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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2000
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
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, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(Address of Principal Executive Offices)
(909) 987-9220
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address And Former Fiscal Year,
if Changed Since Last Report)
Indicated by check 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 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 March 23, 2001, there were 20,570,008 shares of the issuer's
common stock, $.0033 par value, outstanding.
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1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Condensed Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999............................................................... F-1
Consolidated Condensed Statements of Operations and Comprehensive Income for the
three months ended March 31, 2000 and l999 (unaudited).............................. F-2
Consolidated Condensed Statements of Cash Flows for the three months ended
March 31, 2000 and l999 (unaudited)................................................. F-3
Notes to Consolidated Condensed Financial Statements (unaudited)......................... F-4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................................. 3
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK......................................................................... 16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................... 17
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................................... 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................................... 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................. 18
ITEM 5. OTHER INFORMATION................................................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................................... 18
SIGNATURES .................................................................................... 19
2
ITEM 1. FINANCIAL STATEMENTS.
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31,
2000 December 31,
ASSETS (Restated) 1999
--------- ---------
Cash and cash equivalents $ 635 $ 481
Short-term investments 1,181 --
Accounts receivable - net 5,544 6,519
Inventories 4,129 4,181
Other current assets 632 578
--------- ---------
Total current assets 12,121 11,759
Property, plant and equipment-net 1,312 1,393
Goodwill-net 1,459 1,507
Investment in unconsolidated affiliate -- 1,240
Other assets 649 722
--------- ---------
$ 15,541 $ 16,621
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,046 $ 2,107
Current portion of long-term debt 1,245 1,422
Accounts payable 4,124 4,771
Accrued expenses 2,595 2,985
--------- ---------
Total current liabilities 10,010 11,285
Long-term debt, less current portion 121 165
Other liabilities 722 782
--------- ---------
Total liabilities 10,853 12,232
Convertible redeemable preferred stock, $10,000
unit value. Authorized 200 shares; issued and
outstanding 59.5 shares and 59.5 shares
(aggregate liquidation preference of $595 and
$595, respectively) 611 588
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized
10,000,000 shares; 0 shares issued and
outstanding -- --
Common stock, $.0033 par value. Authorized
25,000,000 shares; issued and outstanding
18,494,000 and 16,436,000 shares 61 60
Additional paid-in capital 23,855 23,726
Accumulated deficit (19,909) (19,759)
Accumulated comprehensive income (loss) 70 (226)
--------- ---------
Total stockholders' equity 4,077 3,801
--------- ---------
$ 15,541 $ 16,621
========= =========
See accompanying notes to consolidated condensed financial statements.
F-1
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended
March 31,
2000
(Restated) 1999
-------- --------
(in thousands,
except per share amounts)
Net sales $ 6,486 $ 7,510
Cost of sales 4,113 4,904
-------- --------
Gross profit 2,373 2,606
Operating expenses:
Selling, general and administrative 2,250 3,716
Engineering and product development 243 558
-------- --------
Loss from operations (120) (1,668)
Other income (expense)
Interest expense (96) (119)
Gain on sale of subsidiary -- 331
Equity in earnings of unconsolidated
affiliates -- 536
Other 95 (47)
-------- --------
Loss before income taxes (121) (967)
Income taxes 6 8
-------- --------
Net loss $ (127) $ (975)
-------- --------
Other comprehensive income (loss):
Change in net unrealized gain on marketable
securities 461 --
Foreign currency translation adjustment (165) (263)
-------- --------
Total comprehensive income (loss) $ 169 $(1,238)
======== ========
Basic and diluted loss per share $(0.008) $(0.070)
======== ========
See accompanying notes to consolidated condensed financial statements.
F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
2000
(Restated) 1999
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (127) $ (975)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 32 136
Amortization of intangibles 66 91
Gain on sale of subsidiary -- (331)
Gain on sale of fixed assets (43) --
Equity in earnings of unconsolidated entities -- (536)
Stock and warrants issued as compensation -- 781
Other noncash items 122 360
Changes in operating assets and liabilities:
Accounts receivable 975 687
Inventories 52 (77)
Other assets 56 (95)
Accounts payable and accrued expenses (1,097) (192)
-------- --------
Cash provided by (used in) operating activities 36 (151)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (6) (8)
Cash received for sale of DTS stock 520 --
Proceeds from sale of fixed assets 43 --
Cash collected on note receivable -- 9
-------- --------
Cash from investing activities 557 1
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable and long term debt (282) 202
Proceeds from exercise of employee stock options 8 --
Proceeds from sale of common stock -- 1
-------- --------
Cash provided by (used in) financing activities (274) 203
-------- --------
Effect Of Exchange Rate Changes On Cash (165) (263)
-------- --------
Net Increase (Decrease) In Cash and Cash Equivalents 154 (210)
Cash and Cash Equivalents At Beginning Of Period 481 572
-------- --------
Cash and Cash Equivalents At End Of Period $ 635 $ 362
======== ========
See accompanying notes to consolidated condensed financial statements.
F-3
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
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 U. S., 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.
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 March 31, 2000 and December 31, 1999 and the results of
operations and cash flows for the related interim periods ended March 31, 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) RESTATEMENT OF ACCOUNTING FOR WARRANT EXCHANGE OFFER
In March 2001, it was determined that the warrant exchange offer
described in Note 7 should be accounted for in accordance with APB 25 and FIN 44
or FAS 123, depending on the date of the original grant and whether the warrant
was held by an employee or non-employee. See Note 7.
Accordingly, the accompanying consolidated condensed financial
statements as of and for the three months ended March 31, 2000, have been
restated to reflect additional compensation expense related to the warrant
exchange offer of $38,000 for the quarter ended March 31, 2000, with a
corresponding increase in additional paid in capital. The effect of this change
was to increase net loss by $38,000 to $127,000 for the three months ended March
31, 2000. Additional paid in capital increased by $38,000 to $23,855,000 at
March 31, 2000.
F-4
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(3) LOSS PER SHARE
The following table illustrates the computation of basic and diluted loss per share:
Three months Three months
ended ended
March 31, 2000 March 31, 1999
------------- -------------
NUMERATOR:
Net loss $ (127,000) $ (975,000)
Less: accretion of the excess of the redemption
value over the carrying value of redeemable preferred
stock (23,000) (56,000)
------------- -------------
Loss attributable to common stockholders (150,000) (1,031,000)
DENOMINATOR:
Weighted average number of common shares outstanding
during the period 18,174,000 14,766,000
------------- -------------
Basic and diluted loss per share $ (0.008) $ (0.070)
============= =============
The computation of diluted loss per share 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.
(4) INVENTORIES
Inventories consist of the following.
March 31, December 31,
2000 1999
----------- -----------
Raw materials $1,644,000 $1,728,000
Work-in-process 962,000 1,199,000
Finished goods 1,523,000 1,254,000
----------- -----------
$4,129,000 $4,181,000
=========== ===========
(5) 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.
F-5
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(6) DISPOSITION OF A BUSINESS
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 Stock
Exchange. The Wi-LAN common stock had a market value of $720,000 on the date of
the transaction. The Company is restricted from selling the Wi-LAN stock until
July 7, 2000 due to Toronto Stock Exchange rules that restrict sales of stock
obtained in an acquisition-related transaction. As of March 31, 2000 the value
of the Company's Wi-Lan shares had increased in value by $461,000 to $1,181,000.
The increase in 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. The Wi-LAN investment is shown in the current asset section of
the balance sheet as short-term investments.
(7) WARRANT EXCHANGE OFFER
During the first quarter of 2000, the Company offered to holders of
warrants with an exercise price of one dollar or more and ranging as high as
$3.79 the opportunity to exchange their warrants with new warrants for one half
the number of shares at one half the exercise price of the original warrants.
Neither the expiration dates, nor any other terms of the warrants, were changed
as a result of this offer. The offer was available to all warrant holders with
exercise prices of one dollar or more including Carmine T. Oliva, the Company's
President and Chairman of the Board, and the two other directors. The primary
reason for the offer was to reduce the quantity of shares allocated to warrants
so that the Company would have sufficient authorized stock for its needs until
an increase in the authorized stock could be voted on by the Company's
stockholders.
The offers and acceptances were finalized by April 24, 2000. Shares
represented by warrants were reduced by 1,384,602 shares. A $123,000 expense was
recorded in the first quarter of 2000 for the compensation expense for the
modification of the warrants. Based on the nature and timing of the original
grant of the warrants, the compensation expense was determined by various
methods. For warrants issued to employees and directors, compensation expense
was determined by the intrinsic value method and by treating the modified
warrants as variable from the date of modification in accordance with APB 25 and
FIN 44. For warrants issued to non-employees, compensation expense was
determined in accordance with FAS 123 by calculating the difference between the
fair value of the new warrant and the old warrant at the date of acceptance,
with the exception of warrants initially granted pre-FAS 123, in which case the
entire fair value of the new warrant was recorded as compensation expense. The
estimated fair values of the old and new warrants was calculated using a
Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 93%; a risk-free interest rate of 6.2%; and expected
lives ranging from 0.1 to 5 years.
F-6
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(8) 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 as of March
31, 2000.
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:
Three months Three months
ended March 31, ended March 31,
2000 1999
------------ ------------
Sales to external customers:
Instruments $ 3,553,000 $ 3,708,000
Components 2,264,000 2,918,000
Circuits 669,000 884,000
------------ ------------
$ 6,486,000 $ 7,510,000
============ ============
Intersegment sales:
Instruments $ -- $ --
Components 73,000 60,000
Circuits -- 181,000
------------ ------------
$ 73,000 $ 241,000
============ ============
Segment pretax profits
Instruments $ (95,000) $ (781,000)
Components 467,000 512,000
Circuits (111,000) (387,000)
------------ ------------
$ 261,000 $ (656,000)
============ ============
F-7
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(8) Reportable Segments (continued)
March 31, March 31,
2000 1999
------------ ------------
Segment assets
Instruments $ 7,113,000 $ 9,439,000
Components 5,127,000 7,133,000
Circuits 1,457,000 2,421,000
------------ ------------
$13,697,000 $18,993,000
============ ============
The following is a reconciliation of the reportable segment loss and
assets to the Company's consolidated totals:
Three months Three months
ended ended
March 31, 2000 March 31, 1999
------------- -------------
Total income (loss) for reportable segments $ 261,000 $ (656,000)
Unallocated amounts:
Gain on sale of assets of subsidiary -- 331,000
Equity in earnings of unconsolidated affiliates -- 540,000
Unallocated general corporate expenses (382,000) (1,182,000)
------------- -------------
Consolidated loss before income taxes $ (121,000) $ (967,000)
============= =============
March 31, March 31,
2000 1999
------------ ------------
Assets
------
Total assets for reportable segments $13,697,000 $18,993,000
Other assets 1,844,000 2,584,000
------------ ------------
Total consolidated assets $15,541,000 $21,577,000
============ ============
(9) SUBSEQUENT EVENT
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, assumption of debt of Belix of
$575,000 and an earn-out for the former stockholders based on future sales.
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. A charge for severance
and other consolidation costs will likely be incurred in the second quarter.
Belix's tangible assets consist primarily of accounts receivable, inventories
and fixed assets.
F-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with our consolidated condensed financial statements and notes to financial
statements included elsewhere in this report. This report and our consolidated
condensed financial statements and notes to financial statements contain
forward-looking statements, which generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance and our current beliefs regarding revenues we might
earn if we are successful in implementing our business strategies. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:
-- the projected growth in the telecommunications and electronic
components markets;
-- our business strategy for expanding our presence in these markets;
-- anticipated trends in our financial condition and results of
operations; and
-- our ability to distinguish ourselves from our current and future
competitors.
We do not undertake to update, revise or correct any forward-looking
statements.
The information contained in this report is not a complete description
of our business or the risks associated with an investment in our common stock.
Before deciding to buy or maintain a position in our common stock, you should
carefully review and consider the various disclosures we made in this report,
and in our other materials filed with the Securities and Exchange Commission
that discuss our business in greater detail and that disclose various risks,
uncertainties and other factors that may affect our business, results of
operations or financial condition.
Any of the factors described above or in the "Risk Factors" section
below could cause our financial results, including our net income (loss) or
growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially.
OVERVIEW
We previously organized our operations in three business segments:
-- Instrumentation and Test Equipment;
-- Components and Subsystem Assemblies; and
-- Circuits.
In an effort to focus our attention and working capital on our
telecommunications test instruments and our transmission and network access
products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc.
in April 1998 and sold substantially all of the assets of HyComp, Inc., a
manufacturer of hybrid circuits, in April 1999.
In September 2000, we acquired the assets and business operations of
T-Com, a telecommunications test instruments manufacturer located in Sunnyvale,
California. T-Com produced central office equipment, which is equipment that is
typically employed in switching centers and network operating centers.
3
In October 2000, we decided to discontinue our circuits segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of our wholly-owned subsidiary, XIT
Corporation. We intend to retain our Monrovia, California circuit board
manufacturing facility as a captive supplier of circuit boards to XIT
Corporation's Digitran Division.
Through our three direct wholly-owned operating subsidiaries, XIT
Corporation, CXR Telcom Corporation and CXR, S.A., and through the divisions and
subsidiaries of our subsidiaries, we presently design, manufacture, assemble,
and market products and services in the following two material business
segments:
Telecommunications
-- Telecommunications Test Instruments (analog and digital test
instruments used in the installation, maintenance, management and
optimization of public and private communication networks)
-- Transmission and Network Access Products (range of products for
accessing public and private networks for the transmission of
data, voice and video)
Electronic Components (digital switches and electronic power supplies)
Our sales are primarily in North America, Europe and Asia. Although a
majority of our sales in 2000 were to customers in the telecommunications
industry, we also have significant sales to industrial, aerospace and military
customers.
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
Although our operations as of the date of filing of this report are
organized into two business segments, the financial statements and the
discussions relating to the financial statements contained in this report
reflect our previous organization into three segments because the
discontinuation of our circuits segment did not occur until October 2000.
4
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales for the first quarter of 2000 decreased by
approximately $1,024,000, or 13.6%, as compared with the same period in the
prior year. This decrease in sales primarily comprised:
-- the sale of our HyComp, Inc. subsidiary; and
-- a reduction in the sales of our U. K. based component business.
The table below sets forth the composition of consolidated net sales by
business segment, separately identifying the operations of HyComp for the three
months ended March 31, 2000 and 1999:
March 31, March 31, Variance
2000 1999 Increase/(Decrease)
-------- -------- -------------------
(dollars in thousands)
----------------------
Segment
- -------
Instrumentation and Test Equipment $ 3,553 $ 3,708 $ (155) (4.2)%
Components 2,264 2,918 (654) (22.4)%
Circuits 669 428 241 56.3%
HyComp (sold 3/31/99) -- 456 (456) (100.0)%
-------- -------- --------
Total Sales $ 6,486 $ 7,510 $(1,024) (13.6)%
======== ======== ========
Instrumentation and Test Equipment sales were down slightly by 4.2% in
the first quarter of 2000 as compared to the first quarter of 1999. Management
believes this decrease was partially due to reduced orders of test equipment by
U. S. telecom customers in late 1999 due to Y2K concerns, which was a one-time
non-recurring event. Orders for test equipment have since improved beyond
expectation. The reduction in test equipment sales was offset by improved sales
of transmission products. The increase in U. S. transmission sales was the
result of major product qualification efforts in the latter half of 1999, which
efforts had been underway for almost a year with Pacific Bell and GTE. Sales of
transmission and modem equipment from our facility in France in the current
quarter were slightly below the first quarter of 1999 due to lower than usual
sales in January. This was expected because the sales for this facility in
December 1999 were unusually high, which had the effect of shifting sales that
would otherwise have normally been shipped in January into December.
Components sales declined 22.4% to $2,264,000 in the first quarter of
2000 from $2,918,000 in the first quarter of 1999. The U. S. Components
operation incurred a 9% sales decrease in the current quarter as compared to the
first quarter of 1999 due to a decrease in switch sales. The majority of the
sales decline in this segment is due to a short-term delay in the release of
production for some contracts at our U. K. facility for power supplies. This
resulted in a 28.5% sales decrease in the first quarter of 2000 from the first
quarter of 1999 for the U. K. facility.
Excluding the effect of HyComp, Inc., which was sold March 31, 1999,
sales for the Circuits sector increased 56.3% to $669,000 in the current quarter
from $428,000 in the first quarter of 1999. The increase in sales was the result
of a successful effort to replace the Circuits segment's sales to our own
facilities with sales to unrelated third parties at higher prices. Unit sales
were up 4% in the first quarter of 2000 from the comparable prior year period.
5
GROSS PROFIT
The composition of consolidated gross profit by business segment and
the percentages of related net sales are as follows for the three months ended
March 31, 2000 and 1999:
March 31, March 31,
2000 1999
-------- --------
(dollars in thousands)
Segment
- -------
Instrumentation and Test Equip $ 1,351 38.0% $ 1,452 39.2%
Components 947 41.8% 1,083 37.1%
Circuits 75 11.2% (68) (15.8)%
HyComp (sold 3/31/99) -- -- 139 30.5%
-------- --------
Total Gross Profit $ 2,373 36.6% $ 2,606 34.7%
======== ========
Gross profit for the Instrumentation and Test Equipment segment
declined slightly in the current quarter as compared to the prior year period.
The U. S. facility reduced its manufacturing costs considerably and with a
slightly reduced sales level was able to increase its gross margin to 39% of
sales in the first quarter of 2000 as compared to 32.8% of sales in the first
quarter of 1999 due to reducing headcount, subletting part of its facility and
reorganizing. This improvement in margin was more than offset with a reduction
in margin at the French facility to 37% of sales in the current period from
42.9% of sales in the prior year period. The French facility's margin was
reduced because of the lower exchange rate of the Euro and French Franc to the
U. S. dollar, causing their importation of manufacturing components and resale
items from the U. S. to be more costly in their local currency and thereby
reducing the margins.
Overall, the Components segment was able to increase its gross profit
margin to 41.8% of sales in the current quarter from 37.1% of sales in the first
quarter of last year even though sales declined for this segment by 22.4% for
the same comparison periods. Although the gross margin increased as a percentage
of sales, the gross margin declined to $947,000 in the first quarter of 2000
from $1,083,000 in the first quarter of 1999. The U. S. facility has produced a
substantial increase in its margin performance for the current period by
increasing its gross margin percentage of sales to 57.3% in the current quarter
from 43% in the comparable prior year quarter. This improvement was accomplished
by support personnel reductions and moving from the Ontario, California facility
to the smaller and more efficient Rancho Cucamonga, California facility. The
improvement of the gross margin in the U. S. facility was offset by the
reduction in gross margin in the U. K. facility in actual dollars and percentage
terms because of the reduction in volume causing less absorption of overhead due
to the temporary delay in the placement of production releases for previously
awarded contracts.
Excluding the effect of HyComp, Inc., which was sold March 31, 1999,
the gross margin for the Circuits segment improved to $75,000, or 11.2% of sales
in the first quarter of 2000, from a negative $68,000, or a negative 15.8% of
sales in the first quarter of 1999. This improvement was accomplished by
reducing personnel and making sales of higher priced units as well as a slight
increase in unit volume.
6
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2000 and 1999
comprised the following:
March 31, March 31,
2000 1999
------- -------
Commissions $ 205 $ 250
Other selling expense 745 937
------- -------
Total selling expense 950 1,187
General & administrative expense 1,300 2,529
------- -------
Total selling, general & administrative expense $2,250 $3,716
======= =======
Engineering & product development expense $ 243 $ 558
======= =======
Total selling expense as a percentage of net sales decreased to 14.6%
from 15.8% for the three months ended March 31, 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 3.2 % in
the first quarter of 2000 and 3.3% in the first quarter of 1999.
General and administrative expenses ("G&A") declined to $1,300,000 or
20.0% of net sales in the current quarter from $2,529,000 or 33.7% of net sales
in the first quarter of 1999. After adjusting for $715,000 of non-recurring
charges in the first quarter of 1999, G&A expenses have been reduced by $514,000
or 28.3% in the current quarter from the prior year quarter. We reduced G&A
expenses dramatically by transferring the administrative functions of CXR Telcom
to our corporate headquarters in May 1999 and did so with a reduced corporate
staff. Additional savings in G&A were achieved through closely monitoring and
reducing such expenses at the divisional level and the corporate level.
Engineering and product development costs were incurred by the
Instrumentation and Test Equipment segment in the first quarters of 2000 and
1999. In the first quarter of 1999, $32,000 of such expenses were recorded in
the Circuits segment by our HyComp, Inc. subsidiary that was sold March 31,
1999. Engineering and product development costs were $243,000 or 3.7% of net
sales in the current quarter, which is a $315,000 reduction from the $558,000 or
7.4% of net sales recorded for the first quarter of 1999. The reduction is
primarily due to the elimination of the CXR Telcom engineering effort in
Fremont, California and the consolidation of such engineering efforts in the St.
Charles, Illinois facility. This reorganization has reduced costs and improved
the efficiency of the product development process. The engineering and product
development costs will focus on the Instrumentation and Test Equipment segment
and will focus on bringing new products to the market in order to improve our
competitive position in this segment.
OTHER INCOME AND EXPENSE
In January 2000, we sold all of our interest in Digital Transmission
Systems, Inc. ("DTS") to Wi-LAN, Inc. of Alberta, Canada in exchange for
$520,000 and 28,340 shares of Wi-LAN, Inc. common stock, which is traded on the
Toronto, Ontario Stock Exchange. The market value of the acquired common stock
of Wi-LAN, Inc. was approximately $720,000 on the date of the transaction. Our
decision to sell the DTS stock was due to (1) the investment in DTS not
providing expected benefits and (2) our need to increase liquidity and working
capital.
7
In the first quarter of 1999, we recorded $536,000 of equity in
earnings for DTS and $331,000 gain on the sale of HyComp. No expenses or income
related to either DTS or HyComp were incurred in the first quarter of 2000 and
none are expected to be incurred in the future. Interest expense was reduced to
$96,000 in the current period from $119,000 in the prior year due to lower
average loan balances. Income taxes are not material due to U. S. loss
carryforwards.
SUBSEQUENT EVENT
On April 17, 2000, we finalized our acquisition of Belix Company, Ltd.
("Belix"), including its two subsidiaries. We purchased the capital stock of
Belix for $790,000 cash, assumption of debt of Belix of $575,000 and an earn-out
for the former stockholders based on future sales. Belix is located in England,
U. K. and is in the business of manufacturing power supplies for various
applications. It will be integrated into our existing power supply producer,
XCEL Power Systems, Ltd. Belix's tangible assets consist primarily of accounts
receivable, inventories and fixed assets. A charge for severance and other
consolidation costs will likely be recorded in the second quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $36,000 was generated from operations during the first quarter
of 2000 as compared to a cash usage from operations of $151,000 in the first
quarter of 1999. The primary source of cash from operations was the collection
of receivables, which reduced the balance of receivables to $5,544,000 as of
March 31, 2000 as compared to $6,519,000 as of December 31, 1999. The primary
usage of cash from operations was the reduction in accounts payable by $647,000
in the first quarter of 2000. We generated net cash of $154,000 for the first
quarter of 2000 as compared to a net cash usage of $210,000 in the first quarter
of prior year. We received $520,000 cash from the sale of our DTS stock, which
was primarily used to pay down debt. Cash used to reduce debt was $282,000 in
the first quarter of 2000.
On January 7, 2000, we sold all of our interest in the common stock of
DTS to Wi-LAN, Inc. As consideration, we 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. We used the cash to pay down debt. In conjunction with the
transaction, our lender, Congress Financial Corporation ("Congress"), agreed to
waive defaults of the loan agreement relating to a $350,000 overdraft we were
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, we were prohibited from selling our 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, our lender did increase
our borrowing availability by $400,000 on February 29, 2000 by providing an
authorized overdraft.
The financing facility provided by Congress expires on June 23, 2000.
Congress has informed management that it will not renew the loans and such loans
will be due and payable on that day. The Company is actively pursuing
replacement financing and has already received one proposal from a prospective
lender and expects other additional proposals. If the Company is unable to
secure alternative financing by the date of the expiration of the Congress
financing facility, the Company may not be able to continue its domestic
operations.
8
The Company continues to suffer from a shortage of cash. However, with
the recent efforts in cost cutting, reorganizing in the Instrument and Test
Equipment segment, the improvement in recent orders and improved operating
performance and cash flows, management believes the Company's cash situation,
though serious, has improved substantially since the fourth quarter of 1999.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against us (see Note 5
to the Consolidated Condensed Financial Statements included elsewhere in this
report).
YEAR 2000
To date, we have experienced no material effects related to computer
operations and the arrival of the year 2000. 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 us or our various
operating subsidiaries.
EURO CONVERSION
We have operating subsidiaries located in France and the U.K. with
combined net sales from these operations approximating 48% of our total net
sales for the first quarter of 2000. Net sales from the French subsidiary
participating in the Euro conversion were 34% of our net sales for the first
quarter of 2000. We continue to review the impact of the Euro conversion on our
operations.
In 1998, our 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 because such systems previously had the capability to utilize
multiple currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on our European operations, at this time, we do not foresee any
material impediments to our ability to compete for orders from customers
requesting pricing using the new exchange rate. Since we have no significant
direct sales between our U.S. operations and Europe, exchange rate risk is
regarded as nominal.
9
RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE
FUTURE AND WHICH MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.
We incurred significant net operating losses in each of the years ended
December 31, 1999 and 1998 and incurred a net operating profit in the year ended
December 31, 2000. We realized a net loss of approximately $4.6 million for the
twelve months ended December 31, 1999, as compared to incurring a net loss of
approximately $1.2 million for the twelve months ended December 31, 1998. For
the twelve months ended December 31, 2000, we recorded net income of $1.0
million. Our accumulated deficit and accumulated other comprehensive loss
through December 31, 2000 were approximately $18.8 million and $.7 million,
respectively, and as of that date we had a total stockholders' equity of
approximately $5.8 million. Although we recently reported profitable operations,
there is no assurance that we will continue to maintain profitable operations in
the future. If we are unable to do so, there may be a material adverse effect on
our cash flows, which could cause us to violate covenants under our credit
facility and could impede our ability to raise capital through debt or equity
financing to the extent we may need it for our continued operations or for
planned expansion. Consequently, future losses may have a material adverse
effect on our business, prospects, financial condition, results of operations
and cash flows.
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT
FOREIGN CURRENCY THAT MUST BE CONVERTED INTO UNITED STATES DOLLARS FOR INCLUSION
IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT, EXCHANGE RATE
FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF OPERATIONS.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries. Sales
of our products and services to customers located outside of the United States
accounted for approximately 52.8% of our net sales for the year ended December
31, 2000. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2001. However,
because historically the majority of our currency exposure has related to
financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US. IN ORDER TO COMPETE
SUCCESSFULLY, WE MUST KEEP PACE WITH OUR COMPETITORS IN ANTICIPATING AND
RESPONDING TO THE RAPID CHANGES INVOLVING THE ELECTRONIC COMPONENTS AND
TELECOMMUNICATIONS INDUSTRIES.
Our future success will depend upon our ability to enhance our current
products and services and to develop and introduce new products and services
that keep pace with technological developments, respond to the growth in the
telecommunications and electronic components markets in which we compete,
encompass evolving customer requirements, provide a broad range of products and
achieve market acceptance of our products. Many of our existing and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we
do. Our lack of resources relative to our competitors may cause us to fail to
anticipate or respond adequately to technological developments and customer
requirements or to experience significant delays in developing or introducing
new products and services. These failures or delays could cause us to reduce our
competitiveness, revenues, profit margins or market share.
10
OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT OUR
BUSINESS IF DEMAND IS REDUCED.
During the year ended December 31, 2000, the sale of telecommunications
equipment and related services accounted for approximately 56% of our total
sales and the sale of electronic components accounted for approximately 44% of
our total sales. In many cases we have long-term contracts with our
telecommunications and electronic components customers that cover the general
terms and conditions of our relationships with them but that do not include
long-term purchase orders or commitments. Rather, our customers issue purchase
orders requesting the quantities of telecommunications equipment they desire to
purchase from us, and if we are able and willing to fill those orders, then we
fill them under the terms of the contracts. Accordingly, we cannot rely on
long-term purchase orders or commitments to protect us from the negative
financial effects of a reduced demand for our products that could result from a
general economic downturn, from changes in the telecommunications and electronic
components industries, including the entry of new competitors into the market,
from the introduction by others of new or improved technology, from an
unanticipated shift in the needs of our customers, or from other causes.
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR PRODUCTS
FROM OUTSIDE SUPPLIERS.
The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications products have been in short supply and are frequently on
allocation by semiconductor manufacturers. We have, from time to time,
experienced difficulty in obtaining some components. We do not have guaranteed
supply arrangements with any of our suppliers, and there can be no assurance
that our suppliers will continue to meet our requirements. If our existing
suppliers are unable to meet our requirements, we could be required to alter
product designs to use alternative components or, if alterations are not
feasible, we could be required to eliminate products from our product line.
Shortages of components could not only limit our product line and
production capacity but also could result in higher costs due to the higher
costs of components in short supply or the need to use higher cost substitute
components. Significant increases in the prices of components could have a
material adverse effect on our results of operations because our products
compete on price, and therefore we may not be able to adjust product pricing to
reflect the increases in component costs. Also, an extended interruption in the
supply of components or a reduction in their quality or reliability would have a
material adverse effect on our financial condition and results of operations by
impairing our ability to timely deliver quality products to our customers.
Delays in deliveries due to shortages of components or other factors may result
in cancellation by our customers of all or part of their orders. Although
customers who purchase from us products, such as many of our digital switches,
that are not readily available from other sources would be less likely than
other customers of ours to cancel their orders due to production delays, we
cannot assure you that cancellations will not occur.
11
IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR COMPLETE STRATEGIC ACQUISITIONS,
OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.
Our business strategy includes growth through acquisitions that we
believe will improve our competitive capabilities or provide additional market
penetration or business opportunities in areas that are consistent with our
business plan. Identifying and pursuing strategic acquisition opportunities and
integrating acquired products and businesses requires a significant amount of
management time and skill. Acquisitions may also require us to expend a
substantial amount of cash or other resources, not only as a result of the
direct expenses involved in the acquisition transaction but also as a result of
ongoing research and development activities that may be required to maintain or
enhance the long-term competitiveness of acquired products, particularly those
products marketed to the rapidly evolving telecommunications industry. If we are
unable to complete strategic acquisitions due to our inability to identify
appropriate targets or to manage the difficulties or costs involved in the
acquisitions, our long-term competitive positioning could suffer.
WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Carmine T. Oliva, and our Executive Vice President,
Graham Jefferies. Mr. Oliva co-founded XIT Corporation and has developed
personal contacts and other skills that we rely upon in connection with our
financing, acquisition and general business strategies. Mr. Jefferies is a
long-time employee of MicroTel who we have relied upon in connection with our
United Kingdom acquisitions and who fulfills significant operational
responsibilities in connection with our foreign operations. Consequently, the
loss of Mr. Oliva, Mr. Jefferies or one or more other key members of management
could have a material adverse effect on us. Although we have entered into
employment agreements with several key employees, we have not entered into any
employment agreement with any of our executive officers other than with Mr.
Oliva and Mr. Jefferies. We maintain key-man life insurance on Mr. Oliva and Mr.
Jefferies. However, we cannot assure you that we will be able to maintain this
insurance in effect or that the coverage will be sufficient to compensate us for
the loss of the services of Mr. Oliva or Mr. Jefferies.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF
OUR COMMON STOCK TO FLUCTUATE OR DECLINE.
Our quarterly operating results have varied significantly in the past
and will likely continue to do so in the future due to a variety of factors,
many of which are beyond our control. Fluctuations in our operating results may
result from a variety of factors.
For example, changes affecting the telecommunications industry,
including consolidations and restructuring of United States and foreign
telephone companies, can cause our sales to decrease or increase. Our sales may
increase if we obtain new customers as a result of the consolidations or
restructurings. However, our sales may decrease, either temporarily to the
extent we have difficulty collecting monies due from our customers who are in
the process of reorganizing, or permanently to the extent our customers are
acquired by or combined with companies that are and choose to remain customers
of our competitors.
12
In addition, the cyclical nature of the telecommunications business due
to the budgetary cycle of the regional Bell operating companies, or RBOCs, has
had and will continue to have for the foreseeable future a significant impact on
our quarterly operating results. RBOCs generally obtain approval for their
annual budgets during the first quarter of each calendar year. If an RBOC's
annual budget is not approved early in the calendar year or is insufficient to
cover its desired purchases for the entire calendar year, we are unable to sell
products to the RBOC during the period of the delay or shortfall.
Due to these factors and other factors, including changes in general
economic conditions, we believe that period-to-period comparisons of our
operating results will not necessarily be meaningful in predicting future
performance. If our operating results do not meet the expectations of investors,
our stock price may fluctuate or decline.
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THESE RIGHTS COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION.
Our future success will be highly dependent on proprietary technology,
particularly in our telecommunications business. However, we do not hold any
patents and we currently rely on a combination of contractual rights,
copyrights, trademarks and trade secrets to protect our proprietary rights. Our
management believes that because of the rapid pace of technological change in
the industries in which we operate, the legal intellectual property protection
for our products is a less significant factor in our success than the knowledge,
abilities and experience of our employees, the frequency of our product
enhancements, the effectiveness of our marketing activities and the timeliness
and quality of our support services. Consequently, we rely to a great extent on
trade secret protection for much of our technology. However, there can be no
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors or customers will not independently develop comparable
or superior technologies or obtain unauthorized access to our proprietary
technology. Our financial condition would be adversely impacted if we were to
lose our competitive position due to our inability to adequately protect our
proprietary rights as our technology evolves.
IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE COULD FACE SIGNIFICANT
LIABILITIES.
We are subject to a variety of environmental regulations relating to
the use, storage, discharge and disposal of hazardous chemicals used in our
circuit board manufacturing processes. Any failure to comply with present and
future regulations could subject us to future liabilities or the suspension of
production. These regulations could also require us to acquire costly equipment
or to incur other significant expenses to comply with environmental regulations.
We may also from time to time be subject to lawsuits with respect to
environmental matters. The extent of our liability under any suit is not
determinable and may have a material adverse effect on us.
IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING GOVERNMENT AND INDUSTRY STANDARDS
AND REGULATIONS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS.
We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our telecommunications products must comply with
various regulations defined by the United States Federal Communications
Commission, or FCC, and Underwriters Laboratories as well as industry standards
established by Telcordia Technologies, Inc., formerly Bellcore, and the American
National Standards Institute. Internationally, our telecommunications products
must comply with standards established by the European Committee for
Electrotechnical Standardization, the European Committee for Standardization,
the European Telecommunications Standards Institute, telecommunications
authorities in various countries as well as with recommendations of the
International Telecommunications Union. The failure of our products to comply,
or delays in compliance, with the various existing and evolving standards could
negatively impact our ability to sell our products.
13
THE LIMITATION ON OUR USE OF NET OPERATING LOSS CARRYFORWARDS MAY NEGATIVELY
IMPACT OUR RESULTS OF OPERATIONS AND CASH FLOWS.
We have substantial net operating loss, or NOL, carryforwards for
federal and state tax purposes. Because of our ownership changes resulting from
a merger in 1997, our use of these NOL carryforwards to offset future taxable
income will be limited. To the extent we are unable to fully use these NOL
carryforwards to offset future taxable income, we will be subject to income
taxes on future taxable income, which will negatively impact our results of
operations and cash flows.
OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES OFFERED BY THIS PROSPECTUS.
The market prices of securities of technology-based companies,
including electronics hardware companies, currently are highly volatile. The
market price of our common stock has fluctuated significantly in the past. The
market price of our common stock may continue to exhibit significant
fluctuations in response to the following factors, many of which are beyond our
control:
-- variations in our quarterly operating results;
-- changes in market valuations of similar companies and stock market
price and volume fluctuations generally;
-- economic conditions specific to the electronics hardware industry;
-- announcements by us or our competitors of new or enhanced products,
technologies or services or significant contracts, acquisitions,
strategic relationships, joint ventures or capital commitments;
-- regulatory developments;
-- additions or departures of key personnel; and
-- future sales of our common stock or other securities.
The price at which you purchase shares of common stock offered by this
prospectus may not be indicative of the price of our stock that will prevail in
the trading market. You may be unable to sell your shares of common stock at or
above your purchase price, which may result in substantial losses to you.
Moreover, in the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY
IN OUR STOCK MAY BE REDUCED.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
registered on some national securities exchanges or quoted on Nasdaq). The penny
stock rules require a broker-dealer, prior to a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the nature and level
of risks in the penny stock market. The broker-dealer also must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction, and,
if the broker-dealer is the sole market maker, the broker-dealer must disclose
this fact and the broker-dealer's presumed control over the market, and monthly
account statements showing the market value of each penny stock held in the
customer's account. In addition, broker-dealers who sell these securities to
14
persons other than established customers and "accredited investors" must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser's written agreement to the transaction.
Consequently, these requirements may have the effect of reducing the level of
trading activity, if any, in the secondary market for a security subject to the
penny stock rules, and investors in our common stock may find it difficult to
sell their shares.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT BE
AVAILABLE.
Our future capital requirements will depend upon many factors,
including the magnitude of our sales and marketing efforts, the development of
new products and services, possible future strategic acquisitions, the progress
of our research and development efforts and the status of competitive products
and services. We believe that current and future available capital resources
will be adequate to fund our operations for the foreseeable future. However, to
the extent we are in need of any additional financing, there can be no assurance
that any additional financing will be available to us on acceptable terms, or at
all. If we raise additional funds by issuing equity securities, further dilution
to the existing stockholders may result. If adequate funds are not available, we
may be required to delay, scale back or eliminate portions of our operations and
product development and marketing efforts or to obtain funds through
arrangements with partners or others that may require us to relinquish rights to
some of our technologies or potential products, services or other assets.
Accordingly, the inability to obtain financing could result in a significant
loss of ownership and/or control of our proprietary technology and other
important assets and could also adversely affect our ability to fund our
continued operations and our product development and marketing efforts that
historically have contributed significantly to our competitiveness.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AFTER THE DATE OF THIS
REPORT COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO
RAISE ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of March 23, 2001, we had outstanding approximately 20.6 million
shares of common stock and options, warrants and preferred stock that were
exercisable for or convertible into approximately 6.5 million shares of common
stock. Many of the shares of common stock underlying outstanding warrants,
options or shares of preferred stock are or may in the future be registered or
otherwise become eligible for resale in the public market. Sales of a
substantial number of shares of our common stock in the public market, or the
perception that sales could occur, could adversely affect the market price for
our common stock. Any adverse effect on the market price for our common stock
could make it difficult for us to sell equity securities at a time and at a
price that we deem appropriate.
BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND
IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.
Until May 12, 1999, our common stock was quoted on the Nasdaq SmallCap
Market. We were unable to maintain the minimum bid price of $1.00 per share and
our stock was delisted from that market. Since May 13, 1999, our common stock
has been traded under the symbol "MCTL" on the NASD's OTC Bulletin Board.
Because our stock trades on the OTC Bulletin Board rather than on a national
securities exchange, you may find it difficult to either dispose of, or to
obtain quotations as to the price of, our common stock.
15
OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF MICROTEL, POSSIBLY
PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR SHARES.
Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our stockholders. Of these shares, 200 have been designated as
Series A Preferred, of which 25 are currently outstanding. In addition, 150,000
shares have been designated as Series B Preferred Stock, all of which are
currently outstanding. The rights of the holders of our common stock are subject
to the rights of the holders of our currently outstanding preferred stock and
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that we may issue in the future. The issuance of
preferred stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock, which would delay, defer or prevent a change in control of MicroTel.
Furthermore, preferred stock may have other rights, including economic rights
senior to the common stock, and, as a result, the issuance of preferred stock
could adversely affect the market value of our common stock.
THE ANTI-TAKEOVER EFFECTS OF DELAWARE LAW COULD ADVERSELY AFFECT THE PERFORMANCE
OF OUR STOCK.
Section 203 of the General Corporation Law of Delaware prohibits us
from engaging in business combinations with interested stockholders, as defined
by statute. These provisions may have the effect of delaying or preventing a
change in control of MicroTel without action by our stockholders, even if a
change in control would be beneficial to our stockholders. Consequently, these
provisions could adversely affect the price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
---------------------------------------
Between February and April 2000, we made an offer to all 32 holders of
warrants to purchase shares of common stock at exercise prices of $1.00 or more
pursuant to which these holders could elect to surrender their outstanding
warrants with exercise prices of $1.00 or more in exchange for the issuance to
them of warrants to purchase a number of shares equal to one-half of the number
of shares underlying the surrendered warrants at an exercise price of one-half
of the exercise price of the surrendered warrants. A total of 2,769,201 warrants
with exercise prices ranging from $1.21 to $3.79 were surrendered in exchange
for 1,384,602 warrants with exercise prices ranging from $0.605 to $1.895. The
majority of warrants exchanged were held by persons or entities who were not
employees or directors of MicroTel or its subsidiaries.
In March 2000, we issued 306,148 shares of common stock to one entity
in connection with the cashless exercise of a warrant to purchase up to 500,000
shares of common stock at an exercise price of $0.69 per share, which warrant
had been issued in connection with settlement of litigation.
In March 2000, we issued an aggregate of 35,000 shares of common stock
to three employees upon exercise of warrants at an exercise price of $0.20 per
share.
The issuances of our securities in the above-referenced transactions
were effected in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended, on the basis that such
transactions did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would provide.
Dividends
---------
To date we have not paid dividends on our common stock. Our line of
credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificates of designations related to our
Series A Preferred Stock and Series B Preferred Stock provide that shares of
those series of preferred stock are not entitled to receive cash dividends. We
currently intend to retain future earnings to fund the development and growth of
our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by the our board of directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As of March 31, 2000, we were in default of the tangible net worth
covenant of our domestic credit facility. The balance due under this facility
was $2,810,643 as of March 31, 2000. In August 2000, we replaced our domestic
credit facility with a new domestic credit facility with Wells Fargo Business
Credit, Inc. which expires in August 2003.
17
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
--------
27.1 Financial Data Schedule*
- ---------
* Filed as an exhibit to the initial filing of this Form 10-Q on May 15, 2000.
(b) Reports on Form 8-K
-------------------
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICROTEL INTERNATIONAL, INC.
Dated: April 2, 2001 By: /S/ CARMINE T. OLIVA
-----------------------------------------
Carmine T. Oliva, Chairman of the Board,
Chief Executive Officer (principal executive
officer) and President
By: /S/ RANDOLPH D. FOOTE
-------------------------------------
Randolph D. Foote, Chief Financial Officer
(principal financial and accounting officer)
19