SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarter ended June 30, 2000 or ------------- ( ) Transition report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 For the transition period N/A ---- Commission file Number 1-10346 -------- MICROTEL INTERNATIONAL, INC. - ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 77-0226211 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9485 Haven Avenue, Ste. 100, Rancho Cucamonga, CA 91730 - ------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number (909) 297-2699 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange - -------------------------------- on which registered --------------------- Common Stock $.0033 par value None - -------------------------------------------------------------------------------- Securities registered pursuant to Section 12 (g) of the Act: None - -------------------------------------------------------------------------------- Title of Class Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of August 8, 2000, there were 20,509,549 shares of common stock outstanding. MICROTEL INTERNATIONAL, INC. INDEX TO FORM 10-Q PAGE ---- PART I - FINANCIAL INFORMATION Item l. Financial Statements Consolidated Condensed Balance Sheets June 30, 2000 and December 31, 1999 3 Consolidated Condensed Statements of Operations Three and Six Months Ended June 30, 2000 and l999 4 Consolidated Condensed Statements of Cash Flows Six Months Ended June 30, 2000 and l999 5 Notes to Consolidated Condensed Financial Statements 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 2. Changes in Securities 23 Item 3. Defaults upon Senior Securities 23 Item 4. Submission of Matters to a Vote of Security Holders 23 Item 5. Other Information 24 Item 6. Exhibits and Reports on Form 8-K 24 Signatures 25 -2- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS) JUNE 30, DECEMBER 31, ASSETS 2000 1999 -------- ------------ Cash and cash equivalents $ 391 $ 481 Short-term investments 799 -- Accounts receivable, net 6,256 6,519 Inventories 4,941 4,181 Other current assets 1,274 578 -------- -------- Total current assets 13,661 11,759 Property, plant and equipment-net 1,378 1,393 Goodwill, net 3,123 1,507 Investment in unconsolidated affiliates -- 1,240 Other assets 492 722 -------- -------- $ 18,654 $ 16,621 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Notes payable $ 3,125 $ 2,107 Current portion of long-term debt 1,509 1,422 Accounts payable 5,263 4,771 Accrued expenses 2,867 2,985 -------- -------- Total current liabilities 12,764 11,285 Long-term debt, less current portion 766 165 Other liabilities 652 782 -------- -------- Total liabilities 14,182 12,232 Convertible redeemable preferred stock 253 588 Stockholders' equity: Common stock 68 60 Additional paid-in capital 24,302 23,726 Accumulated deficit (19,785) (19,759) Accumulated comprehensive loss (366) (226) -------- -------- Total stockholders' equity 4,219 3,801 -------- -------- $ 18,654 $ 16,621 ======== ======== See accompanying notes to consolidated condensed financial statements. -3- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands, except per share amounts) Net sales $ 7,512 $ 6,801 $ 13,998 $ 14,311 Cost of sales 4,698 4,411 8,811 9,314 -------- -------- -------- -------- Gross profit 2,814 2,390 5,187 4,997 Operating expenses: Selling, general and administrative 2,459 2,890 4,671 6,607 Engineering and product development 253 477 496 1,035 -------- -------- -------- -------- Income (loss) from operations 102 (977) 20 (2,645) Other income (expense) Interest expense (99) (83) (195) (202) Gain on sale of subsidiary -- -- -- 331 Equity in earnings of unconsolidated affiliates -- 191 -- 727 Other 110 (40) 205 (87) -------- -------- -------- -------- Income (loss) before income taxes 113 (909) 30 (1,876) Income tax expense 4 5 10 13 -------- -------- -------- -------- Net income (loss) 109 (914) 20 (1,889) Other comprehensive gain (loss) Changes in unrealized gain on marketable securities (382) -- 78 -- Foreign currency translation adjustment (51) (161) (217) (424) -------- -------- -------- -------- Total comprehensive loss $ (324) $ (1,075) $ (119) $ (2,313) ======== ======== ======== ======== Basic earnings (loss) per share $ 0.005 $ (0.054) $ (0.001) $ (0.123) ======== ======== ======== ======== Diluted earnings (loss) per share $ 0.004 $ (0.054) $ (0.001) $ (0.123) ======== ======== ======== ======== See accompanying notes to consolidated condensed financial statements. -4- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) SIX MONTHS ENDED JUNE 30, 2000 1999 ------- ------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 20 $(1,889) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 206 240 Amortization of intangibles 169 173 Gain on the sale of fixed assets (43) -- Gain on sale of subsidiary -- (331) Equity in earnings of unconsolidated entities -- (727) Stock and warrants issued as compensation 130 1,219 Other noncash items 221 463 Changes in operating assets and liabilities: Accounts receivable 987 1,576 Inventories (19) 626 Other assets (185) 59 Accounts payable and accrued expenses (2,245) (1,081) ------- ------- Cash provided by (used in) operating activities (759) 328 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (9) (52) Proceeds from sale of fixed assets 43 -- Proceeds from the sale of DTS stock 520 -- Proceeds from sale of subsidiary -- 750 Investment in Belix Ltd. companies (592) -- Cash received from note receivable -- 9 ------- ------- Cash provided by (used in) investing activities (38) 707 ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (repayments) of notes payable and long term debt 852 (1,063) Proceeds from exercise of warrants and employee stock options 73 -- Proceeds from sale of common stock -- 2 ------- ------- Cash provided by (used in) financing activities 925 (1,061) ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (218) (424) ------- ------- -5- NET DECREASE IN CASH AND CASH EQUIVALENTS (90) (450) -------- -------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 481 572 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 391 $ 122 ======== ======== See accompanying notes to consolidated condensed financial statements. -6- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND," "SHOULD," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTE 4 HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MicroTel International, Inc. is an international telecommunications electronics company comprised of three wholly owned subsidiaries - CXR Telcom Corporation in Fremont, California, CXR, S. A. in Paris, France and XIT Corporation in Rancho Cucamonga, California. CXR Telcom Corporation and CXR, S. A. design, manufacture and market electronic telecommunications test instruments, wireless and wireline voice, data and video transmission and network access equipment. XIT Corporation designs, manufactures and markets information technology products, including input and display components, subsystem assemblies and power supplies. The Company operates out of facilities in the United States, France, England and Japan. The Company is organized into three segments - Instrumentation and Test Equipment, Components and Subsystem Assemblies, and Circuits. Through the sale of various subsidiaries in 1998 and 1999, the Company has divested a majority of its circuits operations. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. -7- MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The unaudited consolidated condensed financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the financial position as of June 30, 2000 and the results of operations and cash flows for the related interim periods ended June 30, 2000 and 1999. However, these results are not necessarily indicative of results for any other interim period or for the year. It is suggested that the accompanying consolidated condensed financial statements be read in conjunction with the Company's Consolidated Financial Statements included in its 1999 Annual Report on Form 10-K. (2) EARNINGS (LOSS) PER SHARE The following table illustrates the computation of basic and diluted loss per share (in thousands, except per share amounts): THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ------------------------- 2000 1999 2000 1999 -------- -------- -------- -------- NUMERATOR: Net income (loss) $ 109 $ (914) $ 20 $ (1,889) Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 23 (11) 46 45 -------- -------- -------- -------- Income (loss) attributable to common stockholders 86 (903) (26) (1,934) DENOMINATOR: Weighted average number of common shares outstanding during the period 18,712 16,594 18,443 15,685 Incremental shares from assumed conversions of warrants, options and preferred stock 2,076 -- -- -- -------- -------- -------- -------- Adjusted weighted average shares 20,788 16,594 18,443 15,685 Basic loss per share $ .005 $ (.054) $ (.001) $ (.123) ======== ======== ======== ======== Diluted loss per share $ .004 $ (.054) $ (.001) $ (.123) ======== ======== ======== ======== -8- MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The computation of diluted loss per share for the six month period ended June 30, 2000 and the six and three month period ended June 30, 1999 excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was antidilutive due to losses incurred by the Company or such instruments had exercise prices greater than the average market price of the common shares during the periods presented. (3) INVENTORIES Inventories consist of the following. June 30, 2000 December 31, 1999 ------------- ----------------- Raw materials $ 1,684,000 $ 1,728,000 Work-in-process 1,558,000 1,199,000 Finished goods 1,699,000 1,254,000 ------------------ -------------- $ 4,941,000 $ 4,181,000 ================== ============== (4) LITIGATION The Company and its subsidiaries from time to time become involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows. (5) ACQUISITION AND DISPOSITION OF BUSINESSES On January 7, 2000, the Company sold all of its interest in the common stock in Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a publicly traded company on the Toronto Exchange. The Wi-LAN common stock had a market value of $720,000 on the date of the transaction. The Company was restricted from selling the Wi-LAN stock until July 7, 2000 due to Toronto exchange rules that restrict sales of stock obtained in an acquisition related transaction. As of June 30, 2000 the value of the Company's Wi-Lan shares had increased in value by $79,000 to $799,000. The increase in -9- MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (5) ACQUISITION AND DISPOSITION OF BUSINESSES (CONTINUED) value has been reflected in the carrying value of the investment and the other comprehensive income or loss line of the equity section in the balance sheet. Accordingly, the Wi-LAN investment is shown in the current asset section of the balance sheet as short-term investments. On July 7, 2000, the Company sold all its shares of Wi-LAN common stock for net proceeds of $917,000. The sale resulted in a gain of approximately $197,000 which will be included in the Company's results of operations in the third quarter of 2000. On April 17, 2000, the Company finalized its acquisition of Belix Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased the capital stock of Belix for $790,000 cash and an earn-out for the former stockholders based on sales. The Company has recorded an estimated earn-out accrual of approximately $440,000. In adition, the Company has recorded an additional accrual of approximately $360,000 for certain severance and relocation costs related to Belix. The company has included accruals in the calculation of the cost of the acquisition. Belix is located in England, U. K. and is in the business of manufacturing power supplies for various applications. It will be integrated into the Company's existing power supply producer, XCEL Power Systems, Ltd. Belix' assets consist mostly of accounts receivable, inventories and fixed assets. All dollar amounts indicated in this paragraph are derived from the conversion of British pounds into U. S. dollars at the conversion rate in effect at the time of the acquisition. (6) CONVERSION OF PREFERRED STOCK During the three months ended June 30, 2000, certain holders of convertible redeemable preferred stock converted 34.5 shares of preferred stock into 1,743,285 shares of common stock. The same holders also exercised warrants to purchase 172,500 shares of common stock for $0.25 per share. -10- MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (7) REPORTABLE SEGMENTS The Company has three reportable segments: Instrumentation and Test Equipment, Components and Subsystem Assemblies, and Circuits. The Instrumentation and Test Equipment segment operates principally in the U.S. and European markets and designs, manufactures and distributes telecommunications test instruments and voice and data transmission and networking equipment. The Components and Subsystems Assemblies segment operates in the U.S., European and Asian markets and designs, manufactures and markets information technology products, including input and display components, subsystem assemblies, and power supplies. The Company has disposed of the majority of its Circuits segment business operations and has only one such operation that is material. The Company evaluates performance based upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. The Company's reportable segments are comprised of operating entities offering the same or similar products to similar customers. Each segment is managed separately because each business has different customers, design, manufacturing and marketing strategies. There were no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the amounts disclosed in the Company's consolidated financial statements included in its 1999 Annual Report on Form 10-K. Selected financial data for each of the Company's operating segments is shown below. -11- MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (6) REPORTABLE SEGMENTS (CONTINUED) SIX MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, 2000 1999 ---- ---- SALES TO EXTERNAL CUSTOMERS: Instruments $ 7,193,000 $ 7,357,000 Components 5,408,000 5,540,000 Circuits 1,397,000 1,414,000 ------------ ------------ $ 13,998,000 $ 14,311,000 ============ ============ INTERSEGMENT SALES: Instruments $ -- $ -- Components -- 130,000 Circuits 153,000 321,000 ------------ ------------ $ 153,000 $ 451,000 ============ ============ SEGMENT PRETAX INCOME (LOSS) Instruments $ 46,000 $ (971,000) Components 1,076,000 722,000 Circuits (266,000) (892,000) ------------ ------------ $ 856,000 $ (1,141,000) ============ ============ JUNE 30, DECEMBER 31, 2000 1999 ---- ---- SEGMENT ASSETS Instruments $ 7,139,000 $ 7,960,000 Components 8,757,000 5,213,000 Circuits 1,319,000 1,379,000 ----------- ----------- $17,215,000 $14,552,000 =========== =========== -12- MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (7) REPORTABLE SEGMENTS (CONTINUED) The following is a reconciliation of the reportable segment loss and assets to the Company's consolidated totals. SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 2000 JUNE 30, 1999 ------------- ------------- PRETAX INCOME (LOSS) Total income (loss) for reportable segments $ 856,000 $(1,141,000) Unallocated amounts: Gain on sale of assets of subsidiary -- 331,000 Equity in earnings of unconsolidated affiliates -- 727,000 Write-down of note receivable -- (466,000) Warranty reserve reversal 110,000 -- Unallocated general corporate expenses (936,000) (1,327,000) ----------- ----------- Consolidated loss before income taxes $ 30,000 $(1,876,000) =========== =========== JUNE 30, DECEMBER 31, 2000 1999 ---- ---- ASSETS Total assets for reportable segments $17,215,000 $14,552,000 Other assets 1,439,000 2,069,000 ----------- ----------- Total consolidated assets $18,654,000 $16,621,000 =========== =========== -13- MICROTEL INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. PROSPECTIVE READERS OR INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 1999 NET SALES Consolidated net sales for the second quarter of 2000 increased by $711,000 or 10.5% compared with the same period in 1999. The table below shows the composition of consolidated net sales by business segment. Three Months Three Months Variance- Ended Ended Increase Percent Segment June 30, 2000 June 30, 1999 (Decrease) Change ------- ------------- ------------- ---------- ------ Test Equipment $3,641 $3,649 $ (8) (0.2)% Components 3,143 2,622 521 19.9% Circuits 728 530 198 37.4% ------ ------ ------ ---- Total $7,512 $6,801 $ 711 10.5% ====== ====== ====== ==== The relative percent of net sales by segment between the respective periods experienced the following changes: Three Months Three Months Ended Ended Segment June 30, 2000 June 30, 1999 ------- ------------- ------------- Test Equipment 48.5% 53.7% Components 41.8% 38.5% Circuits 9.7% 7.8% ----- ----- Total 100.0% 100.0% ===== ===== -14- The Instrument and Test Equipment segment sales remained approximately the same in the second quarter of 2000 compared to the second quarter of 1999. CXR Telcom experienced a $665,000 increase in sales of its test equipment in the second quarter of 2000 as compared to the prior year period as a result of favorable acceptance of the Company's new compact series 704 test equipment. This increase was offset by lower than expected sales of transmission equipment from CXR S. A. such as ISDN products and modems. The U. S. transmission product line was transferred from CXR Telcom in Fremont, California to CXR S. A. in France effective April 1, 2000. The Component segment sales increased $521,000 or 19.9% in the second quarter of 2000 over such sales in the prior year period. The Rancho Cucamonga, California based XIT Corporation ("XIT") increased its sales by $119,000 in the second quarter of 2000 as compared to the second quarter of 1999 primarily due to the acceleration of orders of one of XIT's largest customers for the final year of a five year contract. The Company's Japanese subsidiary XCEL Japan, Ltd. increased its sales by $140,000 in the current quarter as compared to the prior year period primarily as result of improved economic conditions in Asian markets. The remaining increase in sales of $262,000 for the second quarter of 2000 as compared to the second quarter of 1999 for the Component segment was primarily due to the net addition to sales that the acquisition of Belix Ltd. contributed to the Company's U. K. subsidiary, XCEL Power Systems, Ltd. ("XPS"). Belix contributed $658,000 of revenue in the second quarter of 2000. The Circuit segment increased sales by $198,000 or 37.4% in the second quarter of 2000 from the second quarter of 1999. The increase in sales was the result of the Company's effort to increase this segment's sales to unrelated third parties in conjunction with a planned reduction of intercompany sales. However, management believes it may be in the Company's long term interest to exit the Circuit segment. GROSS PROFIT Consolidated gross profit as a percent of net sales increased to 37.5% in the second quarter of 2000 from 35.1% in the second quarter of 1999. The composition of consolidated gross profit by business sector and the percentages of related net sales are shown in the following table for the periods indicated: Three Months Percent of Three Months Percent of Ended Related Ended Related Segment June 30, 2000 Net Sales June 30, 1999 Net Sales ------- ------------- --------- ------------- --------- Test Equipment $1,490 40.9% $1,446 39.6% Components 1,284 40.9% 933 35.6% Circuits 40 5.5% 11 2.0% ------ ------ Total $2,814 37.5% $2,390 35.1% ====== ====== Gross profit for the Instrumentation and Test Equipment segment as a percent of net sales improved to 40.9% in the second quarter of 2000 from 39.6% in the second quarter of 1999. The gross profit improvement primarily resulted from a greater percentage of higher margin test equipment sold in the current quarter than in the prior year quarter in comparison to total sales of test equipment and transmission equipment. The increase in relatively high margin test equipment sales more than offset the lower margins related to the transmission and modem sales. The gross profit at CXR Telcom improved to 50% in the second quarter of 2000 as compared to 45% in the second quarter of 1999. For the same -15- comparison period, CXR S. A.'s gross profit fell to 35.4% from 37.4%. This reduction in margin was primarily the result of lower quantities of transmission and modem production sold and to higher material costs due to the lower valuation of the French Franc in relation to U. S. dollars. The Component segment improved its gross profit as a percentage of sales substantially to 40.9% in the second quarter of 2000 from 35.6% in the second quarter of 1999. XIT greatly improved its gross profit margin as a percent of sales to 66.5% in the current quarter from 41.8% in the prior year quarter. This highly improved performance primarily resulted from additional manufacturing efficiencies, less overhead due to the relocation last November into less costly facilities, the discontinuation of the less profitable subsystem assemblies business and higher production volumes. Partially offsetting such improvements was a reduction in gross profit as a percent of sales at XPS to 15.4% in the second quarter of 2000 from 27.2% in the second quarter of 1999. Incomplete engineering and delays in the receipt of components negatively impacted Belix and delays in production releases for existing contracts unfavorably impacted XPS. Belix contributed $658,000 of revenue in the second quarter of 2000. The Circuits segment improved its gross profit as a percent of net sales in the second quarter of 2000 to 5.5% from 2% in the second quarter of 1999. The improvement mainly was due to the to higher prices from more outside business and improved efficiencies due to higher volumes. OPERATING EXPENSES Operating expense for the three months ended June 30, 2000 and 1999 were comprised of the following. Three Months Ended Three Months Ended June 30, 2000 June 30, 1999 ------------- ------------- Commissions $ 209 $ 189 Other selling expense 796 850 ------ ------ Total selling expense 1,005 1,039 General & administrative 1,454 1,851 ------ ------ Total selling, general & administrative $2,459 $2,890 ====== ====== Engineering & product development $ 253 $ 477 ====== ====== Total selling expense as a percentage of net sales decrease to 13.3% from 15.3% for the three months ended June 30, 2000 and 1999, respectively, primarily due to cost reductions at CXR Telcom in Fremont, California. Commissions, as a percentage of net sales, remained relatively stable at 2.8 % for both the current quarter and the prior year second quarter. General and administrative expenses ("G&A") declined to $1,454,000 or 19.4% of net sales in the current quarter from $1,851,000 or 27.2% of net sales in the second quarter of 1999. The G&A for the prior year period included an expense of $466,000 to establish a reserve for a note receivable. Without this charge the prior year period G&A would have been $1,385,000 and would have represented 20.4% of sales. -16- Engineering and product development costs were incurred by the Instrumentation and Test Equipment segment in the second quarters of 2000 and 1999. Such costs were $253,000 or 3.4% of net sales in the second quarter of 2000 compared to $477,000 or 7% of net sales in the second quarter of 1999. The majority of the reduction in engineering and product expenses in the current quarter as compared to the prior year period is due to the closing down of the engineering function at the CXR Telcom facilities in Fremont, California and concentrating the engineering efforts in the St. Charles, Illinois engineering facility. Management believes a substantial engineering and product development effort is necessary to maintain the Company's competitive position. OTHER INCOME AND EXPENSE Interest expense increased slightly in the second quarter of 2000 from the second quarter of 1999. Other income of $110,000 included a reversal of a warranty reserve related to the prior year sale of HyComp, Inc., a former subsidiary of the Company. The reserve was partially reversed due to the settlement of a warranty issue and therefore the Company recorded other income of $116,000. SIX MONTHS ENDED JUNE 30, 2000 VERSUS JUNE 30, 1999 NET SALES Consolidated net sales for the first six months of 2000 decreased by approximately $313,000 or 2.2% compared with the same period in 1999. The table below shows the composition of consolidated net sales by business sector. Six Months Six Months Variance- Ended Ended Increase/ Percent Segment June 30, 2000 June 30, 1999 (Decrease) Change ------- ------------- ------------- ---------- ------ Test Equipment $ 7,193 $ 7,357 $ (164) (2.2)% Components 5,408 5,540 (132) (2.4)% Circuits 1,397 1,414 (17) (1.2)% ------- ------- ------- Total $13,998 $14,311 $ (313) (2.2)% ======= ======= ======= The relative percent of net sales by segment between the respective periods experienced the following changes: Six Months Six Months Ended Ended Segment June 30, 2000 June 30, 1999 ------- ------------- ------------- Test Equipment 51.4% 51.4% Components 38.6% 38.7% Circuits 10.0% 9.9% ----- ----- Total 100.0% 100.0% ===== ===== The Instrument and Test Equipment segment sales declined by 2.2% in the first half of 2000 compared to the first half of 1999. However, CXR Telcom experienced a $1,366,000 increase in sales of test equipment in the first half of 2000 as compared to the prior year period in which $630,000 of test equipment was sold. The increase was primarily due to favorable acceptance of the Company's new compact series 704 test equipment. This represents a 217% increase in test equipment sales in the first half of 2000 from the first half of 1999. This increase was offset by lower than expected sales of -17- transmission equipment from CXR S. A. such as ISDN products and modems. The U. S. transmission product line was transferred from CXR Telcom in Fremont, California to CXR S. A. in France effective April 1, 2000. The Component segment sales decreased slightly by 2.4% in the six-month period ended June 30, 2000 from the prior year six-month period. XPS in the U. K. incurred a sales decline of 9.8% in the first half of 2000 as compared to the first half of 1999 primarily due to delays in the release of production for certain contracts. However, the Company's Japanese subsidiary, XCEL Japan, Ltd., increased its sales by $132,000, or 41.8% in the current six-month period as compared to the prior year period due to strong sales in the Asian market for components. Belix contributed $658,000 of revenue during the first half of 2000. The Circuit segment sales remained relatively flat in the six-month period ended June 30, 2000 as compared to the six-month period ending June 30, 1999. The first six-month period of 1999 included $456,000 sales of HyComp, Inc. a former subsidiary that was sold on March 31, 1999. Excluding the HyComp Inc. sales from the first half of 1999, the circuit segment sales increased to $1,397,000 in the first six-month period of 2000 from $958,000 in the first six-month period of 1999 which represents a $439,000 increase in sales or a 45.8% increase. The dramatic improvement in sales volume has been attained by concentrated effort to replace intercompany sales with more profitable third party sales. Notwithstanding the remarkable progress that has been achieved in this segment, management believes it may be in the long-term interest of the Company to leave this segment. GROSS PROFIT Consolidated gross profit as a percent of net sales increased to 37.1% in the first half of 2000 from 34.9% in the first half of 1999. The composition of consolidated gross profit by business sector and the percentages of related net sales are shown in the following table for the periods indicated: Six Months Percent of Six Months Percent of Ended Related Ended Related Segment June 30, 2000 Net Sales June 30, 1999 Net Sales ------- ------------- --------- ------------- --------- Test Equipment $2,842 39.5% $2,900 39.4% Components 2,230 41.2% 2,016 36.4% Circuits 115 8.2% 81 5.7% ------ ------ Total $5,187 37.1% $4,997 34.9% ====== ====== Gross profit for the Instrumentation and Test Equipment segment as a percent of net sales was relatively unchanged in the six-month period of 2000 as compared to the six-month period of 1999. The gross profit at CXR Telcom improved to 45% in the first half of 2000 as compared to 38.1% in the first half of 1999. For the same comparison period, CXR S. A.'s gross profit fell to 36.2% from 40%. This reduction in margin was primarily the result of higher material costs due to the lower valuation of the French Franc in relation to U. S. dollars. The Component segment improved its gross profit as a percentage of sales to 41.2% in the six-month period ending on June 30, 2000 from 36.4% in the six-month period ending on June 30, 1999. XIT greatly improved its gross profit margin as a percent of sales to 62.2% in the first half from 42.4% in -18- the comparable prior year period. This improved performance primarily resulted from additional manufacturing efficiencies, less overhead due to the relocation last November into less costly facilities, the discontinuation of the less profitable subsystem assemblies business and higher production volumes. Partially offsetting such improvements was a reduction in gross profit as a percent of sales at XPS to 15.4% in the first half of 2000 from 28.7% in the first six months of 1999. The reduction primarily resulted from the additional costs associated with integrating the Belix operations into the XPS operations. Also, both Belix and XPS experienced lower than expected sales. Incomplete engineering and delays in the receipt of components negatively impacted Belix and delays in production releases for existing contracts unfavorably impacted XPS. Belix contributed $658,000 of revenue in the first half of 2000. The Circuits segment improved its gross profit as a percent of net sales in the first half of 2000 to 8.2% from 5.7% in the first half of 1999. The improvement mainly was due to a 45.8% increase in sales of the Company's remaining Circuit segment facilities which was due to higher prices from more outside business and improved efficiencies due to higher volumes. OPERATING EXPENSES Operating expense for the six months ended June 30, 2000 and 1999 were comprised of the following. Six Months Six Months Ended Ended June 30, 2000 June 30, 1999 ------------- ------------- Commissions $ 414 $ 439 Other selling expense 1,541 1,788 ------ ------ Total selling expense 1,955 2,227 General & Administrative 2,716 4,380 ------ ------ Total S,G & A $4,671 $6,607 ====== ====== Engineering & product development $ 496 $1,035 ====== ====== Total selling expense as a percentage of net sales decrease to 13.9% from 15.6% for the six months ended June 30, 2000 and 1999, respectively, primarily due to cost reductions at CXR Telcom in Fremont, California. Commissions, as a percentage of net sales, remained stable at 3% for both the current six-month period and the prior year six-month period. General and Administrative Expenses ("G&A") declined dramatically to $2,716,000 or 19.4% of net sales in the first half of 2000 from $4,380,000 or 30.6% of net sales in the first half of 1999. The G&A for the prior year period of 1999 included an expense of $466,000 to establish a reserve for a note receivable, a charge of $522,000 associated with the company's program to retain its listing on Nasdaq and a $193,000 charge related to a 1997 acquisition. Without these charges the prior year period G&A would have been $3,199,000 and would have represented 22.4% of sales. The reduction of G&A expenses to 19.4% of sales represents the results of much of the company's cost cutting efforts of 1999 and early 2000. Management is continuing to reevaluate all costs and intends to continue reducing administrative expenses in relation to the Company's business levels. -19- Engineering and product development costs were incurred by the Instrumentation and Test Equipment segment in the first half of 2000 and 1999 except for $32,000 of such costs incurred by the Circuits segment in the first quarter of 1999. Engineering and product and development costs were $496,000 or 3.5% of net sales in the first half of 2000 compared to $1,035,000 or 7.2% of net sales in the first half of 1999. The majority of reduction in engineering and product expenses in the current quarter as compared to the prior year period is due to the closing down of the engineering function at the CXR Telcom facilities in Fremont, California and concentrating the engineering efforts in the St. Charles, Illinois engineering facility. Management believes a substantial engineering and product development effort is necessary to maintain the Company's competitive position. OTHER INCOME AND EXPENSE Interest expense decreased slightly in the second half of 2000 from the second half of 1999. Other income of $110,000 included a reversal of a warranty reserve related to the prior year sale of HyComp, Inc., a former subsidiary of the Company. The reserve was partially reversed due to the settlement of a warranty issue and therefore the Company recorded other income of $116,000. The other income category for the period ended June 30, 1999 included $331,000 gain on the sale of HyComp, Inc., a former subsidiary and $727,000 of recorded earnings based on the equity method as result of earnings of the Company's former ownership of 37% of the common stock of Digital Transmission Systems, Inc. -20- LIQUIDITY AND CAPITAL RESOURCES Cash of $759,000 was used by operations in the first six months of 2000 compared to cash of $328,000 provided by operations in the first six months of 1999. The decrease in cash used in operations resulted primarily from substantial payments of accrued expenses and accounts payable. Accounts receivables collection provided much of the cash to partially offset the cash used in the reduction in accrued expenses and payables. Cash flows from investing activities included cash received from the sale of the Company's 37% interest in Digital Transmission Systems, Inc. ("DTS") offset with the investment in Belix. Financing activities provided $925,000 of cash flow primarily from additional debt related to the acquisition of Belix. On January 7, 2000, the Company sold all of its interest in the common stock of ("DTS") to Wi-LAN, Inc., a public company based in Alberta, Canada. As consideration, the Company received $520,000 in cash and 28,340 shares of Wi-LAN common stock valued at approximately $720,000 at the time of the transaction. The Company used the cash to pay down debt. In conjunction with the transaction, the Company's lender, Congress Financial Corporation ("Congress"), agreed to waive certain defaults of the loan agreement relating to a $350,000 overdraft the Company was required to pay down by September 22, 1999 and eliminated the requirement of a $350,000 target reserve. The target reserve was a funding requirement to pay down the principal of the term loan by $350,000 in addition to the regular monthly principal payments secured by the Wi-LAN stock. Due to rules of the Toronto Stock exchange, where Wi-LAN, Inc. stock trades, the Company was prohibited from selling its interest in the Wi-LAN, Inc. stock for six months after acquisition because the stock was acquired in a transaction related to the sale or purchase of a company. However, the Company's lender did increase the Company's borrowing availability by $400,000 on February 29, 2000 by providing an authorized overdraft. On July 7, 2000, the Company sold all its shares of Wi-LAN common stock for net proceeds of $917,000. The sale resulted in a gain of approximately $197,000 which will be included in the Company's results of operations in the third quarter of 2000. The proceeds were used to pay down debt owed Congress eliminating the overadvance and paying down the term loan balance to $55,000. The financing facility provided by Congress expired on June 23, 2000. Congress has twice amended its loan agreement with the Company to extend its credit facility through August 14, 2000. The Company expects to have completed the process of obtaining new financing with the business credit operations of a well-known national lending institution and anticipates paying off its Congress debt by August 14. However, there can be no assurance that the new financing will be obtained. The Company's cash situation continues to improve in the domestic operations. In light of the recent efforts in cost cutting, reorganizing in the Instrument and Test Equipment segment and the improvement in recent orders, management believes the Company's cash situation has improved substantially since the fourth quarter of 1999. The Company expects to further improve its cash position on the effective date of the new financing discussed above. LEGAL PROCEEDINGS There are no material legal proceedings pending against the Company (see Note 4 to the Consolidated Condensed Financial Statements included elsewhere herein). -21- YEAR 2000 To date, the Company experienced no material effects related to computer operations and the arrival of the year 2000 as of the date of this report. Management does not expect any disruptions due to the year 2000 as management believes all its current systems are year 2000 compliant. EFFECTS OF INFLATION The impact of inflation and changing prices has not been significant on the financial condition or results of operations of either the Company or its various operating subsidiaries. EURO CONVERSION The Company has operating subsidiaries located in France and the U.K. with combined net sales from these operations approximating 49% of total Company net sales for the first half of 2000. Net sales from the French subsidiary participating in the Euro conversion were 32% of the Company's net sales for the first half of 2000. The Company continues to review the impact of the Euro conversion on its operations. In 1998, the Company's European operations took steps to ensure their capability of entering into Euro transactions as of January 1, 1999. No material changes to information technology and other systems were necessary to accommodate these transactions as such systems previously had the capability to utilize multiple currencies. While it is difficult to assess the competitive impact of the Euro conversion on the Company's European operations, at this time, the Company does not foresee any material impediments in its ability to compete for orders from customers requesting pricing using the new exchange rate. Since the Company has no significant direct sales between its U.S. operations and Europe, exchange rate risk is regarded as nominal. OUTLOOK FOR THE COMPANY The Company's overall strategy is to expand its Instrumentation and Test Equipment segment through the acquisition and/or development of new products, product lines and/or separate operating companies. Concurrently, the Company continues to evaluate existing lower-margin or loss operations elsewhere throughout the Company, with a view toward divestment so as to redirect capital to the higher margin Instrumentation and Test Equipment segment. In addition, the Company will continue to seek to maximize short to intermediate term profitability on existing maturing product lines in all segments through price increases and lower operating costs. The Company has completed its transfer of production of its U. S. transmission and modem product lines from its CXR Telcom Fremont facility to its French subsidiary, CXR, S. A. This transfer will improve the manufacturing efficiency and sales effort of these product lines as they will now be centralized in one location. CXR Telcom has released a new universal ADSL/xDSL facility test set incorporating IEEE 23 tone test technique that should result in a significant increase in the sales of its 704A universal test set. Also, CXR, S. A. has introduced in Europe its new high speed mSDSL multirate modem. This new Fastline 2000 modem varies its transmission rate to provide maximum performance over single pair copper wires. In the Component segment, XIT's Digitran Division has achieved recertification by the -22- U. S. government's Defense Supply center to manufacture the Digitran patented family of Binary Coded Digital switches for the government's Qualified Parts List. In April 2000, CXR Telcom received a contract from the Federal Aviation Agency for the Halcyon 704A-400 combination test unit that is expected to provide $8,000,000 in revenue over a three year period. The Company's XCEL Power Systems, Ltd. ("XPS") in the U. K. acquired Belix, Ltd. ("Belix") on April 17, 2000. Belix manufactures power supplies as does XPS. The combined entity is expected to double its sales compared to its sales before the acquisition. Belix is expected to be profitable in its first year as part of the Company's U. K. operations. The Company's XIT subsidiary has achieved its highest open order position in several years. In fact, three out of six-months of new orders exceeded one million dollars and this trend is continuing. The open order trend coupled with lower costs from cost reductions achieved in 1999 have resulted in this unit achieving a net income contribution for six-months of $1,129,000 and this trend is expected to continue through the first half of 2001. Following the initial round of mergers of Regional Bell Operating Companies in 1997 and 1998, certain other mergers which occurred in 1999, most notably SBC's acquisition of Ameritic among other acquisitions, have resulted in the Company's CXR Telcom subsidiary having its products, which were previously approved by SBC, now becoming approved also by Ameritec and others. This has resulted in substantially improved order entry and a growing open order position for CXR Telcom. These new approvals coupled with previous approvals for CXR Telcom's new 704A universal tests sets have resulted in higher unit sales in the first quarter of 2000 than all of 1999. We see this trend continuing and further enhanced by newly introduced custom ruggedized enclosures for the new product range. Domestic sales of transmission products have expanded with the introduction of Remote Access Server products for Internet applications as well as for other transmission products for billing and voice mail applications which are currently being sold to SBC Communications, GTE and others. The Company expects its profit and cash flow to continue to improve in subsequent quarters of 2000. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None PART II - OTHER INFORMATION Item 1. Legal Proceedings No material new developments. See Note 4 - Litigation in the accompanying unaudited consolidated condensed financial statements. Item 2. Changes in Securities and Use of Proceeds None. -23- Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Description Number ----------- ------- 10.52 Agreement between XCEL Power Systems Limited and the stockholders of Belix Company Limited dated April 17, 2000 27 Unaudited Financial Data Schedule for the six months ended June 30, 2000. (b) Reports on Form 8-K. Reports on Form 8-K were filed as follows: (1) Dated May 4, 2000 under Item 5 - Other, was filed on May 5, 2000. (2) Dated June 28, 2000 under Item 5 - Other, was filed on June 28, 2000. -24- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MicroTel International, Inc. August 14, 2000 /s/ Carmine T. Oliva ------------------------------------ Carmine T. Oliva Chief Executive Officer (Principal Executive Officer) /s/ Randolph D. Foote ------------------------------------ Randolph D. Foote Chief Financial Officer (Principal Accounting and Financial Officer) -25-