UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 1997 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO ____________________
COMMISSION FILE NUMBER 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 IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
446 HIGHWAY 35
EATONTOWN, NEW JERSEY 07724
- ---------------------------------------- ---------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(908) 389-3900
- --------------------------------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
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 PERIODS 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 ___
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTIONS 12, 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY THE COURT. YES _____ NO____
APPLICABLE ONLY TO CORPORATE ISSUERS
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICAL DATE.
COMMON STOCK, $.01 PAR VALUE, 8,987,483 SHARES AS OF AUGUST 8, 1997.
<PAGE>
XPEDITE SYSTEMS, INC.
- INDEX -
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Consolidated Balance Sheets - June 30, 1997
and December 31, 1996 .............................. 3
Consolidated Statements of Operations
- Six and Three months ended June 30, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity
- Six months ended June 30, 1997 ................... 5
Consolidated Statements of Cash Flows
- Six months ended June 30, 1997 and 1996 .......... 6
Notes to Consolidated Financial Statements ............ 7
ITEM 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 9
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders ..... 14
ITEM 6 - Exhibits and Reports on Form 8-K ........................ 14
SIGNATURES .......................................................... 15
Page 2
<PAGE>
<TABLE>
<CAPTION>
PART I XPEDITE SYSTEMS, INC.
ITEM 1. CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents....................................................... $ 5,124,188 $ 6,679,970
Accounts receivable, net of reserve for allowances and doubtful accounts of
$2,160,000 at June 30, 1997 and $1,851,000 at December 31, 1996............... 30,076,912 25,749,334
Deferred income taxes.......................................................... 1,903,694 1,903,694
Other current assets............................................................ 5,084,143 4,290,034
-------------- ---------------
Total current assets..................................................... 42,188,937 38,623,032
Property, plant and equipment, net................................................... 21,981,552 20,500,426
Customer lists, net of accumulated amortization of $2,614,000 at June 30, 1997 and
$2,004,000 at December 31, 1996................................................... 8,059,579 8,232,144
Purchased software, net of accumulated amortization of $2,561,000 at June 30, 1997
and $2,027,000 at December 31, 1996............................................... 2,669,917 3,156,044
Costs in excess of fair value of net assets acquired, net of accumulated
amortization of $1,466,000 at June 30, 1997 and $2,561,000 at December 31, 1996... 9,997,945 10,609,687
Investments in affiliates, at cost................................................... 2,178,397 2,168,248
Loans to affiliate................................................................... 3,955,946 3,452,580
Deferred income taxes................................................................ 1,879,917 1,879,917
Other assets......................................................................... 2,620,970 2,569,510
-------------- ---------------
Total.................................................................... $ 95,533,160 $ 91,191,588
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 12,199,571 $ 10,067,510
Accrued expenses................................................................ 10,202,503 8,721,801
Current portion of long-term debt............................................... 7,671,208 7,763,459
Current portion of capital lease obligations.................................... 230,315 241,995
Income taxes payable............................................................ 5,918,261 7,131,347
Other current liabilities....................................................... 266,435 223,818
-------------- ---------------
Total current liabilities................................................ 36,488,293 34,149,930
Long-term debt....................................................................... 24,060,352 27,146,147
Long-term portion of capital lease obligations....................................... 206,219 326,686
Deferred income taxes................................................................ 3,599,576 3,692,134
Other liabilities.................................................................... 775,911 739,492
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000; none issued and
outstanding at June 30, 1997 and December 31, 1996......................... - -
Common Stock, $.01 par value, authorized 15,000,000; issued and
outstanding 8,945,051 at June 30, 1997, and 8,903,240 shares at
December 31, 1996............................................................ 89,451 89,032
Additional paid-in capital...................................................... 65,191,986 64,782,539
Accumulated deficit............................................................. (34,662,628) (39,518,372)
Less: Treasury stock; 72,000 shares at June 30, 1997, and
December 31, 1996; at cost................................................... (216,000) (216,000)
-------------- ---------------
Total stockholders' equity............................................... 30,402,809 25,137,199
-------------- ---------------
Total.................................................................... $ 95,533,160 $ 91,191,588
============== ===============
See notes to consolidated financial statements.
Page 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
SIX MONTHS ENDED JUNE 30, THREE MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues:
Domestic service revenues .... $ 49,234,094 $ 37,724,098 $ 25,936,679 $ 19,341,994
International service revenues 27,516,236 20,291,338 14,892,690 10,414,813
System sales and other ....... 2,992,293 3,580,555 1,654,986 1,755,574
------------ ------------ ------------ ------------
Total net revenues ......... 79,742,623 61,595,991 42,484,355 31,512,381
Cost of sales:
Operations, line charges and
support engineering ...... 37,756,717 26,677,926 19,826,580 13,755,690
Cost of sales of systems ..... 1,018,939 1,559,618 667,544 682,275
------------ ------------ ------------ ------------
Total cost of sales ........ 38,775,656 28,237,544 20,494,124 14,437,965
------------ ------------ ------------ ------------
Gross margin ......................... 40,966,967 33,358,447 21,990,231 17,074,416
Operating expenses:
Selling and marketing ........ 18,340,754 13,304,888 9,575,104 6,852,525
General and administrative ... 4,433,112 4,014,502 2,318,364 1,960,382
Research and development ..... 2,413,017 2,483,396 1,302,963 1,273,710
Depreciation and amortization 4,783,015 3,498,304 2,504,030 1,810,143
------------ ------------ ------------ ------------
Total operating expenses ... 29,969,898 23,301,090 15,700,461 11,896,760
------------ ------------ ------------ ------------
Operating income ..................... 10,997,069 10,057,357 6,289,770 5,177,656
Interest income ...................... 176,646 245,431 80,056 131,081
Interest expense ..................... (1,434,244) (2,002,891) (714,782) (996,228)
Other income (expense) ............... (76,809) 130,061 (25,868) 29,935
------------ ------------ ------------ ------------
Income before income taxes ........... 9,662,662 8,429,958 5,629,176 4,342,444
Income tax expense ................... 3,872,735 3,460,817 2,249,734 1,740,617
------------ ------------ ------------ ------------
Net income ........................... $ 5,789,927 $ 4,969,141 $ 3,379,442 $ 2,601,827
============ ============ ============ ============
Net income per Common Share .......... $ 0.62 $ 0.61 $ 0.36 $ 0.31
============ ============ ============ ============
Weighted average shares outstanding .. 9,344,000 8,204,000 9,329,700 8,331,300
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------- PAID-IN ACCUMULATED -------------------
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT TOTAL
------ ------ ------- ------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 8,903,240 $89,032 $ 64,782,539 $(39,518,372) (72,000) $(216,000) $25,137,199
Exercise of stock options............. 26,682 268 192,398 - - - 192,666
Issuance of performance stock options. 15,129 151 (151) -
Deferred compensation cost ........... - - 217,200 - - - 217,200
Cumulative translation
adjustment......................... - - - (934,183) - - (934,183)
Net income............................ - - - 5,789,927 - - 5,789,927
--------- ------- ------------ ------------ ------- --------- -----------
BALANCE, JUNE 30, 1997 8,945,051 $89,451 $ 65,191,986 $(34,662,628) (72,000) $(216,000) $30,402,809
========= ======= ============ ============ ======= ========= ===========
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
------------------------------
1997 1996
------------- ------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income.................................................. $ 5,789,927 $ 4,969,141
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 5,224,259 3,925,065
Other non-cash losses ................................ 140,391 225,990
Deferred income taxes ................................ (92,558) (1,278)
Change in operating assets and liabilities:
Accounts receivable .................................. (4,327,578) (3,658,969)
Other current assets.................................. (952,616) (1,661,542)
Other assets ......................................... (172,899) (14,418)
Accounts payable ..................................... 2,132,061 (108,716)
Accrued expenses...................................... 1,480,702 299,361
Other liabilities..................................... 79,036 100,219
Income taxes payable.................................. (1,213,086) 509,313
------------- ------------
Net cash provided by operating activities................... 8,087,639 4,584,166
------------- ------------
INVESTING ACTIVITIES:
Acquisition of property, equipment, computer software..... (5,124,989) (4,689,966)
Acquisition of businesses ................................ - (1,275,000)
Investments in affiliates................................. (10,149) (2,352)
Loans to affiliate ....................................... (503,366) (760,675)
------------- ------------
Net cash used in investing activities....................... (5,638,504) (6,727,993)
------------- ------------
FINANCING ACTIVITIES:
Proceeds from loans and notes payable..................... 2,050,000 700,000
Repayments of loans and notes payable .................... (5,228,046) (2,862,197)
Repayments of capital lease obligations................... (132,147) (98,002)
Net proceeds from issuance of Common Stock................ 192,666 140,099
------------- ------------
Net cash used in financing activities ...................... (3,117,527) (2,120,100)
------------- ------------
Effect of exchange rate changes on cash .................... (887,390) (284,023)
------------- ------------
Decrease in cash and cash equivalents....................... (1,555,782) (4,547,950)
Cash and cash equivalents at beginning of period ........... 6,679,970 9,076,250
------------- ------------
Cash and cash equivalents at end of period ................. $ 5,124,188 $ 4,528,300
============= ============
</TABLE>
See notes to consolidated financial statement.
Page 6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
A. The financial information included herein is unaudited; however, such
information has been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the six
months ended June 30, 1997, are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the Xpedite Systems, Inc. annual
report on Form 10-K for the year ended December 31, 1996. Certain
prior years amounts have been reclassified to conform with the current
year presentation.
B. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, EARNINGS PER SHARE, which is required to be adopted
on December 31, 1997. At that time, the Company will be required to
change the method it currently uses to compute earnings per share and
to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock
options will be excluded. The impact is expected to result in an
increase in primary earnings per share for the second quarter and six
months ended June 30, 1997 of $0.02 and $0.03 per share, respectively,
and an increase in primary earnings per share for the second quarter
and six months ended June 30, 1996 of $0.03 and $0.03 per share,
respectively. The impact of Statement 128 on the calculation of fully
diluted earnings per share for these quarters is not expected to be
material.
2. Subsequent Events
The Company and Xpedite Acquisition Corp., a Delaware corporation
("Acquisition Corp."), whose stockholders will include UBS Partners LLC (an
affiliate of UBS Capital LLC), Fenway Partners, Inc. and certain members of
the Company's senior management (the "Management Buyers"), have entered
into an Agreement and Plan of Merger dated as of August 8, 1997 (the
"Merger Agreement") under which Acquisition Corp. will merge with and into
the Company for a cash purchase price of $23.25 per share (including shares
issued upon the exercise of incentive stock options) of common stock, $0.01
par value per share (the "Common Stock") of the Company, which values the
Company at approximately $250 million including existing indebtedness.
Concurrently with the execution of the Merger Agreement, certain
stockholders of the Company, including the members of the Board of
Directors, the Management Buyers, certain funds managed by Patricof & Co.
Ventures, Inc. ("Patricof"), and David, Stuart and Robert Epstein
(collectively, the "Epstein Family"), each entered into individual
Stockholder Agreements (the "Stockholder Agreements"), dated as of August
8, 1997, with the Company and Acquisition Corp. Each Stockholder Agreement
provides, among other things, that the stockholder party thereto will vote
his or its shares, among other things, in favor of the Merger of
Acquisition Corp. with and into the Company (the "Merger"), the approval of
the Merger Agreement and the approval of certain amendments to the
Company's certificate of incorporation. Pursuant to the Stockholder
Agreement, each stockholder gives Acquisition Corp. his or its irrevocable
proxy to vote his or its shares, among other things, in favor of the
matters referred to above and agrees to certain restrictions on transfer
with respect to his or its shares. There are an aggregate of 4,164,486
shares of Common Stock (on a fully-diluted basis) subject to the
Stockholder Agreements.
Page 7
<PAGE>
In addition, PHJ&W No. 2 Limited, an English corporation and a wholly-owned
subsidiary of the Company ("UK Acquisition Corp."), Xpedite Systems
Limited, an English corporation ("Xpedite UK"), and the shareholders of
Xpedite UK have entered into a Share Purchase Agreement (the "UK
Agreement") dated as of August 8, 1997, pursuant to which UK Acquisition
Corp. will acquire all of the outstanding share capital of Xpedite UK for
$87 million, subject to certain adjustments (the "UK Acquisition"). The UK
Acquisition is expected to be completed simultaneously with the Merger.
However, the UK Acquisition is not conditional upon the completion of the
Merger. In the event the Merger is not completed, the Company will be
required to raise the financing necessary to complete the UK Acquisition.
The Merger Agreement, which is subject to completion of contemplated
financing and the closing of the UK Acquisition, requires shareholder and
regulatory approvals. The closing of the Merger Agreement is also subject
to, among other things, there being no regulatory change that would
materially and adversely affect the Company's ability to account for the
Merger using "recap accounting". To assist the Company in qualifying for
"recap accounting" treatment, certain of the Management Buyers have agreed
to retain certain of their shares of Common Stock in the Merger in lieu of
receiving cash therefor. In connection with the stockholder vote on the
Merger Agreement, stockholders of the Company will be offered the
opportunity to retain all, but not less than all, of their shares of Common
Stock in the Merger in lieu of receiving cash therefor. The Merger
Agreement provides that an aggregate of 205,000 shares of Common Stock may
be retained in the Merger by stockholders other than the Management Buyers;
in the event holders of more than 205,000 shares of Common Stock elect to
retain their shares, the number of shares to be retained by such
stockholders will be reduced on a pro rata basis to an aggregate of 205,000
shares. If holders of fewer than 205,000 shares of Common Stock elect to
retain their shares, the Epstein Family and Patricof have agreed to retain,
on a pro rata basis, a number of their shares of Common Stock equal to
205,000 minus the number of shares of Common Stock that stockholders other
than the Management Buyers have elected to retain.
The Board of Directors of the Company has, by unanimous vote of the
directors voting, approved the Merger Agreement and the UK Agreement. Both
transactions are expected to close in the fourth quarter of this year.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996, AND
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net revenues increased by 29.5% to $79.7 million and 34.8% to $42.5 million for
the six and three months ended June 30, 1997, respectively, as compared to the
same periods in 1996. For the six and three months ended June 30, 1997, domestic
service revenues increased $11.5 million to $49.2 million and $6.6 million to
$25.9 million, respectively, primarily from the efforts of the Company's
expanded domestic direct sales force in both penetrating new markets and
exploring expanded applications in existing markets. International service
revenues for the six and three months ended June 30, 1997, increased $7.2
million to $27.5 million, and $4.5 million to $14.9 million, respectively,
primarily from the Company's further expansion into international markets.
Compared to the same periods in 1996, system sales and other net revenues
decreased by 16.4% to $3.0 million and 5.7% to $1.7 million for the six and
three months ended June 30, 1997. The decreases were primarily related to fewer
sales of system upgrades and expansion equipment. System sales to affiliates
were $1.7 million and $2.4 million for the six months ended June 30, 1997 and
1996, respectively, and $1.1 million for both the three months ended June 30,
1997 and 1996, respectively.
The Company's gross margins were 51.4% and 51.8% for the six and three months
ended June 30, 1997, and 54.2% for both the same periods in 1996. Service
margins decreased to 50.8% and 51.4% for the six and three months ended June 30,
1997, as compared to 54.0% and 53.8% for the same periods in 1996. The Company
had experienced an increase in the cost of sales associated with the customers
acquired from Pacific Star Services Pty Limited ("PacStar"). The Company also
identified a number of routing issues, which caused traffic to be delivered at a
higher rate than the best cost available on the Xpedite network, and has also
increased certain fixed costs associated with leased lines. The Company believes
that these factors reduced gross margins in the first half of 1997, and has
taken corrective measures which have and will continue to lower the Company's
transmission costs. Margin rates on system sales and other revenues improved
from 56.4% for the six months ended June 30, 1996, to 65.9%, for the same period
in 1997, and declined from 61.1% for the three months ended June 30, 1996, to
59.7% for the same period in 1997, primarily as a result of a higher proportion
of royalty revenues in the six months ended June 30, 1997, which carry higher
margins.
Selling and marketing expenses increased by 37.8% and 39.7% to $18.3 million and
$9.6 million for the six and three months ended June 30, 1997, as compared to
the same periods in 1996. Selling and marketing expenses increased as a
percentage of net revenues, to 23.0% and 22.5% for the six and three months
ended June 30, 1997, from 21.6% and 21.7% for the same periods in 1996. The
Company increased its direct sales force to a total of 268 at June 30, 1997;
compared to 189 at June 30, 1996. As of June 30, 1997, the Company employed 173
of such salespersons in North America, and 95 internationally. The Company has
also expanded its customer care, sales support, marketing, and product
management functions to a total of 150 employees at June 30, 1997.
General and administrative expenses increased by 10.4% to $4.4 million for the
six months ended June 30, 1997, and 18.3% to $2.3 million for the three months
ended June 30, 1997, as compared to the same period in 1996, due to expanded
administrative support for the Company's growth. General and administrative
expenses as a percentage of net revenues decreased to 5.6% and 5.5% for the six
and three months ended June 30, 1997, as compared with 6.5% and 6.2% for the six
and three months ended June 30, 1996, primarily resulting from consolidation of
administrative and financial functions.
Research and development expenses decreased by 2.8% and increased 2.3% for the
six and three months ended June 30, 1997, to $2.4 million and $1.3 million
respectively, as compared to the same periods in 1996. The decreases were
primarily due to consolidation and integration of certain
Page 9
<PAGE>
research and development functions acquired in November 1995. Research and
development expenses as a percentage of net revenues decreased to 3.0% and 3.1%
for the six and three months ended June 30, 1997, from 4.0% for both the six and
three months ended June 30, 1996, primarily due to the Company's increased
revenue base.
Depreciation and amortization increased by 36.7% to $4.8 million for the six
months ended June 30, 1997, and 38.3% to $2.5 million for the three months ended
June 30, 1996, as compared to the same periods in the prior year. The increases
in depreciation and amortization are attributable to additional capital
equipment for expansion of the Company's systems to support the growth in
revenue, combined with depreciation and amortization of tangible and intangible
assets related to acquisitions.
As a result of the above, operating income increased by 9.3% to $11.0 million
for the six months ended June 30, 1997, and 21.5% to $6.3 million for the three
months ended June 30, 1997, as compared with the same periods in 1996. Operating
income as a percentage of net revenues decreased to 13.8% and 14.8% for the six
and three months ended June 30, 1997, as compared with 16.3% and 16.4% for the
six and three months ended June 30, 1996, respectively.
Interest income remained relatively constant at $0.2 million for the six months
ended June 30, 1997 and 1996, and $0.1 million for the three months ended June
30, 1997 and 1996. The Company also incurred interest expense of $1.4 million
and $0.7 million for the six and three months ended June 30, 1997, respectively.
Interest expense decreased mainly due to a reduction in average borrowings for
the six and three months ended June 30, 1997.
Income tax expense for the six and three months ended June 30, 1997, was $3.9
million and $2.2 million, or 40% of income before income taxes, compared to 41%
and 40% for the six and three months ended June 30, 1996.
As a result of the factors discussed above, the Company's net income increased
by 16.5% to $5.8 million for the six months ended June 30, 1997, and 29.9% to
$3.4 million for the three months ended June 30, 1997, as compared with $5.0
million and $2.6 million for the comparable periods in 1996. Although based on a
higher average share count, net income per common share increased by 1.6% to
$0.62 on 9,344,000 shares outstanding, for the six months ended June 30, 1997,
from $0.61 on 8,204,000 shares outstanding, for the six months ended June 30,
1996.
Page 10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company entered into a credit facility in November 1995, consisting of a
$40.0 million term loan and a $5.0 million revolving loan. As of June 30, 1997,
the Company had $3.2 million of available borrowings on its revolving loan. The
term loan is payable in quarterly installments of $1.25 million (subsequently
amended to $1.0 million reflecting the prepayment in August 1996) increasing
periodically to $2.25 million with a final payment in August 2001. During the
three months ended June 30, 1997, the Company made principal payments on the
term loan amounting to $1.25 million, and the balance at June 30, 1997, was
$29.5 million. The Company has other notes payable to banks and to a former
owner of ViTel totaling $0.4 million at June 30, 1997.
At June 30, 1997, the Company had $5.1 million in cash and cash equivalents, and
working capital of $5.7 million. Operations generated $8.1 million in cash for
the six months ended June 30, 1997, compared to $4.6 million for the same period
in 1996.
Net cash used in investing activities for the six months ended June 30, 1997,
was $5.6 million as compared with $6.7 million for the same period in 1996. The
Company's primary capital expenditures are investments in computer systems and
equipment, and telecommunications systems.
The Company and Xpedite Acquisition Corp., a Delaware corporation ("Acquisition
Corp."), whose stockholders will include UBS Partners LLC (an affiliate of UBS
Capital LLC), Fenway Partners, Inc. and certain members of the Company's senior
management (the "Management Buyers"), have entered into an Agreement and Plan of
Merger dated as of August 8, 1997 (the "Merger Agreement") under which
Acquisition Corp. will merge with and into the Company for a cash purchase price
of $23.25 per share (including shares issued upon the exercise of incentive
stock options) of common stock, $0.01 par value per share (the "Common Stock")
of the Company, which values the Company at approximately $250 million including
existing indebtedness.
Concurrently with the execution of the Merger Agreement, certain stockholders of
the Company, including the members of the Board of Directors, the Management
Buyers, certain funds managed by Patricof & Co. Ventures, Inc. ("Patricof"), and
David, Stuart and Robert Epstein (collectively, the "Epstein Family"), each
entered into individual Stockholder Agreements (the "Stockholder Agreements"),
dated as of August 8, 1997, with the Company and Acquisition Corp. Each
Stockholder Agreement provides, among other things, that the stockholder party
thereto will vote his or its shares, among other things, in favor of the Merger
of Acquisition Corp. with and into the Company (the "Merger"), the approval of
the Merger Agreement and the approval of certain amendments to the Company's
certificate of incorporation. Pursuant to the Stockholder Agreement, each
stockholder gives Acquisition Corp. his or its irrevocable proxy to vote his or
its shares, among other things, in favor of the matters referred to above and
agrees to certain restrictions on transfer with respect to his or its shares.
There are an aggregate of 4,164,486 shares of Common Stock (on a fully-diluted
basis) subject to the Stockholder Agreements.
In addition, PHJ&W No. 2 Limited, an English corporation and a wholly-owned
subsidiary of the Company ("UK Acquisition Corp."), Xpedite Systems Limited, an
English corporation ("Xpedite UK"), and the shareholders of Xpedite UK have
entered into a Share Purchase Agreement (the "UK Agreement") dated as of August
8, 1997, pursuant to which UK Acquisition Corp. will acquire all of the
outstanding share capital of Xpedite UK for $87 million, subject to certain
adjustments (the "UK Acquisition"). The UK Acquisition is expected to be
completed simultaneously with the Merger. However, the UK Acquisition is not
conditional upon the completion of the Merger. In the event the Merger is not
completed, the Company will be required to raise the financing necessary to
complete the UK Acquisition.
The Merger Agreement, which is subject to completion of contemplated financing
and the closing of the UK Acquisition, requires shareholder and regulatory
approvals. The closing of the Merger Agreement is also subject to, among other
things, there being no regulatory change that would
Page 11
<PAGE>
materially and adversely affect the Company's ability to account for the Merger
using "recap accounting". To assist the Company in qualifying for "recap
accounting" treatment, certain of the Management Buyers have agreed to retain
certain of their shares of Common Stock in the Merger in lieu of receiving cash
therefor. In connection with the stockholder vote on the Merger Agreement,
stockholders of the Company will be offered the opportunity to retain all, but
not less than all, of their shares of Common Stock in the Merger in lieu of
receiving cash therefor. The Merger Agreement provides that an aggregate of
205,000 shares of Common Stock may be retained in the Merger by stockholders
other than the Management Buyers; in the event holders of more than 205,000
shares of Common Stock elect to retain their shares, the number of shares to be
retained by such stockholders will be reduced on a pro rata basis to an
aggregate of 205,000 shares. If holders of fewer than 205,000 shares of Common
Stock elect to retain their shares, the Epstein Family and Patricof have agreed
to retain, on a pro rata basis, a number of their shares of Common Stock equal
to 205,000 minus the number of shares of Common Stock that stockholders other
than the Management Buyers have elected to retain.
The Board of Directors of the Company has, by unanimous vote of the directors
voting, approved the Merger Agreement and the UK Agreement. Both transactions
are expected to close in the fourth quarter of this year.
The Company has "put" and "call" arrangements relating to the outstanding shares
of each of Xpedite UK, Xpedite Systems, GmbH ("Xpedite Germany") and Xpedite
Systems, S.A. ("Xpedite France"), (collectively "the European Affiliates"). The
purchase prices payable in connection with the exercise of such "put" or "call"
options is based on, among other things, the achievement of certain financial
results as set forth in the put and call agreements. The Company has also been
granted a "special option" to purchase approximately 17% of the outstanding
shares of Xpedite Germany from a current shareholder at a cost of approximately
$27,000. While the Company expects to purchase Xpedite UK simultaneously with
the closing of the Merger, in the event the UK Agreement is terminated for any
reason, the "put" and "call" options with respect to Xpedite UK will continue to
be exercisable (with certain amendments to the "MC" and "CP" components of the
formula utilized to calculate the purchase price payable by the Company in
connection with any such exercise, as set forth in the Xpedite UK Agreement).
Assuming that Xpedite UK continues its current earnings trend, and utilizing the
Company's stock price and earnings as of the twelve months ended June 30, 1997,
the purchase price payable in connection with the exercise of 100% of the put
option with respect to Xpedite UK would be approximately $90.6 million. The
actual amount of the purchase price will more than likely differ from this
amount due to (1) the variable factors used to determine the purchase price;
and/or (2) the possibility of changes in the Company's capital structure, and/or
its continued status as a publicly traded company.
Xpedite Germany has recently produced operating results indicating they may
attain the minimum earnings required in order to enable the exercise of the put
or call option under the Xpedite Germany agreement in 1998. Assuming that
Xpedite Germany achieves the minimum amount of earnings of $0.9 million (at
current exchange rates) and utilizing the Company's stock price and earnings as
of the twelve months ended June 30, 1997, the purchase price payable in
connection with the exercise of 100% of the put option with respect to Xpedite
Germany would be approximately $6.8 million, after utilization of the "special
option" (not including assumption of debt). The actual amount of the purchase
price will more than likely differ from this amount due to (1) the variable
factors used to determine the purchase price; and/or (2) the possibility of
changes in the Company's capital structure, and/or its continued status as a
publicly traded company.
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
$0.9 million (at current exchange rates) and utilizing the Company's stock price
and earnings as of the twelve months ended June 30, 1997, the purchase price
payable in connection with the exercise of 100%
Page 12
<PAGE>
of the put option would be approximately $9.3 million. The actual amount of the
purchase price will more than likely differ from this amount due to (1) the
variable factors used to determine the purchase price; and/or (2) the
possibility of changes in the Company's capital structure, and/or its continued
status as a publicly traded company.
If exercised, the purchase price payable in connection with the "put" and "call"
option with respect to Xpedite Germany is payable in any combination of cash,
negotiable securities, or Common Stock of the Company. The "put" and "call"
option with respect to Xpedite France is payable 80% in Common Stock of the
Company and 20% in cash or negotiable securities. 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
about this possibility.
The Company believes that its sources of capital, including internally generated
funds, and cash available pursuant to its Credit Facility would be adequate to
satisfy its current debt requirements.
Page 13
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 15, 1997, the Company held its annual meeting of shareholders. At
the annual meeting, the shareholders elected two Class 1 Directors to serve
until the 2000 annual meeting. The results of the voting were as follows:
NAME FOR ABSTAIN
---- --- -------
Philip A. Campbell 7,111,985 1,355
Robert Chefitz 7,111,985 1,355
The remaining Directors of the Company are Roy B. Andersen, Jr., John C. Baker
and David Epstein.
In addition, the shareholders ratified and approved the appointment of
Ernst & Young LLP as the Registrant's Independent Public Accountants, for the
fiscal year ended December 31, 1997. The results of the voting were as follows:
FOR AGAINST WITHHELD
7,113,040 300 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
2.1* Agreement and Plan of Merger, dated as of August 8,
1997, by and between the Registrant and Acquisition Corp.
2.2* Share Purchase Agreement, dated as of August 8, 1997,
among UK Acquisition Corp., Xpedite UK, and the
Shareholders of Xpedite UK.
4.1* Stockholder Agreement, dated as of August 8, 1997, among
the Registrant, Acquisition Corp. and Roy B. Andersen, Jr.
27.1 Financial Data Schedule
* incorporated by reference from the Registrant's Current
Report on Form 8-K filed August 12, 1997
(b) Reports on Form 8-K:
None.
Page 14
<PAGE>
SIGNATURES
Pursuant to the Requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XPEDITE SYSTEMS, INC.
(Registrant)
DATE: August 13, 1997 /S/ ROBERT S. VATERS
----------------------
Robert S. Vaters
Executive Vice President, Finance
and Chief Financial Officer
(Principal Accounting and Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854009
<NAME> Xpedite Systems, Inc.
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,124,188
<SECURITIES> 0
<RECEIVABLES> 32,236,912
<ALLOWANCES> 2,160,000
<INVENTORY> 0
<CURRENT-ASSETS> 42,188,937
<PP&E> 36,379,343
<DEPRECIATION> 14,397,790
<TOTAL-ASSETS> 95,533,160
<CURRENT-LIABILITIES> 36,488,293
<BONDS> 0
0
0
<COMMON> 89,451
<OTHER-SE> 30,313,358
<TOTAL-LIABILITY-AND-EQUITY> 95,533,160
<SALES> 79,742,623
<TOTAL-REVENUES> 79,742,623
<CGS> 38,775,656
<TOTAL-COSTS> 68,745,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,434,244
<INCOME-PRETAX> 9,662,662
<INCOME-TAX> 3,872,735
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,789,927
<EPS-PRIMARY> 0.62
<EPS-DILUTED> 0.62
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854009
<NAME> Xpedite Systems, Inc.
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Apr-01-1997
<PERIOD-END> Jun-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 42,484,355
<TOTAL-REVENUES> 42,484,355
<CGS> 20,494,124
<TOTAL-COSTS> 36,194,585
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 714,782
<INCOME-PRETAX> 5,629,176
<INCOME-TAX> 2,249,734
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,379,442
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
