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 March 31, 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
incorporation or organization) Identification Number)
446 Highway 35
Eatontown, New Jersey 07724
- ------------------------------- ------------------------------------
(Address of principal (Zip Code)
executive offices)
(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, 9,030,967 shares as of May 9, 1997.
<PAGE>
XPEDITE SYSTEMS, INC.
- INDEX -
PAGE NO.
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Consolidated Balance Sheets - March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Income
- Three months ended March 31, 1997 and 1996 4
Consolidated Statement of Stockholders' Equity (Deficit)
- Three months ended March 31, 1997 5
Consolidated Statements of Cash Flows
- Three months ended March 31, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
ITEM 2 - Managements Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
<PAGE>
PART I
ITEM 1.
XPEDITE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, 1997 DECEMBER 31, 1996
-------------- -----------------
(unaudited)
Current assets:
Cash and cash equivalents................. $ 4,025,697 $ 6,679,970
Accounts receivable, net.................. 27,262,349 25,749,334
Deferred income taxes.................... 1,903,694 1,903,694
Other current assets...................... 4,731,373 1,489,318
------------ ------------
Total current assets.................. 37,923,113 35,822,316
Property, plant and equipment, net........... 20,936,964 20,500,426
Customer lists, net.......................... 8,088,782 8,232,144
Purchased software, net...................... 2,843,310 3,156,044
Costs in excess of fair value of net assets
acquired, net............................. 10,262,354 10,609,687
Investments in affiliates, at cost........... 2,084,469 2,168,248
Loans to affiliate........................... 3,932,455 3,452,580
Deferred income taxes........................ 1,879,917 1,879,917
Other assets................................. 2,572,179 2,569,510
------------ ------------
Total................................. $ 90,523,543 $ 88,390,872
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................... $ 9,797,902 $ 10,067,510
Accrued expenses............................. 10,277,144 5,921,085
Income taxes payable......................... 6,630,426 7,131,347
Other current liabilities.................... 357,705 223,818
Current portion of long-term debt............ 6,210,980 7,763,459
Current portion of capital lease obligations. 234,554 241,995
------------ ------------
Total current liabilities............. 33,508,711 31,349,214
Long-term debt............................... 25,587,643 27,146,147
Long-term portion of capital lease
obligations............................... 264,747 326,686
Deferred income taxes........................ 3,554,744 3,692,134
Other liabilities............................ 794,765 739,492
Stockholders' equity (deficit):
Common Stock, $.01 par value,
authorized 15,000,000; 8,925,944
issued and outstanding at March 31,
1997, and 8,903,240 shares at
December 31, 1996...................... 89,259 89,032
Additional paid-in capital................ 65,067,621 64,782,539
Accumulated deficit....................... (38,127,947) (39,518,372)
Less: Treasury stock; 72,000 shares at
March 31, 1997, and December 31, 1996;
at cost................................ (216,000) (216,000)
------------ ------------
Total stockholders' equity (deficit). 26,812,933 25,137,199
------------ ------------
Total................................ $ 90,523,543 $ 88,390,872
============ ============
See notes to financial statements.
3
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
{PRIVATE } THREE MONTHS ENDED
------------------
MARCH 31,
---------
1997 1996
---- ----
Net revenues:
Domestic service revenues................. $ 23,297,415 $ 18,382,092
International service revenues............ 12,623,546 9,876,537
System sales and other.................... 1,337,307 1,824,981
------------ ------------
Total net revenues 37,258,268 30,083,610
Cost of sales:
Operations, line charges and
support engineering..................... 17,930,137 12,922,236
Cost of sales of systems.................. 351,395 877,343
------------ ------------
Total cost of sales.................... 18,281,532 13,799,579
------------ ------------
Gross margin................................. 18,976,736 16,284,031
Operating expenses:
Selling and marketing..................... 8,765,650 6,452,363
General and administrative................ 2,114,748 2,054,120
Research and development.................. 1,110,054 1,209,686
Depreciation and amortization............. 2,278,985 1,688,161
------------ ------------
Total operating expenses............... 14,269,437 11,404,330
------------ ------------
Operating income............................. 4,707,299 4,879,701
Interest income.............................. 96,590 114,350
Interest expense............................. (719,462) (1,006,663)
Other income................................. (50,941) 100,126
------------ ------------
Income before income taxes................... 4,033,486 4,087,514
------------ ------------
Income tax expense........................... 1,623,001 1,720,200
------------ ------------
Net income................................... $ 2,410,485 $ 2,367,314
============ ============
Net income per Common Share.................. $ 0.26 $ 0.29
============ ============
Weighted average shares outstanding.......... 9,369,100 8,115,000
============ ============
See notes to financial statements.
4
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(unaudited)
<TABLE>
<CAPTION>
{PRIVATE}
COMMON STOCK ADDITIONAL
----------------- PAID-IN ACCUMULATED TREASURY STOCK
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.. 22,704 227 160,507 - - - 160,734
Deferred compensation cost. - - 124,575 - - - 124,575
Cumulative translation
adjustment.............. - - - (1,020,060) - - (1,020,060)
Net income................. - - - 2,410,485 - - 2,410,485
--------- -------- ----------- ------------ --------- --------- -----------
BALANCE, MARCH 31, 1997 8,925,944 $ 89,259 $65,067,621 $(38,127,947) (72,000) $(216,000) $26,812,933
========= ======== =========== ============ ========= ========== ===========
</TABLE>
See notes to financial statements.
5
<PAGE>
XPEDITE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
{PRIVATE} THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
---- ----
OPERATING ACTIVITIES:
Net income................................ $ 2,410,485 $ 2,367,314
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization........ 2,487,779 1,899,434
Other non-cash losses................ 93,478 65,838
Deferred income taxes................ - 12,972
Change in operating assets and
liabilities:
Accounts receivable................ (1,594,101) (2,139,187)
Other current assets............... (5,299,632) (1,061,127)
Other assets....................... (27,786) (50,382)
Accounts payable................... (266,631) 1,396,854
Accrued expenses................... 5,726,951 139,171
Other liabilities.................. 91,958 147,414
Income taxes payable............... (566,199) (271,092)
------------ -------------
Net cash provided by operating activities. 3,056,302 2,507,209
INVESTING ACTIVITIES:
Acquisition of property, equipment,
computer software.................... (2,112,889) (1,646,943)
Acquisition of businesses............... - (756,996)
Investments in affiliates............... - -
Loans to affiliate...................... (479,875) (695,383)
----------- -------------
Net cash used in investing activities... (2,592,764) (3,099,322)
FINANCING ACTIVITIES:
Proceeds from loans and notes payable... 200,000 -
Repayments of loans and notes payable... (3,416,703) (1,518,007)
Repayments of capital lease obligations. (69,380) (17,804)
Net proceeds from issuance of Common
Stock............................... 226,141 6,583
------------ -------------
Net cash provided by (used in) financing
activities.............................. (3,059,942) (1,529,228)
Effect of exchange rate changes on cash... (43,769) (7,794)
------------ -------------
(Decrease) in cash and cash equivalents... (2,654,273) (2,129,135)
Cash and cash equivalents at beginning
of period.............................. 6,679,970 9,076,250
------------ -------------
Cash and cash equivalents at end of
period................................. $ 4,025,697 $ 6,947,115
============ =============
See notes to financial statements.
6
<PAGE>
Notes to Consolidated Financial Statements
1. General
A. The financial information included herein is unaudited; however, such
information has been prepared in accordance with generally accepted
accounting principles and reflects all adjustments, consisting solely of
normal recurring adjustments which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
Operating results for the three months ended March 31, 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. 1996 Annual Report.
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 first quarter ended March 31, 1997 and March
31, 1996 of $0.01 and $0.02 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.
C. In April 1997, the Company acquired an additional 0.9% of the stock of
Xpedite Systems, GmbH ("Xpedite Germany", or "XSG"), making the Company's
total ownership in XSG 19.9%. The Company has an option to purchase an
additional 17.0% of XSG held by a significant shareholder of XSG.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997, COMPARED TO THREE MONTHS ENDED
MARCH 31, 1996
Net revenues increased by 23.9% to $37.3 million for the three months ended
March 31, 1997, as compared to the same period in 1996. For the three month
period ended March 31, 1997, international revenues increased $2.7 million to
$12.6 million in net service revenues, primarily from the further expansion into
new international markets. The domestic revenues increased $4.9 million to $23.3
million, 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.
Compared to the same periods in 1996, system sales and other net revenues
decreased by 26.7% to $1.3 million for the three months ended March 31, 1997.
The decreases were related to fewer sales of system upgrades and expansion
equipment, which were partially offset by increased royalty revenues from
affiliates.
The Company's gross margin was 50.9% for the three months ended March 31, 1997,
and 54.1% for the same period in 1996. Service margins decreased to 50.1% for
the first three months of 1997, as compared to 54.3% for the same period in
1996. The Company has experienced an increase in the cost of sales associated
with the customers acquired from Pacific Star Services Pty Limited ("PacStar").
The Company has 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 by at least
2% in the first quarter, and is taking corrective measures to lower the
transmission costs. The Company continues to pursue lower pricing from its
carriers and expects pricing improvements in the second and third quarters.
Margin rates on system sales and other revenues increased to 73.7% for the three
months ended March 31, 1997, compared to 51.9% for the same period in 1996,
primarily as a result of product mix.
Selling and marketing expenses increased by 35.9% to $8.8 million for the three
months ended March 31, 1997, as compared to the same periods in 1996. Selling
and marketing expenses increased as a percentage of net revenues, to 23.5% for
the three months ended March 31, 1997, from 21.4% for the same period in 1996.
The Company continues to expand its sales and marketing organization, increasing
its direct sales force to a total of 274 at March 31, 1997; 167 of such
salespersons were operating in North America and 107 internationally. The
Company has also expanded its customer care, sales support, marketing, and
product management functions to a total of 122 employees at March 31, 1997.
General and administrative expenses increased by 3.0% to $2.1 million for the
three months ended March 31, 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 5.7% for
the three months ended March 31, 1997, as compared with 6.8% for the three
months ended March 31, 1996, primarily resulting from consolidation of
administrative and financial functions.
Research and development expenses decreased by 8.2% for the three months ended
March 31, 1997, to $1.1 million, as compared to the same period 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
three months ended March 31, 1997, from 4.0% for the three months ended March
31, 1996, primarily due to the increased revenue base.
8
<PAGE>
Depreciation and amortization increased by 35.0% to $2.3 million for the three
months ended March 31, 1997, as compared to the same period 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 decreased by 3.5% to $4.7 million for
the three months ended March 31, 1997, as compared with the same period in 1996.
Operating income as a percentage of net revenues decreased to 12.6% for the
three months ended March 31, 1997, as compared with 16.2% for the three months
ended March 31, 1996.
Interest expense, net of interest income, decreased to $0.6 million for the
three months ended March 31, 1997, compared to $0.9 million for the three months
ended March 31, 1996, primarily due to reduction of debt.
Income tax expense for the three months ended March 31, 1997, was $1.6 million
or 40% of income before income taxes, compared to 42% for the three months ended
March 31, 1996. The effective rates for the three months ended March 31, 1997,
and March 31, 1996, exclusive of amortization of costs in excess of fair value
of the net assets acquired (a non-deductible item), were 38%, and 40%,
respectively.
As a result of the factors discussed above, the Company's net income increased
by 1.8% to $2.4 million for the three months ended March 31, 1997, as compared
with $2.4 million for the comparable period in 1996. Based on a higher average
share count for the first quarter of 1997, net income per common share decreased
by 10.0% to $0.26, based on 9,369,100 shares, for the three months ended March
31, 1997, from $0.29, based on 8,115,000 shares, for the three months ended
March 31, 1996.
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 March 31, 1997,
the Company had $0.2 million outstanding balance 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 March 31, 1997, the Company made principal payments on the
term loan amounting to $1.0 million, and the balance at March 31, 1997, is $30.8
million. The Company has other notes payable to banks and to a former owner of
ViTel totaling $0.8 million at March 31, 1997. In connection with the
acquisition of certain assets from PosData in September 1996, the Company
obtained a $2.2 million loan from the Korean branch of a U.S. bank,
collateralized by a cash deposit of the same amount in the domestic branch,
which was repaid in February 1997.
At March 31, 1997, the Company had $4.0 million in cash and cash equivalents,
and working capital of $4.4 million. Operations generated $3.1 million in cash
for the three months ended March 31, 1997, compared to $2.5 million for the same
period in 1996.
Net cash used in investing activities for the three months ended March 31, 1997,
was $2.6 million as compared with $3.1 million for the same period in 1996. The
Company's primary capital expenditures are investments in computer systems and
9
<PAGE>
equipment, and telecommunications systems. During the three months ended March
31, 1997, the Company made additional loans to Xpedite Germany of approximately
$0.5 million.
The Company has "put" and "call" arrangements relating to the outstanding shares
of each of Xpedite Systems, Ltd. ("Xpedite UK"), Xpedite Germany and Xpedite
Systems S.A. ("Xpedite France"), (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 17.5% of the outstanding
shares of Xpedite Germany from a current shareholder at a cost of approximately
$30,000. Due to the uncertainties as to the ability of each of the European
Affiliates to achieve or continue to achieve such financial results and as to
whether the conditions set forth in such agreements will be met, the Company
does not consider the exercise of these options to be probable during the next
twelve months.
However, because (i) Xpedite UK has produced operating results in excess of the
minimum earnings required in order to enable the exercise of the put and call
option in the Xpedite UK agreement, and (ii) Xpedite Germany has recently
produced operating results indicating they may attain the minimum earnings
required in order to enable the exercise of the put and call option in the
Xpedite Germany agreement, and if the profitable financial performance of
Xpedite UK and Xpedite Germany continues, it is reasonably likely that the
Company could exercise or be subject to the exercise of these options in early
1998 with respect to Xpedite UK and Xpedite Germany. Assuming that Xpedite
Germany achieves the minimum amount of earnings of $1.0 million (at current
exchange rates) and utilizing the Company's stock price and earnings at and as
of the twelve months ended March 31, 1997, the purchase price payable in
connection with the exercise of 100% of the put option with respect to Xpedite
Germany would be approximately $8.9 million, after utilization of the "special
option". The actual amount of the purchase price will more than likely differ
from this amount due to the variable factors used to determine the purchase
price.
Assuming that Xpedite UK continues its current earnings trend, and utilizing the
Company's stock price and earnings at and as of the twelve months ended March
31, 1997, the purchase price payable in connection with the exercise of 100% of
the put option with respect to Xpedite UK would be approximately $96.6 million.
The actual amount of the purchase price will more than likely differ from this
amount due to the variable factors used to determine the purchase price.
Xpedite France has not met the minimum amount of earnings necessary for the put
or call option to be exercisable, and therefore, due to the uncertainties as to
the ability of Xpedite France to achieve the required financial results in the
future, and the uncertainty of future events, the Company does not consider the
exercise of these options to be probable during the next eighteen months.
However, assuming that Xpedite France achieves the minimum amount of earnings of
$1.0 million (at current exchange rates) and utilizing the Company's stock price
and earnings at and as of the twelve months ended March 31, 1997, the purchase
price payable in connection with the exercise of 100% of the put option would be
approximately $12.2 million. The actual amount of the purchase price will more
than likely differ from this amount due to the variable factors used to
determine the purchase price.
If exercised, the purchase price payable in connection with the "put" and "call"
options is payable in cash or any negotiable security, Common Stock, or a
combination of cash, Common Stock, or any negotiable security, 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
(a "Negotiated Purchase"). The Company has had preliminary discussions with each
of the European Affiliates about this possibility.
10
<PAGE>
The Company believes that its sources of capital, including internally generated
funds, and cash available pursuant to its Credit Facility will be adequate to
satisfy its debt requirements and anticipated capital needs for the next twelve
months. However, the Company may elect to finance its future capital
requirements through additional equity or debt financing. Further, if the
Company exercises, or is subject to the exercise, of the options described
above, or purchases one or more of the European Affiliates pursuant to a
Negotiated Purchase, and if the Company elects to finance such exercise or
purchase using cash, then the Company may be required to obtain additional
equity or debt financing. The Company cannot predict whether or not the purchase
of all or any portion of one or more of the European Affiliates will have a
dilutive effect on the Company's earnings, as such effect will be dependent upon
purchase price paid, the manner in which the purchase is financed and other
variable factors.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
12
<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: May 13, 1997 /s/ ROY B. ANDERSEN, JR.
------------------------
Roy B. Andersen, Jr.
President, Chief Executive
Officer and Director
(Principal Executive Officer)
DATE: May 13, 1997 /s/ ROBERT S. VATERS
--------------------
Robert S. Vaters
Executive Vice President, Finance
and Chief Financial Officer
(Principal Accounting and Financial Officer)
13
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<NAME> Xpedite Systems, Inc.
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<PERIOD-START> Jan-01-1997
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