<PAGE>
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 September 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.
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(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)
One Industrial Way West
Eatontown, New Jersey 07724
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(Address of principal executive offices) (Zip Code)
(732) 389-3900
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(Registrant's telephone number, including area code)
446 Highway 35, Eatontown, New Jersey 07724
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(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, 9,069,105 shares as of November 7, 1997
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XPEDITE SYSTEMS, INC.
- INDEX -
PAGE NO.
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Consolidated Balance Sheets--September 30, 1997 and 3
December 31, 1996
Consolidated Statements of Operations--Nine and three 4
months ended September 30, 1997 and 1996
Consolidated Statement of Stockholders' Equity-- Nine 5
months ended September 30, 1997
Consolidated Statements of Cash Flows--Nine months ended 6
September 30, 1997 and 1996
Notes to Consolidated Financial Statements 7
ITEM 2--Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
ITEM 1--Legal Proceedings 16
ITEM 6--Exhibits and Reports on Form 8-K 16
SIGNATURES 17
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PART I Xpedite Systems, Inc.
ITEM 1. Consolidated Balance Sheets
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
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<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents....................................................... $ 3,856,584 $ 6,679,970
Accounts receivable, net of reserve for allowances and doubtful accounts of
$2,172,000 at September 30, 1997 and $1,851,000 at December 31, 1996........... 29,711,404 25,749,334
Deferred income taxes........................................................... 1,903,694 1,903,694
Other current assets............................................................ 3,714,860 4,290,034
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Total current assets........................................................ 39,186,542 38,623,032
Property, plant and equipment, net................................................. 22,837,557 20,500,426
Customer lists, net of accumulated amortization of $2,926,000 at September 30, 1997
and $2,004,000 at December 31, 1996.............................................. 7,706,801 8,232,144
Purchased software, net of accumulated amortization of $3,517,000 at September 30,
1997 and $2,027,000 at December 31, 1996......................................... 2,536,118 3,156,044
Costs in excess of fair value of net assets acquired, net of accumulated
amortization of $1,921,000 at September 30, 1997 and $1,180,000 at December 31,
1996............................................................................. 9,686,240 10,609,687
Investments in affiliates, at cost................................................. 2,247,711 2,168,248
Loans to affiliate................................................................. 3,662,161 3,452,580
Deferred income taxes.............................................................. 1,879,917 1,879,917
Other assets....................................................................... 4,173,221 2,569,510
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Total........................................................................ $ 93,916,268 $ 91,191,588
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 7,145,685 $ 10,067,510
Accrued expenses............................................................... 12,937,749 8,721,801
Current portion of long-term debt.............................................. 6,283,011 7,763,459
Current portion of capital lease obligations................................... 271,235 241,995
Income taxes payable........................................................... 5,483,421 7,131,347
Other current liabilities...................................................... 268,138 223,818
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Total current liabilities................................................... 32,389,239 34,149,930
Long-term debt..................................................................... 22,509,940 27,146,147
Long-term portion of capital lease obligations..................................... 312,193 326,686
Deferred income taxes.............................................................. 3,590,914 3,692,134
Other liabilities.................................................................. 782,668 739,492
Stockholders' equity:
Preferred stock, $.01 par value, authorized 1,000,000; none issued and outstanding
at September 30, 1997 and December 31, 1996...................................... -- --
Common Stock, $.01 par value, authorized 15,000,000; issued and outstanding
9,107,563 at September 30, 1997, and 8,903,240 shares at December 31, 1996....... 91,076 89,032
Additional paid-in capital........................................................ 65,672,071 64,782,539
Accumulated deficit............................................................... (29,893,545) (39,431,890)
Cumulative translation adjustment................................................. (1,322,288) (86,482)
Less: Treasury stock; 72,000 shares at September 30, 1997, and December 31, 1996;
at cost.......................................................................... (216,000) (216,000)
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Total stockholders' equity.................................................... 34,331,314 25,137,199
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Total........................................................................ $ 93,916,268 $ 91,191,588
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</TABLE>
See notes to consolidated financial statements.
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Xpedite Systems, Inc.
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------- ------------- ------------- -------------
Net revenues:
Domestic service revenues........................... $ 75,134,253 $ 57,931,365 $ 25,900,159 $ 20,132,396
International service revenues...................... 43,242,148 31,384,851 15,725,912 11,168,384
System sales and other.............................. 4,006,888 5,451,028 1,014,595 1,870,473
------------- ------------- ------------- -------------
Total net revenues.............................. 122,383,289 94,767,244 42,640,666 33,171,253
Cost of sales:
Operations, line charges and support engineering.... 57,543,978 41,393,892 19,787,261 14,715,966
Cost of sales of systems............................ 1,228,901 2,021,610 209,962 461,992
------------- ------------- ------------- -------------
Total cost of sales (exclusive of depreciation and
amortization shown separately below).............. 58,772,879 43,415,502 19,997,223 15,177,958
------------- ------------- ------------- -------------
Operating expenses:
Selling and marketing.............................. 27,975,775 20,704,174 9,635,021 7,399,286
General and administrative......................... 6,818,266 6,172,830 2,385,154 2,158,328
Research and development........................... 3,655,114 3,687,757 1,242,097 1,204,361
Depreciation and amortization...................... 7,389,830 5,515,645 2,606,815 2,017,341
------------- ------------- ------------- -------------
Total operating expenses....................... 45,838,985 36,080,406 15,869,087 12,779,316
------------- ------------- ------------- -------------
Operating income.................................... 17,771,425 15,271,336 6,774,356 5,213,979
Interest income..................................... 289,615 356,137 112,969 110,706
Interest expense.................................... (2,129,336) (2,826,175) (695,092) (823,284)
Other income........................................ 56,154 146,773 132,963 16,712
------------- ------------- ------------- -------------
Income before income taxes.......................... 15,987,858 12,948,071 6,325,196 4,518,113
Income tax expense.................................. 6,392,888 5,276,302 2,520,153 1,815,485
------------- ------------- ------------- -------------
Net income.......................................... $ 9,594,970 $ 7,671,769 $ 3,805,043 $ 2,702,628
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net income per Common Share......................... $ 1.03 $ 0.91 $ 0.41 $ 0.30
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Weighted average shares outstanding................. 9,359,100 8,415,100 9,391,500 8,890,800
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</TABLE>
See notes to consolidated financial statements.
Page 4
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Xpedite Systems, Inc.
Consolidated Statement of Stockholders' Equity
(unaudited)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE TREASURY STOCK
---------------------- PAID-IN ACCUMULATED TRANSLATION --------------------
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT SHARES AMOUNT TOTAL
--------- ----------- ------------ ----------- --------- --------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996...... 8,903,240 $ 89,032 $64,782,539 $(39,431,890) $ (86,482) (72,000) $ (216,000) $25,137,199
Exercise of stock options....... 187,491 1,876 572,880 -- -- -- -- 574,756
Issuance of performance stock
options....................... 19,582 196 (196) -- -- -- -- --
Deferred compensation cost...... -- -- 318,195 -- -- -- -- 318,195
Treasury stock acquired......... -- -- -- -- -- (2,750) (58,000) (58,000)
Retirement of treasury stock.... (2,750) (28) (1,347) (56,625) -- 2,750 58,000 --
Cumulative translation
adjustment.................... -- -- -- -- (1,235,806) -- -- (1,235,806)
Net income...................... -- -- -- 9,594,970 -- -- -- 9,594,970
--------- ----------- ------------ ----------- --------- --------- ---------- ------------
BALANCE, JUNE 30, 1997.......... 9,107,563 $ 91,076 $65,672,071 $(29,893,545)$(1,322,288) (72,000) $ (216,000) $34,331,314
--------- ----------- ------------ ----------- --------- --------- ---------- ------------
--------- ----------- ------------ ----------- --------- --------- ---------- ------------
</TABLE>
See notes to consolidated financial statements.
Page 5
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Xpedite Systems, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
<S> <C> <C>
1997 1996
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OPERATING ACTIVITIES:
Net income........................................................................... $ 9,594,970 $ 7,671,769
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization...................................................... 8,058,079 6,119,053
Other non-cash losses.............................................................. 266,615 182,001
Deferred income taxes.............................................................. (101,220) 60,076
Change in operating assets and liabilities:
Accounts receivable................................................................ (4,397,954) (6,768,726)
Other current assets............................................................... (227,488) (2,177,846)
Other assets....................................................................... (1,929,135) (76,960)
Accounts payable................................................................... (2,646,727) (2,834,878)
Accrued expenses................................................................... 4,453,369 2,743,952
Other liabilities.................................................................. (186,354) 795,355
Income taxes payable............................................................... (1,320,349) 1,372,843
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Net cash provided by operating activities............................................ 11,563,806 7,086,639
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INVESTING ACTIVITIES:
Acquisition of property, equipment, purchased software.............................. (8,192,079) (7,540,912)
Acquisition of businesses........................................................... -- (2,914,692)
Investments in affiliates........................................................... (84,340) (1,630,928)
Loans to affiliate.................................................................. (209,581) (842,594)
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Net cash used in investing activities................................................ (8,486,000) (12,929,126)
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FINANCING ACTIVITIES:
Proceeds from loans and notes payable............................................... -- 2,201,187
Repayments of loans and notes payable............................................... (5,978,672) (8,412,248)
Repayments of capital lease obligations............................................. (197,503) (176,897)
Net proceeds from issuance of Common Stock.......................................... 573,382 10,484,304
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Net cash (used in) provided by financing activities.................................. (5,602,793) 4,096,346
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Effect of exchange rate changes on cash.............................................. (298,399) (118,841)
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Decrease in cash and cash equivalents................................................ (2,823,386) (1,864,982)
Cash and cash equivalents at beginning of period..................................... 6,679,970 9,076,250
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Cash and cash equivalents at end of period........................................... $ 3,856,584 $ 7,211,268
------------ -------------
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</TABLE>
See notes to consolidated financial statements.
Page 6
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Notes to Consolidated Financial Statements
(unaudited)
1. BASIS OF PRESENTATION
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, such
information does 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 nine months ended September 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.
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
third quarter and nine months ended September 30, 1997 of $0.02 and $0.05 per
share, respectively, and an increase in primary earnings per share for the
third quarter and nine months ended September 30, 1996 of $0.02 and $0.05 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. OFFERS TO PURCHASE THE COMPANY
The Company and Xpedite Acquisition Corp., a Delaware corporation
("Acquisition Corp."), whose stockholders include UBS Capital II LLC, Fenway
Partners Capital Fund, L.P., and certain of their affiliates (collectively,
the "Investors"), have entered into an Agreement and Plan of Merger dated as
of August 8, 1997 (the "Merger Agreement") under which Acquisition Corp.
would merge with and into the Company for a cash purchase price of $23.25 per
share 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,
certain members of Senior Management (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 gave 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.
In addition, Xpedite Systems Holdings (UK) Limited, a United Kingdom
corporation and a wholly-owned subsidiary of the Company ("UK Acquisition
Page 7
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Corp."), the Company, and the shareholders of Xpedite Systems Limited, a
United Kingdom corporation ("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 must 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 an aggregate of 205,000 shares
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 (other than Roy B. Andersen, Jr., who did not attend or vote
at the meeting to approve the Merger Agreement due to his participation with
the Investors in the proposed Merger transaction), approved the Merger
Agreement and the UK Agreement. Subject to the disclosure set forth below,
both transactions would be expected to close in the fourth quarter of this
year, or in the first quarter of 1998.
On October 24, 1997, Premiere Technologies, Inc. ("Premiere") expressed
to the Special Committee of the Board of Directors an unsolicited indication
of interest (the "Proposal") that it would be prepared to enter into an
agreement pursuant to which it would acquire the Company. Premiere's Proposal
was non-binding and subject to certain conditions, including completion of
due diligence and a mutually acceptable merger agreement.
On November 5, 1997, the Company received from Premiere a written offer to
acquire the Company (the "Offer") in a stock-for-stock merger transaction (the
"Premiere Merger") which Premiere intends to qualify as a "pooling of interests"
for accounting purposes and to qualify as a tax-free reorganization. Under the
terms of Premiere's offer, each share of the Company's common stock would be
converted into $30 of Premiere's common stock, subject to certain adjustments,
with the precise exchange ratio to be based on the average trading price of
Premiere's common stock prior to closing. On November 11, 1997, Premiere
increased the Offer to $34 of Premiere's common stock, subject to certain
adjustments, with the precise exchange ratio to be based on the average trading
price of Premiere's common stock prior to closing (the "Amended Offer").
The Offer was and the Amended Offer is subject to certain conditions,
including the negotiation of a definitive merger agreement, consummation of
the Company's pending acquisition of Xpedite UK, the receipt of assurances
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from the Company's and Premiere's accountants regarding the ability of
Premiere to treat the Premiere Merger as a "pooling of interests" for
accounting purposes, the approval by the Company's stockholders of the
Premiere Merger and Premiere's stockholders of the issuance of additional
shares in the Premiere Merger and the receipt of required antitrust approvals.
Consistent with its fiduciary duties the Company's Board of Directors, along
with its financial and legal advisors, is considering this offer. At this time,
the Company's Board of Directors cannot predict whether the Amended Offer will
be acceptable to it, whether "pooling of interests" treatment can be obtained
for the proposed transaction, whether an agreement will be reached with Premiere
on a definitive merger agreement or that Premiere's stockholders will approve
the issuance of additional shares in the Premiere Merger.
Page 9
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Nine Months ended September 30, 1997 compared to Nine Months ended
September 30, 1996, and Three Months ended September 30, 1997 compared to
Three Months ended September 30, 1996
Net revenues increased by 29.1% to $122.4 million and 28.5% to $42.6
million for the nine and three months ended September 30, 1997, respectively,
as compared to the same periods in 1996. For the nine and three months ended
September 30, 1997, domestic service revenues increased $17.2 million to
$75.1 million and $5.8 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 nine and three months ended
September 30, 1997, increased $11.9 million to $43.3 million, and $4.5
million to $15.7 million, respectively, as compared to the same periods in
1996, 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 26.5% to $4.0 million and 45.8% to $1.0 million for the nine and
three months ended September 30, 1997. The decreases were primarily related to
fewer sales of system upgrades and expansion equipment. System sales to
affiliates were $1.8 million and $3.7 million for the nine months ended
September 30, 1997 and 1996, respectively, and $0.4 million and $1.2 million for
the three months ended September 30, 1997 and 1996, respectively.
The Company's cost of sales as a percentage of net revenues were 48.0% and
46.9% for the nine and three months ended September 30, 1997, and 45.8% for the
same periods in 1996. Cost of service revenues as a percentage of service
revenues increased to 48.6% and 47.5% for the nine and three months ended
September 30, 1997, as compared to 46.3% and 47.0% 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 margins in the first half of 1997,
and has taken corrective measures which have lowered and will continue to lower
the Company's transmission costs. Cost of system sales and other revenues as a
percentage of system sales and other revenues improved from 37.1% for the nine
months ended September 30, 1996, to 30.7%, for the same period in 1997, and
improved from 24.7% for the three months ended September 30, 1996, to 20.7% for
the same period in 1997, primarily as a result of a higher proportion of royalty
revenues, which carry higher margins, in the nine months and the three months
ended September 30, 1997.
Selling and marketing expenses increased by 35.1% and 30.2% to $28.0 million
and $9.6 million for the nine and three months ended September 30, 1997, as
compared to the same periods in 1996. Selling and marketing expenses increased
as a percentage of net revenues, to 22.9% and 22.6% for the nine and three
months ended September 30, 1997, from 21.8% and 22.3% for the same periods in
1996. The Company increased its direct sales force to a total of 265 individuals
at September 30, 1997; compared to 221 individuals at September 30, 1996. As of
September 30, 1997, the Company employed 168 of such salespersons in North
America and 97 internationally. The Company has also expanded its customer care,
sales support, marketing, and product management functions to a total of 142
employees at September 30, 1997.
General and administrative expenses increased by 10.4% to $6.8 million for
the nine months ended September 30, 1997, and by 10.5% to $2.4 million for the
three months ended September 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 improved to 5.6% for the
nine and three months ended September 30, 1997, as compared with
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6.5% for the nine and three months ended September 30, 1996, primarily
resulting from consolidation of administrative and financial functions.
Research and development expenses decreased by 0.9% and increased 3.2%
for the nine and three months ended September 30, 1997, to $3.7 million and
$1.2 million respectively, as compared to the same periods in 1996. The
decreases were primarily due to consolidation and integration of certain
research and development functions acquired in November 1995. Research and
development expenses as a percentage of net revenues decreased to 3.0% for
the nine and three months ended September 30, 1997, from 3.9% and 3.6% for
the nine and three months ended September 30, 1996, respectively, primarily
due to the Company's increased revenue base.
Depreciation and amortization increased by 34% to $7.4 million for the
nine months ended September 30, 1997, and 29.3% to $2.6 million for the three
months ended September 30, 1997, 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 16.4% to $17.8
million for the nine months ended September 30, 1997, and 29.9% to $6.8
million for the three months ended September 30, 1997, as compared with the
same periods in 1996. Operating income as a percentage of net revenues
decreased to 14.5% and improved to 15.9% for the nine and three months ended
September 30, 1997, as compared with 16.1% and 15.7% for the nine and three
months ended September 30, 1996, respectively.
Interest income remained relatively constant at $0.3 million for the nine
months ended September 30, 1997 and 1996, and $0.1 million for the three months
ended September 30, 1997 and 1996. The Company also incurred interest expense of
$2.1 million and $0.7 million for the nine and three months ended September 30,
1997, respectively. Interest expense decreased mainly due to a reduction in
average borrowings for the nine and three months ended September 30, 1997.
Income tax expense for the nine and three months ended September 30, 1997,
was $6.4 million and $2.5 million, or 40% of income before income taxes,
compared to 41% and 40% for the nine and three months ended September 30, 1996.
As a result of the factors discussed above, the Company's net income
increased by 25.1% to $9.6 million for the nine months ended September 30,
1997, and 40.8% to $3.8 million for the three months ended September 30,
1997, as compared with $7.7 million and $2.7 million for the comparable
periods in 1996. Although based on a higher average share count, net income
per common share increased by 13.2% to $1.03 on 9,359,100 shares outstanding,
for the nine months ended September 30, 1997, from $0.91 on 8,415,100 shares
outstanding, for the nine months ended September 30, 1996.
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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
September 30, 1997, the Company had $4.7 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 September 30, 1997, the Company
made principal payments on the term loan amounting to $1.25 million, and the
balance at September 30, 1997, was $28.25 million. The Company has other
notes payable to banks and to a former owner of an entity acquired by the
Company totaling $0.2 million at September 30, 1997.
At September 30, 1997, the Company had approximately $3.9 million in cash
and cash equivalents, and working capital of $6.8 million. Operations
generated $11.6 million in cash for the nine months ended September 30, 1997,
compared to $7.1 million for the same period in 1996.
Net cash used in investing activities for the nine months ended September
30, 1997, was $8.5 million as compared with $12.9 million for the same period
in 1996. The Company's primary capital expenditures are investments in
computer systems and equipment, and telecommunications systems.
At September 30, 1997, the cumulative translation adjustment was
approximately $1.3 million. Cumulative translation adjustments result from
the process of translating the consolidated financial statements from the
functional currencies of each subsidiary into U.S. dollars. The functional
currencies of the Registrant's subsidiaries include thirteen different
foreign currencies. This translation resulted in an approximate $1.2 million
unfavorable cumulative translation adjustment for the nine months ended
September 30, 1997. More specifically, in the period from December 31, 1996
to September 30, 1997, all of the foreign currencies that represent
functional currencies of the Registrant's subsidiaries were devalued,
relative to the U.S. Dollar, including the devaluation of the Australian
Dollar, Malaysian Ringgit, Japanese Yen and South Korean Won by approximately
10%, 28%, 4% and 8%, respectively.
The Company and Xpedite Acquisition Corp., a Delaware corporation
("Acquisition Corp."), whose stockholders include UBS Capital II LLC, Fenway
Partners Capital Fund, L.P., and certain of their affiliates (collectively, the
"Investors"), have entered into an Agreement and Plan of Merger dated as of
August 8, 1997 (the "Merger Agreement") under which Acquisition Corp. would
merge with and into the Company for a cash purchase price of $23.25 per share 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,
certain members of Senior Management (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 gave 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.
Page 12
<PAGE>
In addition, Xpedite Systems Holdings (UK) Limited, a United Kingdom
corporation and a wholly-owned subsidiary of the Company ("UK Acquisition
Corp."), the Company, and the shareholders of Xpedite Systems Limited, a
United Kingdom corporation ("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 must 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 an aggregate of 205,000 shares
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 (other than Roy B. Andersen, Jr., who did not attend or vote
at the meeting to approve the Merger Agreement due to his participation with
the Investors in the proposed Merger transaction), approved the Merger
Agreement and the UK Agreement. Subject to the disclosure set forth below,
both transactions would be expected to close in the fourth quarter of this
year, or in the first quarter of 1998.
On October 24, 1997, Premiere Technologies, Inc. ("Premiere") expressed to
the Special Committee of the Board of Directors an unsolicited indication of
interest (the "Proposal") that it would be prepared to enter into an agreement
pursuant to which it would acquire the Company. Premiere's Proposal was non-
binding and subject to certain conditions, including completion of due diligence
and a mutually acceptable merger agreement.
On November 5, 1997, the Company received from Premiere a written offer to
acquire the Company (the "Offer") in a stock-for-stock merger transaction (the
"Premiere Merger") which Premiere intends to qualify as a "pooling of interests"
for accounting purposes and to qualify as a tax-free reorganization. Under the
terms of Premiere's offer, each share of the Company's common stock would be
converted into $30 of Premiere's common stock, subject to certain adjustments,
with the precise exchange ratio to be based on the average trading price of
Premiere's common stock prior to closing. On November 11, 1997, Premiere
increased the Offer to $34 of Premiere's common stock, subject to certain
adjustments, with the precise exchange ratio to be based on the average trading
price of Premiere's common stock prior to closing (the "Amended Offer").
The Offer was and the Amended Offer is subject to certain conditions,
including the negotiation of a definitive merger agreement, consummation of the
Company's pending acquisition of
Page 13
<PAGE>
Xpedite UK, the receipt of assurances from the Company's and Premiere's
accountants regarding the ability of Premiere to treat the Premiere Merger as
a "pooling of interests" for accounting purposes, the approval by the
Company's stockholders of the Premiere Merger and Premiere's stockholders of
the issuance of additional shares in the Premiere Merger and the receipt of
required antitrust approvals.
Consistent with its fiduciary duties the Company's Board of Directors, along
with its financial and legal advisors, is considering this offer. At this time,
the Company's Board of Directors cannot predict whether the Amended Offer will
be acceptable to it, whether "pooling of interests" treatment can be obtained
for the proposed transaction, whether an agreement will be reached with Premiere
on a definitive merger agreement or that Premiere's stockholders will approve
the issuance of additional shares in the Premiere Merger.
Xpedite UK reported net revenues, EBITDA and net income of L16.3 million,
L5.2 million and L3.4 million ($25.5, $8.2 and $5.3 US dollar equivalents,
respectively, using average exchange rates) for the year ended December 31,
1996. In conjunction with the acquisition of Xpedite UK and the Merger, the
Company expects to incur a significant amount of indebtedness, including a bank
credit facility that has final maturity in seven years; subordinated notes due
in ten years and redeemable preferred stock which will be subject to mandatory
redemption by the Company beginning eleven years after issuance. Management
expects the upward trend in revenue and gross margin of the Company and Xpedite
UK to continue as management's expectations are in line with the financial model
prepared by Merrill Lynch in connection with the Merger.
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 $30,000. 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 September
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 $110.1 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 it may
attain the minimum earnings required in order to enable the exercise of the put
or call option under the Xpedite Germany agreement in early 1998. Assuming that
Xpedite Germany achieves the minimum amount of earnings of $1.0 million (at
current exchange rates) and utilizing the Company's stock price and earnings as
of the twelve months ended September 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 $8.3 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.
Page 14
<PAGE>
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 twelve months.
However, assuming that Xpedite France achieves the minimum amount of earnings of
$1.0 million (at current exchange rates) and utilizing the Company's stock price
and earnings as of the twelve months ended September 30, 1997, the purchase
price payable in connection with the exercise of 100% of the put option would be
approximately $11.4 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, at the Company's
option, 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 in any combination of cash, negotiable securities or Common Stock of the
Company, at the Company's option. In addition to the foregoing, the Company may
purchase one or more of the European Affiliates pursuant to negotiations with
the stockholders thereof. The Company has had preliminary discussions with each
of the European Affiliates about this possibility, has agreed to purchase
Xpedite UK and is currently involved in negotiations for the purchase of a
majority of the shares of Xpedite Germany not currently owned by the Company or
subject to the Company's option to purchase a portion of such shares. There can
be no assurances that the purchase of shares of Xpedite Germany by the Company
will be consummated.
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 15
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
PATENT DISPUTE
In July 1996, Xpedite received a letter from counsel for AudioFAX IP LLC
("AudioFAX"), which informed Xpedite that AudioFAX is the owner of certain U.S.
and Canadian patents relevant to the fax processing business entitled "Facsimile
Telecommunications Systems and Method" (the "Patents"), and inquired as to
Xpedite's interest in obtaining a license to use the Patents. Xpedite has
reviewed the Patents, obtained certain legal opinions with respect to the
Patents and concluded that it is not necessary to obtain a license to the
Patents. AudioFAX has continued to pursue licensing of the Patents by Xpedite.
Management cannot predict the outcome of this matter, including but not limited
to whether or not AudioFAX will commence a lawsuit against Xpedite in order to
induce Xpedite to enter into a license to use the Patents; however, management
believes that the resolution of such matter will not have a material adverse
effect on Xpedite's financial position or results of operations.
SHAREHOLDER LITIGATION
The Company and the individual members of the Board of Directors and
certain of its executive officers have been named as defendants in three
lawsuits filed in Court of Chancery of the State of Delaware in connection
with the Merger. In these proceedings the plaintiffs, on behalf of themselves
and other Xpedite stockholders, primarily assert that the members of the
Board of Directors have failed to maximize shareholder value and have
breached their fiduciary duties and that the Merger does not provide
sufficient value to the Company and its Stockholders. The plaintiffs seek,
among other things, to enjoin the Merger. The Company has consulted with
counsel and believes that each of these lawsuits is without merit and,
accordingly, does not expect these lawsuits to have a material adverse affect
on the Company or the Merger.
In July 1997, certain limited partners in a group of limited partnerships
(the "Partnerships") filed in the Superior Court of the State of New Jersey a
derivative action against the Company, on behalf of the Partnerships, alleging,
among other things, that the Company had breached certain license agreements
dated August 1, 1986 (the "License Agreements") between the Company and the
Partnerships by failing to pay royalties to the Partnerships which were alleged
to be due under the License Agreements, and requesting $2 million in damages.
The Company believes that the plaintiffs' claims are without merit and has,
among other things, moved to dismiss this action.
In addition, the Company is involved from time to time in routine legal
matters incidental to the 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
Item 5 filed on August 12, 1997.
Page 16
<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: November 13, 1997 /s/ ROBERT S. VATERS
----------------------------
Robert S. Vaters
Executive Vice President, Finance
and Chief Financial Officer
(Principal Accounting and Financial Officer)
Page 17
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