranche shall be
granted to the Executive in the event of an acquisition of all of
the outstanding Stock or a merger or consolidation of the Company
where the Company is not the surviving corporation, in either case
announced or completed prior to December 31, 1997, and the price
per share paid by the acquiring entity for the Stock acquired in
such transaction is greater than $28.00 per share but less than
$30.00 per share, as adjusted for any stock splits, stock
dividends and combinations of shares occurring after the date
hereof.
(iii) In the event of an acquisition of a
majority of the outstanding Stock or a merger or consolidation of
the Company where the Company is not the surviving corporation,
the price per share paid by the acquiring entity for the Stock
acquired in such transaction shall be used to determine whether
the price-per-share thresholds for the First Tranche and the
Second Tranche set forth in subsections (i) and (ii) above have
been achieved, and the requirement that such price be an average
maintained for 90 consecutive days shall not apply.
(iv) In the event that the conditions precedent
to the issuance of either the First Tranche or the Second Tranche
are not achieved within the time periods specified in subsections
(a)(i) and (c)(ii) hereof, respectively, then the First Tranche or
the Second Tranche, as the case may be, shall not be issued to the
Executive hereunder and the Executive shall have no right to
receive the same from the Company.
(b) EXERCISE PERIOD. Except as otherwise provided in this
Agreement, the Options granted hereunder shall become exercisable by the
Executive according to the following schedule: one forty-eighth (1/48) of the
number of Options granted shall become exercisable on the same calendar date as
the date of grant in each of the next succeeding 48 months following the month
in which the date of grant occurs in accordance with Section 1(a) until all such
Options are exercisable; provided, however,
-2-
<PAGE>
that the right to exercise an Option as to any fractional share of Stock shall
be deemed the right to exercise an Option as to a full share of Stock with
appropriate adjustments made to the last exercise period so that the total
number of Options shall not exceed that specified under paragraph (a) of Section
1 hereof.
(c) NO LAPSE OF EXERCISE POWER. Any Option which becomes
exercisable on a certain date but is not exercised in full on that date shall
not lapse but shall remain outstanding as to the unexercised portion and shall
continue in effect throughout the remainder of the Option Term (taking into
account any early termination of such Option Term which may be provided for
under this Agreement).
(d) OPTION TERM. An option which is not exercised shall
expire upon the earlier of:
(i)five (5) years after the date such Option was
granted;
(ii) three (3) months after the date the
Executive terminates his employment with the Company, unless such
termination was the result of the Executive's death or disability
or unless the Company terminates the employment for cause;
(iii) one (1) year after the Executive's death or
disability; and
(iv) any such earlier termination date as may be
provided by this Agreement.
The period commencing on the date hereof and concluding on the date of
termination as provided in this paragraph (d) shall be referred to herein as the
"Option Term".
(e) OPTION PRICE. The purchase price for each share of
Stock subject to the Option shall be $0 per share.
(f) ADJUSTMENTS.
(i) STOCK SPLITS AND DIVIDENDS. Subject to any
required action by the Board and/or stockholders, the number of
Shares covered by each outstanding Option shall be proportionately
adjusted for any increase or decrease in the number of issued
Shares resulting from a subdivision or consolidation of Shares or
the payment of a stock dividend (but only if paid in Shares), a
stock split or any other increase or decrease in the number of
issued Shares effected without receipt of consideration by the
Company.
-3-
<PAGE>
(ii) MERGERS. Subject to any required action by
the Board and/or stockholders, if the Company shall merge with
another corporation and the Company is the surviving corporation
in such merger and under the terms of such merger the Shares
outstanding immediately prior to the merger remain outstanding and
unchanged, each outstanding Option shall continue to apply to the
Shares subject thereto and shall also pertain and apply to any
additional securities and other property, if any, to which a
holder of the number of Shares subject to the Option would have
been entitled as a result of the merger.
(iii) COMMITTEE. Adjustments under this Section
1(f) shall be made by the Committee, whose determination as to
what adjustments shall be made, and the extent thereof, shall be
final, binding and conclusive. In computing any adjustment under
this Section 1(f), any fractional Share which might otherwise
become subject to an Option shall be eliminated.
2. LIMITATIONS ON OPTIONS.
(a) SEQUENTIAL EXERCISE. Options granted to the Executive
may be exercised in any order, so that the Executive may exercise an Option if
another Option, granted to him at an earlier time, remains outstanding in whole
or in part.
(b) NON-TRANSFERABILITY OF OPTION. The Options may not be
assigned or transferred other than by will or by the laws of descent and
distribution. During the lifetime of the Executive, the Options may be
exercisable only by the Executive. Transfer of an Option by will or by the laws
of descent and distribution shall not be effective to bind the Company unless
the Company shall have been furnished with written notice thereof and an
authenticated copy of the will or such other evidence as the Committee may deem
necessary to establish the validity of the transfer and the acceptance by the
transferee of the terms and conditions of such Option. Any attempted assignment,
transfer, pledge, hypothecation or other disposition of the Option contrary to
the provisions hereof, or the levy of any execution, attachment or similar
process upon the Option shall be null and void and without effect.
3. METHOD OF EXERCISING OPTIONS. Options shall be exercised by a
written notice delivered to the Company at its principal office in Eatontown,
New Jersey.
In the event the Company determines that it is required to
withhold state or Federal income tax as a result of the exercise of an Option,
as a condition to the exercise thereof, the Executive may be required to make
arrangements satisfactory to the Company to enable it to satisfy such
withholding requirements. Payment of such withholding requirements may be made,
in the discretion of the Committee, (i) in cash, (ii) by delivery of Shares
registered in the name of the Executive, or by the Company not issuing such
number of Shares subject to the Option, having a Fair Market Value at the
-4-
<PAGE>
time of exercise equal to the amount to be withheld or (iii) any combination of
(i) and (ii) above. If (i) any Shares are registered under Section 12 of the
Exchange Act, (ii) the Executive is an officer (as defined in Section 16 of the
Exchange Act) of the Company subject to Section 16(b) of the Exchange Act and
(iii) such payment is made with Shares acquired by the Executive upon the
exercise which gives rise to such withholding, an election under the preceding
sentence (a) must be irrevocable and with respect to all Shares covered by the
Option subject to the election, provided, however, that such election may be
changed through another irrevocable election that takes effect at least six
months after the prior election; or (b) may be made during the period beginning
on the third business day following the date of release of quarterly and annual
summary statements of sales and earnings as provided by Rule 16b-3(e)(3) of the
Securities and Exchange Commission and ending on the twelfth (12th) business day
following such date and only if such period occurs before the date the Company
requires payment of the withholding tax. The election need not be made during
the ten-day window period if counsel to the Company determines that compliance
with such requirement is unnecessary.
4. ISSUANCE OF OPTIONED STOCK.
(a) ISSUANCE OF CERTIFICATES. The Company shall not be
required to issue or deliver any certificate for Stock upon the exercise of any
Option, or any portion thereof, prior to fulfillment of each of the following
applicable conditions:
(i) The admission of such Stock to listing on all
stock exchanges or markets on which the Stock is then listed to
the extent such admission is necessary;
(ii) The completion of any registration or other
qualification of such Stock under any federal or state securities
laws or under the rulings or regulations of the Securities and
Exchange Commission or any other governmental regulatory body,
which the Board shall in its sole discretion deem necessary or
advisable or the determination by the Board in its sole discretion
that no such registration or qualification is required;
(iii) The obtaining of any approval or other
clearance from any federal or state governmental agency which the
Board shall, in its sole discretion, determine to be necessary or
advisable; and
(iv) The lapse of such reasonable period of time
following the exercise of the Option as the Board from time to
time may establish for reasons of administrative convenience.
-5-
<PAGE>
(B) COMPLIANCE WITH SECURITIES AND OTHER LAWS. In no event
shall the Company be required to issue or deliver Stock pursuant to Options if
in the opinion of the Board the issuance thereof would constitute a violation by
either the Executive or the Company of any provision of any law or regulation of
any governmental authority or any securities exchange. As a condition of any
issuance of Stock pursuant to Options, the Company may place legends on the
Stock, issue stop-transfer orders and require such agreements or undertakings
from the Executive as the Company may deem necessary or advisable to assure
compliance with any such law or regulation, including, if the Company or its
counsel deems it appropriate, representations from the Executive that he is
acquiring the Stock solely for investment and not with a view to distribution
and that no distribution of Stock acquired by him will be made unless registered
pursuant to applicable federal and state securities laws or unless, in the
opinion of counsel to the Company, such registration is unnecessary.
5. OPTION RIGHTS IN THE EVENT OF CERTAIN EVENTS.
(a) RIGHTS IN THE EVENT OF SALE, MERGER OR OTHER
REORGANIZATION OF COMPANY.
(i) In the event of a merger or consolidation
where the Company is not the surviving corporation, and the
agreement of merger or consolidation does not provide for the
substitution for the unexercised portion of the Option of a new
option on substantially the same terms (including the exercise
price thereof), or for the assumption of the Option by the
surviving corporation, or in the event of the sale or transfer of
assets, liquidation or dissolution and the plan of liquidation or
dissolution or agreement of sale does not make special provision
for the Option, Executive shall have the right immediately prior
to the effective date of such merger, consolidation, sale or
transfer of assets, liquidation or dissolution to exercise the
Option in whole or in part without regard to any installment
provision contained in paragraph (b) of Section 1 hereof. If not
so exercised, the Option shall terminate at the time of any such
merger, consolidation, sale or transfer of assets, liquidation or
dissolution.
(ii) In the event the Option is assumed by the
surviving corporation in a merger or consolidation where the
Company is not the surviving corporation, or a new option on
substantially the same terms (including the exercise price
thereof) is substituted by the surviving corporation for the
unexercised portion of the Option, or other special provision is
made for continuation of the Option in the event of the sale or
transfer of assets, liquidation or dissolution, if (A) the
Executive is terminated by the surviving corporation without
"cause" (as defined below), (B) the Executive suffers a reduction
in the annual rate of base salary or level of participation in any
bonus or incentive plan for which he is eligible, relative to the
amount thereof paid to the Executive by
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<PAGE>
the Company prior to such transaction or (C) the Executive suffers
a material diminution in his position, duties, responsibility or
authority, relative to the level thereof enjoyed by the Executive
during his employment by the Company prior to such transaction,
then and in such event vesting of Options granted to the Executive
pursuant to paragraph (a) of Section 1 shall accelerate and such
Options shall be fully exercisable by the Executive without regard
to any installment provision contained in paragraph (b) of Section
1.
(iii) In no event, however, may any Option which
becomes exercisable pursuant to this paragraph (a) of Section 5,
be exercised, in whole or in part, later than the date specified
in paragraph (d) of Section 1 above.
(b) TERMINATION OF EMPLOYMENT. In the event that an
Executive's employment with the Company terminates, other than by reason of
death or "Total and Permanent Disability", voluntary termination of employment
by the Executive or termination by the Company for "cause", vesting of Options
granted to the Executive pursuant to paragraph (a) of Section 1 shall accelerate
and such Options shall be fully exercisable by the Executive for a period which
shall not exceed the earlier of the remaining Option Term or three months from
such termination of employment, without regard to any installment provision
contained in paragraph (b) of Section 1. At the expiration of such three month
period, or such earlier time as may be applicable, any such Options which remain
unexercised shall expire. Notwithstanding the foregoing, if the Executive's
employment is terminated for cause, the Company may notify the Executive that
any Options not exercised prior to the termination are cancelled. For purposes
hereof, (x) "Total and Permanent Disability" shall mean the inability of the
Executive to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a continuous
period of not less than twelve months; and (y) a termination of employment for
"cause" shall include, but not be limited to, dismissal as a result of (1)
Executive's conviction of any crime or offense involving money or other property
of the Company or its subsidiaries or which constitutes a felony in the
jurisdiction involved; (2) Executive's gross negligence, gross incompetence or
willful misconduct in the performance of his or her duties; or (3) Executive's
willful failure or refusal to perform his or her duties.
(c) TOTAL AND PERMANENT DISABILITY. If an Executive's
employment with the Company is terminated on account of Total and Permanent
Disability, vesting of Options granted to the Executive pursuant to paragraph
(a) of Section 1 shall accelerate and such Options shall be fully exercisable by
the Executive for a period which shall not exceed the earlier of the remaining
Option Term or one year from the date of such Executive's disability, without
regard to any installment provision contained in paragraph (b) of Section 1. At
the expiration of such one year period, or such earlier time as may be
applicable, any such Options which remain unexercised shall expire.
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<PAGE>
(d) DEATH. If an Executive's employment with the Company is
terminated on account of death, vesting of Options granted to the Executive
pursuant to paragraph (a) of Section 1 shall accelerate and such Options shall
be fully exercisable by the person or persons who shall have acquired the right,
by will or the laws of descent and distribution, to exercise his Options for a
period which shall not exceed the earlier of the remaining Option Term or one
year from the date of such Executive's death, without regard to any installment
provision contained in paragraph (b) of Section 1. At the expiration of such one
year period, or such earlier time as may be applicable, any such Options which
remain unexercised shall expire.
6. ADMINISTRATION BY COMMITTEE. The interpretation and
construction by the Committee of any provisions of this Agreement shall be
final. No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Options granted hereunder.
The members of the Committee, of which there are at least two, are
"disinterested persons", as such term is defined pursuant to Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended.
7. RESTRICTIVE COVENANTS.
(a) COVENANT NOT TO COMPETE. The Executive acknowledges
that he or she is aware that the services performed by him or her for the
Company or its subsidiaries have been and are of a special and unique character.
The Executive further acknowledges and recognizes his or her possession of
confidential and proprietary information regarding the business of the Company.
Accordingly, the Executive agrees that he or she will not, without the written
permission of the Company, within or outside of the United States for a period
of one (1) year from the date on which such Executive's employment by or on
behalf of the Company or its subsidiaries is terminated (i) directly or
indirectly engage or become interested or involved in any Competitive Business
(as hereinafter defined), whether such engagement, interest or involvement shall
be as an employer, officer, director, owner, stockholder, employee, partner or
in any other capacity or relationship, (ii) assist others in engaging in any
Competitive Business in the manner described in the foregoing clause (i), or
(iii) induce employees of the Company or its subsidiaries to terminate their
employment with the Company or its subsidiaries or engage in any Competitive
Business; provided, however, that nothing contained in this Section 7(a) shall
be deemed to prohibit the Executive from acquiring, solely for investment
purposes, less than 5% of the publicly-traded shares of the capital stock of any
corporation. As used in this Section 7(a), the term "Competitive Business" means
and includes any business or activity that is now or at any time in the future
competitive with or directly related to the business conducted by the Company or
its subsidiaries on the date the Executive's employment by or on behalf of the
Company or its subsidiaries is terminated.
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<PAGE>
(b) AGREEMENT NOT TO SOLICIT CUSTOMERS. For a period of
one (1) year from the date on which such Executive's employment by or on behalf
of the Company or its subsidiaries is terminated, the Executive agrees that he
or she will not, for or on behalf of a Competitive Business, directly or
indirectly, as owner, officer, stockholder, partner, associate, consultant,
manager, advisor, representative, employee, agent, creditor or otherwise,
attempt to solicit or in any other way disturb or service any person, firm or
corporation that has been a customer account of the Company or its subsidiaries
at any time or times prior to the date hereof, whether or not the Executive had
direct account responsibility for such customer account.
(c) CONFIDENTIAL INFORMATION.
(i) The Executive agrees not to disclose to any
person or use, at any time after the date hereof, any confidential
information of the Company or its subsidiaries, whether the
Executive has such information in his memory or embodied in
writing or any other physical form. For purposes of this Agreement
the phrase "confidential information of the Company" means all
information which (a) is known only to the employees of the
Company or its subsidiaries, or others in a confidential
relationship with the Company or its subsidiaries or employees of
affiliated companies, (b) relates to specific technical matters,
such as the Company's or its subsidiaries' proprietary
information, plans, reports, and promotional, sales or operational
procedures and materials, or (c) relates to the identity and
solicitation of customers and accounting procedures of the Company
or its subsidiaries or other business practices of the Company or
its subsidiaries.
(ii) The Executive agrees not to remove from the
premises of the Company, at any time after the date hereof, any
document or object containing or reflecting any confidential
information of the Company or its subsidiaries, and the Executive
recognizes that all such documents and objects, whether developed
by the Company or by someone else for the Company, are the
exclusive property of the Company and its subsidiaries.
(iii) It is agreed that the names and addresses
of customers who were contacted by the Executive on behalf of the
Company or its subsidiaries, or of whom the Executive became aware
through his or her employment with the Company or its
subsidiaries, are trade secrets of the Company, as is other such
confidential information of the Company and its subsidiaries,
including but not limited to the customer's business needs and
requirements.
(iv) The Executive shall, at any time requested
by the Company after the date hereof, promptly deliver to the
Company all confidential memoranda, notes, reports, lists, and
other documents (and all copies thereof)
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<PAGE>
relating to the business of the Company which he or she may then
possess or have under his or her control.
8. LOCK-UP AGREEMENT. The Executive agrees, if requested by the
Company and an underwriter of Common Stock (or other securities) of the Company,
not to sell or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by the Executive during the one hundred eighty
(180) day period following the effective date of a registration statement filed
under the 1933 Act, as amended, without the prior consent of the Company or such
underwriter, as the case may be, provided that such agreement only applies to
registration statements including securities to be sold to the public in an
underwritten offering during the period ending on December 31, 2001.
9. MISCELLANEOUS.
(a) NO EMPLOYMENT RIGHTS. Nothing in the Agreement or in
any Option granted hereunder shall confer upon any employee the right to
continue in the employ of the Company.
(b) BINDING EFFECT. The Agreement shall be binding upon,
and inure to the benefit of the Company, Executive, and their respective
personal representatives, successors and permitted assigns.
(c) SINGULAR, PLURAL; GENDER. Whenever used herein, except
where the context clearly indicates to the contrary, nouns in the singular shall
include the plural, and the masculine pronoun shall include the feminine gender.
(d) HEADINGS. Headings of the Sections hereof are inserted
for convenience and reference and constitute no part of the Agreement.
(e) RIGHTS AS STOCKHOLDERS. The Executive or transferee
of an Option shall have no rights as a stockholder with respect to any Stock
subject to such Option prior to the purchase of such Stock by exercise of such
Option as provided herein.
(f) APPLICABLE LAW. This Agreement and the Options granted
hereunder shall be interpreted, administered and otherwise subject to the laws
of the State of New Jersey, except to the extent the General Corporation Law of
the State of Delaware shall govern.
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<PAGE>
IN WITNESS WHEREOF, the Company and the Executive have
executed this Agreement as of the day and year first written above.
EXECUTIVE XPEDITE SYSTEMS, INC.
- ------------------------- ----------------------------------
Name: By: Roy B. Andersen, Jr.
Address: President and CEO
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THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS,
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
WARRANTS TO PURCHASE SHARES OF COMMON
STOCK OF XPEDITE SYSTEMS, INC.
Warrant Certificate No. W--- As of April 23, 1996
This certifies that ------------- (the "Holder"), solely in
consideration for services previously performed on behalf of Xpedite Systems,
Inc., a Delaware corporation (the "Company"), is the holder of twenty-five
thousand (25,000) warrants (each, a "Warrant" and collectively, the "Warrants")
and, on the exercise thereof is entitled, subject to the other terms set forth
below, to purchase from the Company, an aggregate of twenty-five thousand
(25,000) fully paid and nonassessable shares of the Company's common stock, $.01
par value (the "Stock"), at a price per share of $17.50 (the "Warrant Exercise
Price"), upon surrender to Xpedite Systems, Inc., 446 Highway 35, Eatontown, New
Jersey 07724, attention: Chief Financial Officer (or to such other entity or at
such other location as the Company may advise Holder in writing) of this Warrant
Certificate and upon payment in cash, certified check or official bank check,
payable to the order of the Company in the amount of the Warrant Exercise Price
multiplied by the number of shares of Stock to be acquired pursuant to such
exercise. The Warrants shall have a term of ten (10) years and become
exercisable by the Holder beginning April 23, 1996. This Warrant Certificate and
all rights hereunder, to the extent not exercised in the manner set forth
herein, shall terminate and become null and void at 5:00 P.M. (Eastern Time) on
April 23, 2006 (the "Warrant Expiration Date").
This Warrant Certificate is subject to the following terms and
conditions:
1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.
The Warrants represented hereby are exercisable at the option of the Holder
beginning April 23, 1996 until 5:00 P.M. (Eastern Time) on the Warrant
Expiration Date, for all or
1
<PAGE>
a portion of the shares of Stock which may be purchased hereunder. The Company
agrees that the shares of Stock purchased on the exercise of each Warrant shall
be and be deemed to be issued to the Holder as the record owner of such shares
of Stock as of the close of business on the date on which this Warrant
Certificate shall have been surrendered and payment made for such shares of
Stock, subject to compliance with all provisions of the Securities Act of 1933,
as amended (the "Securities Act"), the Securities and Exchange Act of 1934 and
applicable state securities and Blue Sky laws. Certificates for the shares of
Stock so purchased, together with any other securities or property to which the
Holder is entitled upon such exercise, shall be delivered to the Holder by the
Company within a reasonable time after the rights represented by this Warrant
Certificate have been exercised. Each stock certificate so delivered shall be in
such denominations of Stock as may be requested by the Holder and shall be
registered in the name of the Holder or such other name as shall be designated
by the Holder. If, upon exercise of the Warrants represented hereby, fewer than
all of the shares of Stock evidenced by this Warrant Certificate are purchased
prior to the Warrant Expiration Date, one or more new warrants substantially in
the form of, and on the terms in, this Warrant Certificate will be issued for
the remaining number of shares of Stock not purchased upon exercise of the
Warrants represented hereby.
2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The
Company covenants and agrees that all shares of Stock which may be issued upon
the exercise of the rights represented by this Warrant Certificate will, upon
issuance, be duly authorized, validly issued, fully paid and nonassessable and
free from all preemptive rights of any stockholder and free of all taxes, liens
and charges with respect to the issue thereof, subject to the provisions of
Section 3 hereof. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant Certificate may be
exercised, the Company will at all times have authorized and reserved, for the
purpose of issue or transfer upon exercise of the subscription rights evidenced
by this Warrant Certificate, a sufficient number of shares of authorized but
unissued Stock, when and as required to provide for the exercise of the rights
represented by this Warrant Certificate.
3. ISSUE TAX. The issuance of certificates for shares of
Stock upon the exercise of this Warrant Certificate shall be made subject to
payment by the Holder of any issue tax in respect thereof.
2
<PAGE>
4. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY.
Nothing contained in this Warrant Certificate shall be construed as conferring
upon the Holder hereof the right to vote or to consent or to receive notice as a
stockholder in respect of meetings of stockholders for the election of directors
of the Company or any other matters or any rights whatsoever as a stockholder of
the Company. No cash dividends shall be payable or accrued in respect of this
Warrant Certificate or the shares of Stock purchasable hereunder until, and only
to the extent that, this Warrant Certificate shall have been exercised. No
provisions hereof, in the absence of affirmative action by the Holder to
purchase shares of Stock, and no mere enumeration herein of the rights or
privileges of the Holder hereof, shall give rise to any liability of the Holder
for the Warrant Exercise Price or as a stockholder of the Company whether such
liability is asserted by the Company or by its creditors.
5. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES; COMPLIANCE
WITH SECURITIES ACT.
5.1 RESTRICTIONS ON TRANSFERABILITY. This Warrant
Certificate, the Warrants represented hereby and the Stock issuable upon
exercise thereof (collectively, the "Securities"), shall not be transferable
except in compliance with the provisions of the Securities Act and applicable
state securities and Blue Sky laws. Any transfer of Securities shall be subject
to and preceded by the delivery to the Company of a legal opinion by counsel for
the Holder in form and substance reasonably satisfactory to the Company, to the
effect that such transfer is in compliance with applicable laws, including but
not limited to the laws described above.
5.2 RESTRICTIVE LEGEND. Each certificate representing the
Securities or any other securities issued in respect of the Securities upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event, shall (unless otherwise permitted by the Company) be stamped or otherwise
imprinted with a legend in substantially the following form:
THE SECURITIES REPRESENTED HEREBY HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITES LAWS AND NEITHER THE
SECURITIES NOR ANY INTEREST THEREIN MAY
BE OFFERED, SOLD, TRANSFERRED, PLEDGED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT
TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER SUCH ACT OR SUCH LAWS OR AN
EXEMPTION
3
<PAGE>
FROM REGISTRATION UNDER SUCH ACT AND
SUCH LAWS, WHICH, IN THE OPINION OF
COUNSEL FOR THE HOLDER, WHICH COUNSEL
AND OPINION ARE REASONABLY SATISFACTORY
TO COUNSEL FOR THIS CORPORATION, IS
AVAILIABLE
5.3 OWNERSHIP. The Company and any agent of the Company may
treat the person in whose name this Warrant Certificate is registered on the
register kept at the offices of the Company as the owner and holder thereof for
all purposes, except that, if and when this Warrant Certificate is properly
assigned in blank, the Company and any agent of the Company may (but shall not
be obligated to) treat the bearer thereof as the owner of this Warrant
Certificate. This Warrant Certificate, if properly assigned, may be exercised by
a new holder without first having a new Warrant Certificate issued.
6. MODIFICATION AND WAIVER. This Warrant Certificate and any
provision hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of the same
is sought.
7. NOTICES. Any notice, request or other document required
or permitted to be given or delivered to the Holder or the Company shall be
personally delivered or shall be sent by certified or registered mail, postage
prepaid, if to the Holder at its address as shown on the books of the Company or
the transfer agent, or if to the Company at its principal office at 446 Highway
35, Eatontown, New Jersey 07724, Attention: Chief Financial Officer, and any
notice, request or other document shall be deemed to have been given upon
receipt if personally delivered, or on the fifth day after being mailed if
mailed. The Company shall notify the Holder in writing of any change of address
of the Company within a reasonable time following such change of address.
8. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The descriptive
headings of the several sections and paragraphs of this Warrant Certificate are
inserted for convenience only and do not constitute a part of this Warrant
Certificate. Except to the extent that the Delaware General Corporation Law
applies to matters related to internal governance of the Company and the rights
of the holders of its securities, this Warrant Certificate shall be construed
and enforced in accordance with, and the rights of the parties shall be governed
by, the laws of the State of New York, notwithstanding principles of conflicts
of laws.
4
<PAGE>
9. LOST WARRANT CERTIFICATES OR STOCK CERTIFICATES. The
Company agrees that upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction, or mutilation of this Warrant
Certificate or any stock certificate deliverable upon the exercise hereof and,
in the case of any such loss, theft or destruction, upon receipt of an indemnity
and, if requested, bond reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of this Warrant
Certificate or such stock certificate, the Company at its expense will make and
deliver a new Warrant Certificate or stock certificate, of like tenor, in lieu
of the lost, stolen, destroyed or mutilated Warrant Certificate or stock
certificate.
10. FRACTIONAL SHARES. No fractional shares of Stock shall
be issued upon exercise of this Warrant Certificate. The Company shall, in lieu
of issuing any fractional share of Stock, pay the Holder a sum in cash equal to
such fraction multiplied by the Stock Price (as defined below) on the trading
day preceding such exercise.
The term Stock Price for any trading day shall mean (A) the
mean, on any trading day, between the high and low sale price of a share of
Stock or if no such sale takes place on any such trading day, the mean of the
highest closing bid and lowest closing asked prices thereof on any such trading
day, in each case as officially reported on the Nasdaq National Market System or
any national securities exchanges on which the Stock is then listed or admitted
to trading, or (B) if the Stock is not then quoted on the Nasdaq National Market
System or listed or admitted to trading on any national securities exchange, the
mean between the highest and lowest bid prices reported by the market makers and
dealers for the Stock listed as such by the National Quotation Bureau,
Incorporated or any similar successor organization, or (C) if the Stock not then
so reported, an amount determined in good faith by the Company.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be executed by its officer, thereunto duly authorized.
XPEDITE SYSTEMS, INC.
By:-----------------------------
Name: Roy B. Andersen, Jr.
Title: President
5
SHAREHOLDERS AGREEMENT
SHAREHOLDERS AGREEMENT dated as of January 31, 1997
among XPEDITE SYSTEMS, INC., a Delaware corporation (the "COMPANY"); DAVID
EPSTEIN, an individual, STUART EPSTEIN, an individual, ROBERT EPSTEIN, an
individual (collectively, the "EPSTEINS"); APA EXCELSIOR III, L.P., a Delaware
limited partnership, COUTTS & CO. (JERSEY), CUSTODIAN FOR APA EXCELSIOR
III/OFFSHORE, L.P., a Channel Islands corporation, CIN VENTURE NOMINEES, LTD., a
United Kingdom corporation and APA/FOSTIN PENNSYLVANIA VENTURE CAPITAL FUND,
L.P., a New York limited partnership (collectively, the "PATRICOF SHAREHOLDERS"
and together with the Epsteins, the "CONTROLLING SHAREHOLDERS").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Controlling Shareholders own an aggregate of
approximately 34% of the issued and outstanding common stock, par value $.01 per
share (the "Common Stock") of the Company; and
WHEREAS, the Board of Directors (the "Board") of the Company
wishes to ensure that, in connection with any sale of shares of Common Stock by
two or more of the Controlling Shareholders, or one or more of the Controlling
Shareholders along with City Trading Corporation, European Trading Corporation,
11313 Yukon Corporation or any other holder of Common Stock whose activities are
under the management of Paul Leslie Hammond (individually, a "Thai Investor"
and, collectively, the "Thai Investors") all shareholders of the Company have an
opportunity to participate in such sale, in view of the fact that such a sale
may involve a "control premium".
NOW, THEREFORE, in consideration of the foregoing, the
parties hereto agree as follows:
1. TRADER OFFER . In the event of a proposed transfer, sale
or other disposition of more than twenty-five percent (25%) of the issued and
outstanding shares of the Common Stock (the number of shares proposed to be
sold, transferred or otherwise disposed of, hereinafter, the "Proposed Sale
Shares") by two or more of the Controlling Shareholders or one or more of the
Controlling Shareholders along with one or more of the Thai Investors (a
"Transfer") to
<PAGE>
any individual, corporation, general or limited partnership, limited liability
company, joint venture, estate, trust, association, organization, or other
entity or governmental body (each, a "Person") or group of Persons other than
another Controlling Shareholder or group of Controlling Shareholders, whether in
an individual transaction or in a series of related transactions (collectively,
the "Proposed Transfer"):
(a) the Proposed Transferee shall be required
to commence a tender offer (the "Offer") to purchase from the shareholders of
the Company other than the Controlling Shareholders (the "Non-Controlling
Shareholders") their aggregate pro rata portion (determined as the total number
of shares of Common Stock outstanding (on a fully diluted basis) held by the
Non-Controlling Shareholders divided by the total number of shares of Common
Stock outstanding (on a fully diluted basis)), of the Proposed Sale Shares (the
Non- Controlling Shareholders' pro rata portion of the Proposed Sale Shares,
hereinafter, the "NCS Portion"), at the same price and upon terms and conditions
substantially similar (but not less favorable) to those pursuant to which the
Proposed Transferee proposes to purchase shares of Common Stock from the
Controlling Shareholders. Such Offer shall be made in accordance with Regulation
14D and Regulation 14E (the "Tender Offer Rules") promulgated under the
Securities Exchange Act of 1934, as amended;
(b) with respect to the Proposed Sale Shares
which are not required to be the subject of the Offer (i.e., the Proposed Sale
Shares other than the NCS Portion, which shall hereinafter be referred to as the
"CS Portion"), the Proposed Transferee may complete its acquisition of such CS
Portion at any time as long as the Proposed Transferee has (i) provided to the
Board written evidence reasonably satisfactory to the Board to the effect that
the Proposed Transferee has obtained financing commitments in amounts sufficient
to enable the Proposed Transferee to complete the purchase of the NCS Portion
and (ii) executed and delivered to the Company a binding commitment, in form and
substance reasonably satisfactory to the Board, to complete the Offer and to
purchase a number of shares of Common Stock which is at least equal to the NCS
Portion tendered pursuant thereto;
(c) the Board shall (i) cooperate with the
Proposed Transferee in connection with the dissemination of the Offer, (ii)
evaluate and respond to such Offer in accordance with the Tender Offer Rules and
its fiduciary duties to the shareholders of the Company and (iii), subject to
the Board's fiduciary duties to the shareholders of the
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<PAGE>
Company, take such steps as may be required by ss.203 of the General Corporation
Law of the State of Delaware in order to enable the Proposed Transferee to
acquire and enjoy the benefits of ownership of the Proposed Sale Shares; and
(d) to the extent a number of shares less than
the NCS Portion is tendered pursuant to the Offer, following the expiration of
the Offer the Proposed Transferee shall be entitled to purchase form the
Controlling Shareholders a number of shares equal to the number of shares in the
NCS Portion which were not tendered by the Non-Controlling Shareholders.
2. REMEDIES. The parties agree and acknowledge that money
damages would not be an adequate remedy for breach of the provisions of this
Agreement and that any party hereto shall be entitled, in its sole discretion,
to apply to any court of competent jurisdiction for specific performance or
injunctive relief in order to enforce or prevent any violation of the provisions
of this Agreement, in addition to its remedies at law.
3. TRANSFER AGENT. The parties agree and acknowledge that
the Company shall have the right to instruct the Company's transfer agent not to
effect any transfer of shares of Common Stock held by the Controlling
Shareholders or the Thai Investors if such transfer would violate any provision
of this Agreement.
4. NOTICES. Any notice given pursuant to this Agreement
shall be in writing and shall be either personally delivered, sent by telex or
facsimile (with confirmation by certified mail, return receipt requested), by a
nationally recognized overnight courier or mailed by certified mail, return
receipt requested:
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<PAGE>
To the Company:
Xpedite Systems, Inc.
446 Highway 35
Eatontown, New Jersey 07724
Attention: President
with a copy to:
Paul, Hastings, Janofsky & Walker
399 Park Avenue
New York, New York 10022-4697
Attention: Neil A. Torpey
and to any of the Controlling Shareholders at such address as is indicated in
Schedule 1 attached hereto or at such other address or to the attention of such
other person as the recipient party has specified by prior written notice to the
sending party. Notice shall be effective when so personally delivered, one
business day after being sent by courier, facsimile or telex or five (5) days
after being mailed.
5. MODIFICATION, AMENDMENT, WAIVER. No modification,
amendment or waiver of any provision of this Agreement shall be effective unless
approved in writing by the parties hereto. The failure of any party at any time
to enforce any of the provisions of this Agreement shall in no way be construed
as a waiver of such provisions and shall not affect the rights of the party
thereafter to enforce the provisions of this Agreement in accordance with its
terms.
6. TERM; COMPLETE AGREEMENT. This Agreement shall terminate
on July 1, 1998. This document embodies the complete agreement and understanding
between and among the parties hereto with respect to the subject matter hereof,
and supersedes and preempts any prior understandings, agreements, or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof.
7. SUCCESSORS AND ASSIGNS. This Agreement will bind and
inure to the benefit of and be enforceable by the parties and their respective
permitted successors and assigns.
8. COUNTERPARTS. This Agreement may be executed in separate
counterparts, each of which will be an original and all of which taken together
will constitute one and the same Agreement.
-4-
<PAGE>
9. APPLICABLE LAW. All questions concerning this Agreement
will be governed by and interpreted in accordance with the internal laws of the
State of Delaware, without giving effect to principles of conflicts of laws.
10. ACKNOWLEDGEMENT. The parties hereto acknowledge that the
arrangements among them set forth herein have been entered into in lieu of the
adoption by the Company of alternative measures that were contemplated by the
Board (which measures included the adoption of a "poison pill").
* * * *
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the date first above written.
XPEDITE SYSTEMS, INC.
By: --------------------------------------
Title:
------------------------------------------
David Epstein
------------------------------------------
Stuart Epstein
------------------------------------------
Robert Epstein
APA EXCELSIOR III, L.P.
By: APA Excelsior III Partners, L.P.
General Partner
By: -----------------------------
Name:
Title:
COUTTS & CO. (JERSEY), LTD.,
CUSTODIAN FOR APA EXCELSIOR
III/OFFSHORE, L.P.
By: APA Excelsior III Partners, L.P.
General Partner
By: -----------------------------
Name:
Title:
<PAGE>
CIN VENTURE NOMINEES LTD.
By: Patricof & Co. Ventures, Inc.
Investment Manager
By: ----------------------------
Name:
Title:
APA/FOSTIN PENNSYLVANIA VENTURE
CAPITAL FUND, L.P.
By: APA Pennsylvania Partners, a
New York partnership
General Partner
By: ----------------------------
Name:
Title:
<PAGE>
SCHEDULE 1
NAME AND ADDRESS OF CONTROLLING SHAREHOLDERS
--------------------------------------------
David Epstein
David Epstein & Associates
830 Post Road East
Westport, CT 06880
Stuart Epstein
Cohen & Wolf, P.C.
595 Summer Street
Stamford, CT 06901
Robert Epstein
Epstein, Fogerty, Cohen & Selby
88 Field Point Road
Greenwich, CT 06836
APA Excelsior III, L.P.
Coutts & Co. (Jersey), Custodian for
APA Excelsior III/Offshore, L.P.
CIN Venture Nominees, Ltd.
APA/Fostin Pennsylvania Venture Capital Fund, L.P.
c/o Patricof & Co. Ventures, Inc.
445 Park Avenue
New York, NY 10022
XPEDITE SYSTEMS, INC.
SUBSIDIARIES OF THE REGISTRANT
Xpedite Systems Worldwide, Inc., a Delaware corporation
Xpedite Systems Canada, Ltd., a Delaware corporation
Xpedite Systems Canada, Inc., a Canadian corporation
Swift Global Communications Inc., a Delaware corporation
The following entities are subsidiaries of Swift Global Communications Inc.:
Swift Global International Ltd., a New York corporation
Swift Global Communications H.K. Limited, a Hong Kong corporation
Phone Technology Inc., a Delaware corporation
ViTel International Holding Company, Inc., a Delaware corporation
The following entities are subsidiaries of ViTel International
Holding Company, Inc.:
ViTel Limited, a United Kingdom corporation
ViTel Scandinavia A/S Kolding, Denmark, a Danish corporation
ViTel Bureau Services Limited, a United Kingdom corporation
ViTel International (H.K.) Limited, a Hong Kong corporation
ViTel Malaysia Sdn Bhd, a Malaysian corporation
ViTel International (Australia) Pty Ltd., an Australian corporation
ViTel International (New Zealand) Ltd., a New Zealand corporation
ViTel International, Inc., a New York corporation
ViTel International, Inc., a Delaware corporation
ViTel Telecommunications of Canada, Inc., a Canadian corporation
ViTel (Japan) Limited, a Japanese corporation
ViTel International (AustralAsia) Ltd., a New Zealand corporation
ViTel Data Network Limited, a Hong Kong corporation
ViTel GmbH, a German corporation
Comwave Communications AG, a Swiss corporation
The following entities are subsidiaries of Comwave Communications AG:
Comwave (U.K.) Ltd., a United Kingdom corporation
Comwave GmbH, a German corporation
U.S. Comwave Communications, Inc., a New York corporation
Comwave Communications Sarl, a French corporation
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-83754) pertaining to Xpedite Systems, Inc. 1992 Incentive Stock
Option Plan, Xpedite Systems, Inc. 1993 Incentive Stock Option Plan, and Certain
Warrant Grants to Certain Individuals and Registration Statement (Form S-3 No.
333-08259) of Xpedite Systems, Inc. and in the related Prospectus of our reports
dated February 27, 1997, with respect to the consolidated financial statements
and schedule of Xpedite Systems, Inc. included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
Ernst & Young LLP
MetroPark, New Jersey
March 26, 1997
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of Xpedite Systems, Inc.
We have audited the consolidated financial statements of Xpedite Systems,
Inc. as of December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996, and have issued our report thereon dated
February 27, 1997 (included elsewhere in this Form 10-K). Our audits also
included the financial statement schedule listed in Item 14(a) of this Form
10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth herein.
Ernst & Young LLP
MetroPark, New Jersey
February 27, 1997
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