-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PTeP9Ceq48t0loUg3HAM/xpBAOl7GrVKlSYDDWPm983QHkbvdUWs6FdxBwia2ENW cNfg9h4F9fDcgUeG3fxmGQ== 0000930413-97-000189.txt : 19970329 0000930413-97-000189.hdr.sgml : 19970329 ACCESSION NUMBER: 0000930413-97-000189 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: XPEDITE SYSTEMS INC CENTRAL INDEX KEY: 0000854009 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 222903158 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23394 FILM NUMBER: 97567752 BUSINESS ADDRESS: STREET 1: 446 HIGHWAY 35 CITY: EATONTOWN STATE: NJ ZIP: 07724 BUSINESS PHONE: 9083893900 MAIL ADDRESS: STREET 1: 446 HIGHWAYS 35 CITY: EATONTOWN STATE: NJ ZIP: 07724 10-K 1 ANNUAL REPORT ================================================================================ 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 - ------------------------------------ ------------------------------- (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. 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. 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 2 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 3 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. 4 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 5 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 6 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. 7 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 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 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 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.
Years Ended December 31, ---------------------------------------------------------------------- 1992 1993 (1) 1994 1995 (2) 1996 ---------------------------------------------------------------------- (in thousands, except per share data) 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
11
December 31, ---------------------------------------------------------------- 1992 1993 1994 1995 (2) 1996 ---- (IN THOUSANDS) 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
- -------------------- (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 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 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 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 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 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 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 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 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 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 XPEDITE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS ASSETS DECEMBER 31, ----------------------------- 1996 1995 --------- --------- 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 =========== ===========
See accompanying notes. 22 XPEDITE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) DECEMBER 31, ----------------------------- 1996 1995 --------- --------- 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 =========== ===========
See accompanying notes. 23 XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996 1995 1994 ------------- ------------- -------- 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 =========== ============ ==========
See accompanying notes. 24 XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) ADDITIONAL COMMON STOCK PAID-IN ACCUMULATED TREASURY STOCK ----------------- ------------------ SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL -------- -------- --------- --------- -------- -------- -------- 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 ========== ========== ============ ============ ======== ========= ============
See accompanying notes. 25 XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS 1996 1995 1994 ------------- ------------- -------- OPERATING ACTIVITIES Net income (loss).............................................. $10,433,462 $(46,563,944) $4,727,558 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization ............................... 8,437,697 3,060,801 1,674,189 Write-off of in-process research and development.............. - 53,000,000 - Accretion on subordinated debt .............................. 175,925 - - Deferred income taxes......................................... (656,400) (2,012,700) 157,000 Change in operating assets and liabilities: Accounts receivable.......................................... (9,182,216) (839,721) (477,246) Other current assets......................................... 934,139 355,833 (461,046) Other assets................................................. (131,453) - 41,783 Accounts payable............................................. (645,052) (3,128,006) 1,147,423 Accrued expenses............................................. (1,206,077) 631,373 (1,926,770) Deferred revenue............................................. - - (13,000) Other liabilities............................................ 127,386 176,021 - Income taxes payable......................................... 3,855,874 1,665,745 121,306 --------- Net cash provided by operating activities...................... 12,143,285 6,345,402 4,991,197 INVESTING ACTIVITIES Acquisition of property, plant and equipment................... (8,964,368) (3,650,251) (4,280,337) Acquisition of businesses...................................... - (46,199,458) - Acquisition of intangibles...................................... (6,193,052) - - Purchase of computer software.................................. (272,417) (252,327) (365,028) Purchase of held-to-maturity securities........................ - (11,692,002) (5,818,012) Sale of held-to-maturity securities............................ - 17,510,014 - Investments in affiliates...................................... (1,693,893) (4,599) (339,700) Loans to affiliate............................................. (842,594) (1,622,513) (902,589) -------- ---------- ---------- Net cash used in investing activities.......................... (17,966,324) (45,911,136) (11,705,666) FINANCING ACTIVITIES Payments of acquisition liability.............................. - - (600,000) Proceeds from notes payable.................................... 2,915,516 40,000,000 1,495,701 Payment of debt issuance costs................................. - (1,402,500) - Repayments of other loans and notes payable.................... (9,766,158) (292,892) (2,599,486) Repayments of related party loans and notes payable.............. - - (3,618,102) Repayments of capital lease obligations........................ (289,924) (79,917) (39,502) Net proceeds from issuance of Common Stock..................... 10,585,506 129,805 22,371,206 Redemption of Preferred Stock shares........................... - - (372,000) Payment of Preferred Stock dividends........................... - - (74,476) ------------ ------------- --------- Net cash provided by financing activities...................... 3,444,940 38,354,496 16,563,341 Effect of exchange rate changes on cash........................ (18,181) (33,445) - -------- --------- ---------- (Decrease) increase in cash and cash equivalents............... (2,396,280) (1,244,683) 9,848,872 Cash and cash equivalents at beginning of year................. 9,076,250 10,320,933 472,061 --------- ---------- --------- Cash and cash equivalents at end of year....................... $6,679,970 $9,076,250 $10,320,933 ========== ========== ===========
See accompanying notes. 26 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 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 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 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 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 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 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 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 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:
1996 1995 1994 ------------------------ ----------------------- ---------------------- Amount Percent Amount Percent Amount Percent -------------- -------- ------------- ------- ------------ -------- 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% ============== ======== ============= ======= ============ ========
35 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 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 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 XPEDITE SYSTEMS, INC.
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 ----------- ----------- -------- ---------- ---------- ---------- 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 =========== ========== ==========
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 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 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 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 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 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 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 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 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 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 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 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
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS BALANCE AT CHARGED TO BEGINNING COSTS AND BALANCE AT DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) END OF PERIOD ------------ ----------- -------------- ------------ ------------- 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) =========== ============== ============ =============
- --------------------------- (1) These deductions relate to the write-off of accounts and credits issued to customers. S-2 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 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 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 EX-10.30 2 FORM OF OFFICERS' CONTINGENT STOCK PLAN 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 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- 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- (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- 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- (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 -6- 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. -7- (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. -8- (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) -9- 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. -10- 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 -11- EX-10.31 3 FORM OF NON-EMPLOYEE DIRECTORS' WARRANT PLAN 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 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 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 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 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 EX-10.32 4 SHAREHOLDERS AGREEMENT 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 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 -2- 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: -3- 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- 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- 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: 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: 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 EX-21.1 5 SUBSIDIARIES OF THE REGISTRANT 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 EX-23.1 6 CONSENT OF ERNST & YOUNG LLP 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 EX-23.2 7 REPORT OF ERNST & YOUNG LLP 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 EX-27 8 FDS --
5 0000854009 XPEDITE SYSTEMS INC. 1 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 6679970 0 27600334 1851000 0 35822316 31413108 10912682 88390872 31349214 0 0 0 89032 25048167 88390872 129847651 129847651 59976829 109394861 0 0 3662118 17552633 7119171 0 0 0 0 10433462 1.20 1.20
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