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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2001
| | 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 April 30, 2001, there were 20,570,415 shares of the issuer's common
stock, $.0033 par value, outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Condensed Balance Sheets as of March 31, 2001 (unaudited)
and December 31, 2000........................................................ F-1
Consolidated Condensed Statements of Operations and Comprehensive Income for the
three months ended March 31, 2001 and 2000 (unaudited)....................... F-2
Consolidated Condensed Statements of Cash Flows for the three months ended
March 31, 2001 and 2000 (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........................................................................ 15
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................................ 17
ITEM 5. OTHER INFORMATION.................................................................. 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 18
SIGNATURES .............................................................................. 19
ITEM 1. FINANCIAL STATEMENTS.
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS March 31, December 31,
2001 2000
--------- ---------
(Unaudited)
Cash and cash equivalents $ 368 $ 756
Accounts receivable - net 6,876 7,440
Notes receivable 97 130
Inventories 6,265 6,298
Other current assets 487 750
--------- ---------
Total current assets 14,093 15,374
Property, plant and equipment-net 735 809
Goodwill-net 2,679 2,737
Other assets 536 564
--------- ---------
$ 18,043 $ 19,484
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 3,435 $ 3,661
Current portion of long-term debt 559 614
Accounts payable 4,618 5,222
Accrued expenses 2,788 3,082
Net liability of discontinued operations 5 15
--------- ---------
Total current liabilities 11,405 12,594
Long-term debt, less current portion 225 282
Other liabilities 464 542
--------- ---------
Total liabilities 12,094 13,418
Convertible redeemable preferred stock, $10,000
unit value. Authorized 200 shares; issued and
outstanding 25 shares (aggregate liquidation
preference of $250) 261 259
Stockholders' equity:
Convertible Series B Preferred stock, $0.01 par
value. Authorized 10,000,000 shares; 150,000
shares issued and outstanding 938 938
Common stock, $.0033 par value. Authorized
50,000,000 shares; 20,570,000 shares issued
and outstanding 68 68
Additional paid-in capital 24,307 24,307
Accumulated deficit (18,672) (18,775)
Accumulated other comprehensive loss (953) (731)
--------- ---------
Total stockholders' equity 5,688 5,807
--------- ---------
$ 18,043 $ 19,484
========= =========
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,
2001 2000
-------- --------
(in thousands, except
per share amounts)
Net sales $ 7,465 $ 5,860
Cost of sales 4,350 3,534
-------- --------
Gross profit 3,115 2,326
Operating expenses:
Selling, general and administrative 2,581 2,147
Engineering and product development 359 243
-------- --------
Income (loss) from operations 175 (64)
Other income (expense):
Interest expense (93) (96)
Other income 28 96
-------- --------
Income (loss) from continuing operations
before income taxes 110 (64)
Income tax expense 3 7
-------- --------
Income (loss) from continuing operations 107 (71)
-------- --------
Discontinued operations:
Loss from operations of discontinued segment -- (56)
-------- --------
Net income (loss) 107 (127)
-------- --------
Other comprehensive income (loss):
Foreign currency translation adjustment (222) 296
-------- --------
Total comprehensive income (loss) $ (115) $ 169
======== ========
Earnings (loss) per share:
Continuing operations:
Basic $ 0.01 $ (0.01)
======== ========
Diluted $ 0.00 $ (0.01)
======== ========
Discontinued operations:
Basic -- $ (0.00)
========
Diluted -- $ (0.00)
========
Net income (loss):
Basic $ 0.01 $ (0.01)
======== ========
Diluted $ 0.00 $ (0.01)
======== ========
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,
2001 2000
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 107 $ (127)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 84 32
Amortization of intangibles 95 66
Provision for doubtful account 24 --
Provision for obsolete/slow moving inventory 164 --
Gain on sale of fixed assets -- (43)
Other noncash items -- 122
Net change in operating assets of discontinued operations (10) (87)
Changes in operating assets and liabilities:
Accounts receivable 544 1,066
Inventories (89) 67
Other assets 291 (20)
Accounts payable and accrued expenses (1,068) (1,061)
-------- --------
Cash provided by operating activities 142 15
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (38) (6)
Cash received for sale of DTS stock -- 520
Proceeds from sale of fixed assets -- 43
Cash collected on note receivable 33 --
-------- --------
Cash from investing activities (5) 557
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in notes payable and long-term debt (339) (260)
Proceeds from exercise of employee stock options -- 8
-------- --------
Cash (used in) financing activities (339) (252)
-------- --------
Effect Of Exchange Rate Changes On Cash (186) (165)
-------- --------
Net Increase (Decrease) In Cash and Cash Equivalents (388) 155
Cash and Cash Equivalents At Beginning Of Period 756 480
-------- --------
Cash and Cash Equivalents At End Of Period $ 368 $ 635
======== ========
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. (the "Company") operates through three
wholly-owned subsidiaries: CXR Telcom Corporation, CXR, S.A. and XET
Corporation, formerly XIT Corporation ("XET"). CXR Telcom Corporation and CXR,
S.A. (collectively "CXR") design, manufacture and market electronic
telecommunication test equipment and transmission and network access products.
XET and its subsidiaries design, manufacture and market digital switches and
power supplies. The Company conducts its operations out of various facilities in
the U. S., France, England and Japan and organizes itself in two product line
segments: Telecommunications and Electronic Components.
In October 2000 the Company decided to discontinue its circuits segment
operations. At that time, the circuits segment operations consisted of XCEL Etch
Tek, a wholly-owned subsidiary, and XCEL Circuits division ("XCD"), a division
of XET. XCEL Etch Tek was offered for sale and sold in November 2000. XCD, a
captive supplier of printed circuit boards to the electronic components segment,
has been retained and is now included in the electronic components segment.
Accordingly, all current and prior financial information related to the circuits
segment operations have been presented as discontinued operations in the
accompanying consolidated condensed financial statements.
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, 2001 and December 31, 2000 and the results of
operations and cash flows for the related interim periods ended March 31, 2001
and 2000. 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 2000 Annual Report
on Form 10-K.
F-4
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(2) EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
Three months ended
March 31,
---------
2001 2000
--------- ---------
(in thousands, except
per share amounts)
NUMERATOR:
Net income (loss) $ 107 $ (127)
Less: accretion of the excess of the redemption value over the
carrying value of redeemable preferred stock (3) (23)
--------- ---------
Income (loss) attributable to common stockholders $ 104 $ (150)
--------- ---------
DENOMINATOR:
Weighted average number of common shares outstanding during the
period 20,570 18,174
Incremental shares from assumed conversions of warrants, options
and preferred stock 3,246 --
--------- ---------
Adjusted weighted average shares 23,816 18,174
--------- ---------
Basic earnings (loss) per share $ 0.01 $ (0.01)
========= =========
Diluted earnings (loss) per share $ 0.00 $ (0.01)
========= =========
The computation of diluted loss per share for the three month period
ended March 31, 2000 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.
March 31, 2001 December 31, 2000
-------------- -----------------
Raw materials $ 2,575,000 $ 2,777,000
Work-in-process 1,926,000 1,914,000
Finished goods 1,764,000 1,607,000
------------------ ------------------
$ 6,265,000 $ 6,298,000
================== ==================
F-5
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(4) COMMITMENTS AND CONTINGENCIES
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
may not be predictable because of considerable uncertainties that may 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) 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 expense for the modification of
the warrants. Based on the nature and timing of the original grant of the
warrants, the 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.
(6) Reportable Segments
The Company has two reportable segments: Telecommunications and
Electronic Components. The Telecommunications 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 Electronic Components segment operates in the U.S.,
European and Asian markets and designs, manufactures and markets primarily
digital switches and power supplies.
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.
F-6
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 2000 Annual Report
on Form 10-K. Selected financial data for each of the Company's operating
segments is shown below:
Three months ended Three months ended
March 31, March 31,
2001 2000
---- ----
Sales to external customers:
Telecommunications $ 3,772,000 $ 3,553,000
Electronic Components 3,693,000 2,307,000
-------------- --------------
$ 7,465,000 $ 5,860,000
============== ==============
Intersegment sales:
Telecommunications $ -- $ 73,000
Electronic Components -- --
-------------- --------------
$ -- $ 73,000
============== ==============
Segment pretax profits (losses)
Telecommunications $ (255,000) $ (95,000)
Electronic Components 1,058,000 480,000
-------------- --------------
$ 803,000 $ 385,000
============== ==============
March 31, December 31,
2001 2000
---- ----
Segment assets
Telecommunications $ 8,665,000 $ 9,901,000
Electronic Components 8,687,000 8,876,000
-------------- --------------
$ 17,352,000 $ 18,777,000
============== ==============
F-7
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following is a reconciliation of the reportable segment income and
(loss) from continuing operations and assets to the Company's consolidated
totals:
Three months ended Three months ended
March 31, 2001 March 31, 2000
-------------- --------------
Total income for reportable segments $ 803,000 $ 385,000
Unallocated amounts:
Unallocated general corporate expenses (696,000) (449,000)
-------------------- --------------------
Consolidated income (loss) before
income taxes $ 107,000 $ (64,000)
==================== ====================
March 31, December 31,
2000 2000
---- ----
Assets
Total assets for reportable segments $ 17,352,000 $ 18,777,000
Other assets 691,000 707,000
-------------------- --------------------
Total consolidated assets $ 18,043,000 $ 19,484,000
==================== ====================
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:
o the projected growth in the telecommunications and electronic
components markets;
o our business strategy for expanding our presence in these
markets;
o anticipated trends in our financial condition and results of
operations; and
o 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:
o Instrumentation and Test Equipment;
o Components and Subsystem Assemblies; and
o 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 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, XET
Corporation (formerly, XIT Corporation). We intend to retain our small Monrovia,
California circuit board manufacturing facility as a captive supplier of circuit
boards to XET Corporation's Digitran Division.
3
Effective August 1, 2000, we acquired the assets and business
operations of T-Com, LLC, or 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 and
network operating centers.
Through our three direct wholly-owned operating subsidiaries, XET
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:
o 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)
o Electronic Components (digital switches and electronic power
supplies)
Our sales are primarily in North America, Europe and Asia. In the first
quarter of 2001, approximately one-half of our sales were to customers in the
telecommunications industry, and the remainder of our sales were 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.
4
Results of Operations
Three Months Ended March 31, 2001 Compared To Three Months Ended March 31, 2000
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:
THREE MONTHS ENDED
MARCH 31,
-----------------------
2001 2000
---- ----
Net sales............................................. 100.0% 100.0%
Cost of sales......................................... 58.3 60.3
------ ------
Gross profit.......................................... 41.7 39.7
Selling, general and administrative expenses.......... 34.6 36.6
Engineering and product development expenses.......... 4.8 4.1
------ ------
Operating income (loss)............................... 2.3 (1.1)
Interest expense...................................... (1.2) (1.6)
Other expense......................................... (0.4) 1.6
------ ------
Income (loss) from continuing operations before income
taxes............................................. 1.5 (1.1)
Income taxes.......................................... 0.1 0.1
------ ------
Income (loss) from continuing operations.............. 1.4 (1.2)
Loss from discontinued operations..................... -- (1.0)
------ ------
Net income (loss)..................................... 1.4% (2.2)%
====== ======
CONTINUING OPERATIONS
NET SALES. Net sales for the three months ended March 31, 2001
increased by $1,605,000 (27.4%) to $7,465,000 as compared to $5,860,000 for the
three months ended March 31, 2000.
Net sales of our telecommunications products for the three months ended
March 31, 2001 increased by $217,000 (6.1%) to $3,772,000, as compared to
$3,555,000 for the comparable period in 2000. Net sales of our U. S.-based
telecom operation of CXR Telcom for the three months ended March 31, 2001
increased by $147,000 (11.2%) to $1,464,000, as compared to $1,317,000 for the
comparable period in 2000. This increase was mainly due to the addition of
$410,000 of net sales of T-Com products that more than offset a $263,000 decline
in sales of our CXR HALCYON 700 series field test equipment. Both the CXR
HALCYON 700 series field test equipment and the T-Com central office test
equipment had lower than expected sales in the first quarter of 2001 primarily
due to weak order entry in November and December 2000 and the fact that many of
CXR Telcom's customers did not have their capital budgets released until late in
February 2001. This led to a slow sales start in the first two months of the
quarter for CXR Telcom. Sales of our telecom test equipment have since returned
to a level more consistent with our expectations. Net sales of our transmission
and original equipment manufactured test instruments by our French subsidiary,
CXR, S.A., for the three months ended March 31, 2001 increased by $72,000 (3.1%)
to $2,309,000, as compared to $2,237,000 for the comparable prior year period.
This increase would have been larger if not for the decline in the value of the
French Franc in relation to the value of the U.S. Dollar in the quarter ended
March 31, 2001 as compared to their relative values for the quarter ended March
31, 2000. CXR, S. A. sales in CXR, S.A.'s functional currency, the French Franc,
actually increased by 14.4%. However, due to the decline in the value of the
French Franc in relation to the value of the U.S. Dollar, CXR S.A.'s sales show
only a slight increase when measured in U.S. Dollars.
5
Net sales of our electronic components for the three months ended March
31, 2001 increased by $1,388,000 (60.2%) to $3,693,000, as compared to
$2,305,000 for the comparable period in 2000, primarily due to an $873,000
increase in sales of power supplies manufactured by our U.K. subsidiary, XCEL
Corporation Ltd. This increase in net sales was primarily due to an increase in
deliveries of outstanding contracts and, to a lesser extent, to the acquisition
of Belix Power Supply Ltd. in April 2000 which provided $193,000 of this
increase. Also contributing to the increase in sales of our electronic
components segment was XET Corporation's Digitran Division in Rancho Cucamonga,
California, which increased its sales in the quarter ended March 31, 2001 by
$480,000 (39.6%) to $1,692,000, as compared to $1,212,000 for the comparable
prior year period. This increase was mainly due to shipments of digital switches
under its contract with BAE Systems, Canada. Although shipments under this
contract ended during the first quarter of 2001, we anticipate that higher
revenues from our power conversion products will offset completion of our
contract with BAE Systems, Canada.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 41.7% for the three months ended March 31, 2001, as compared to 39.7% for the
comparable period in 2000. In dollar terms, total gross profit increased by
$789,000 (33.9%) to $3,115,000 for the three months ended March 31, 2001, as
compared to $2,326,000 for the comparable period in 2000.
Gross profit for our telecommunications segment increased in dollar
terms by $37,000 (2.7%) to $1,388,000 for the three months ended March 31, 2001,
as compared to $1,351,000 for the comparable period in 2000, and decreased as a
percentage of net sales from 42.3% in 2000 to 36.8% in 2001. The decrease in
gross profit as a percentage of net sales was due primarily to the addition of
T-Com costs coupled with lower net sales of our CXR HALCYON 700 series test
instruments in the first quarter of 2001 as compared to the first quarter of
2000.
Gross profit for our electronic components segment increased in dollar
terms by $752,000 (77.2%) to $1,727,000 for the three months ended March 31,
2001, as compared to $975,000 for the comparable period in 2000, and increased
as a percentage of related net sales from 42.3% in 2000 to 46.8% in 2001. This
increase was primarily the result of improved profit margins in connection with
higher production volumes and a larger percentage of higher margin night vision
switch sales by XET Corporation's Digitran Division. Also contributing to the
increase in gross profit was increased production at XCEL Corporation Ltd. in
the U.K. due to substantially higher sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $434,000 (20.2%) to $2,581,000 for the
three months ended March 31, 2001, as compared to $2,147,000 for the comparable
period in 2000. The increase in these expenses was primarily due to an increase
in legal and accounting fees of $164,000 for various Securities and Exchange
Commission filings, increases in administrative expenses related to the T-Com
acquisition, increased legal fees related to the Belix acquisition, and
increases in wages and group insurance costs of $217,000.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses increased by
$116,000 (47.7%) to $359,000 for the three months ended March 31, 2001, as
compared to $243,000 for the comparable prior year period. The increase
primarily was due to the addition of engineering staff and related costs at CXR
Telcom reflecting the T-Com acquisition.
6
OTHER INCOME AND EXPENSE. Interest expense was reduced slightly to
$93,000 for the three months ended March 31, 2001 from $96,000 in the comparable
period in 2000. Other income of $28,000 in the first quarter of 2001 declined
from $96,000 in the first quarter of 2000 primarily due to a $43,000 gain on the
sale of a fixed asset reported in the first quarter of 2000.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $56,000 for the three months ended March 31, 2000. Net sales, gross profit
and selling, general and administrative expenses for our circuits business for
the three months ended March 31, 2000 were $628,000, $580,000 and $103,000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2001, we funded our operations
primarily through revenue generated from our operations and through our line of
credit with Wells Fargo Business Credit, Inc. During the latter part of 1999, we
embarked on a cost reduction program in an effort to improve our cash flow
position and profitability. This program included a significant reduction in
personnel, the downsizing and relocation of our corporate headquarters and the
sale of investments we had in other companies. As described below, these cost
measures, together with our line of credit, have had a positive impact on
MicroTel.
As of December 31, 2000 we had working capital of $2,780,000 and an
accumulated deficit of $18,775,000. As of that date, we had $756,000 in cash and
cash equivalents and $7,440,000 of accounts receivable. As of March 31, 2001 we
had working capital of $2,688,000, an accumulated deficit of $18,672,000 and an
accumulated other comprehensive loss of $953,000. As of that date, we had
$368,000 in cash and cash equivalents and $6,876,000 of accounts receivable.
Cash provided by our operating activities totaled $142,000 and $15,000
for the three months ended March 31, 2001 and 2000, respectively. This increase
in cash provided by operations during the three months ended March 31, 2001
resulted primarily from a reduction in receivables and prepaid expenses,
partially offset with a reduction in accounts payable and accrued expenses.
Cash used in our investing activities totaled $5,000 for the three
months ended March 31, 2001 as compared to cash provided by investing activities
of $557,000 for the three months ended March 31, 2000. Included in the prior
period's results is $520,000 from the sale of shares of common stock we held in
Digital Transmission Systems, Inc.
Cash used in financing activities totaled $339,000 for the three months
ended March 31, 2001 as compared to cash used in financing activities $252,000
for the three months ended March 31, 2000, primarily due to the reduction in
notes payable and long-term debt.
On June 23, 2000, our credit facility with our previous lender,
Congress Financial Corporation, or Congress Financial, expired while we were out
of compliance with the adjusted net worth covenant of this facility. Congress
Financial extended this facility through August 14, 2000. On August 16, 2000,
our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting
as guarantor, obtained a credit facility from Wells Fargo Business Credit, Inc.
This facility provides for a revolving loan of up to $3,000,000 secured by our
inventory and accounts receivable and a term loan in the amount of $687,000
secured by our machinery and equipment. As a condition of extending this credit
facility to our subsidiaries, Wells Fargo Business Credit, Inc. required our
President and Chief Executive Officer, Carmine Oliva, to personally guaranty a
7
portion of our indebtedness under the facility. On January 26, 2001, Mr. Oliva
was released from this guaranty. The annual interest rate on both portions of
the credit facility is the prime rate plus 2%. The facility contains a
performance-based interest reduction feature. Based upon our 2000 financial
performance, we obtained a reduction in the interest rate to the prime rate plus
1% effective April 1, 2001. The balance outstanding under this credit facility
was $1,173,000 on March 31, 2001. There was $329,000 of additional borrowings
available as of March 31, 2001. The credit facility expires on August 16, 2003.
Our foreign subsidiaries have obtained credit facilities with Lloyds Bank in
England, Banc National du Paris, Societe General and Banque Hervet in France and
Johan Tokyo Credit Bank in Japan. The balances outstanding under our U.K. and
France credit facilities were $1,607,000 and $655,000, respectively, on March
31, 2001.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including our credit facility with Wells Fargo Business Credit, Inc., will be
adequate to meet our anticipated working capital and capital expenditure
requirements for at least the next twelve months. If, however, our capital
requirements or cash flow vary materially from our current projections or if
unforeseen circumstances occur, we may require additional financing sooner than
we anticipate. Failure to raise necessary capital could restrict our growth,
limit our development of new products or hinder our ability to compete.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against us (see Note 4
to the Consolidated Condensed Financial Statements included elsewhere in this
report).
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 operating
subsidiaries.
EURO CONVERSION
Our operating subsidiaries located in France and the United Kingdom
have combined net sales from operations approximating 54.6% of our total net
sales for the three months ended March 31, 2001. Net sales from the French
subsidiary participating in the Euro conversion were 30.9% of our net sales for
the three months ended March 31, 2001. 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 already were capable of using 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 United States and European operations, we regard
exchange rate as nominal.
8
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 and the three months ended March 31, 2001. 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. For the three months ended March
31, 2001, we recorded net income of $107,000. Our accumulated deficit and
accumulated other comprehensive loss through March 31, 2001 were approximately
$18.7 million and $1.0 million, respectively, and as of that date we had a total
stockholders' equity of approximately $5.7 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 53% of our net sales for the year ended December 31,
2000 and approximately 57% of our net sales for the quarter ended March 31,
2001. 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
9
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.
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 and the quarter ended March 31,
2001, the sale of telecommunications equipment and related services accounted
for approximately 56% and 51%, respectively, of our total sales, and the sale of
electronic components accounted for approximately 44% and 49%, respectively, 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.
10
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 XET 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.
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
11
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.
BECAUSE WE MAY HAVE INADVERTENTLY FAILED TO COMPLY WITH THE FEDERAL TENDER OFFER
RULES, WE COULD FACE SIGNIFICANT LIABILITIES WHICH, IN TURN, COULD ADVERSELY
IMPACT OUR FINANCIAL CONDITION.
During 1998 and 1999 we modified the terms of some of our outstanding
warrants and the terms of our Series A Preferred Stock. These transactions may
have been subject to the federal tender offer rules which would have required us
to make filings with the Securities and Exchange Commission and to conduct our
activities in a manner prescribed by the tender offer rules. We did not make any
of these filings nor did we comply with the other requirements of the tender
offer rules. Although we believe that our activities surrounding the
modifications to our warrants and Series A Preferred Stock are not subject to
the federal tender offer rules, the Securities and Exchange Commission, as well
as those security holders who participated in the modification transactions, may
disagree with us. If that were to happen, we may be subject to fines by the
Securities and Exchange Commission and may be required by the Securities and
Exchange Commission and/or the security holders to rescind the transactions. The
dollar amount of any fines and the costs associated with rescission, including
the related legal and accounting costs, are difficult for us to quantify, yet
they could be significant. If they are significant, our financial condition
would be adversely impacted.
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.
12
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.
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:
o variations in our quarterly operating results;
o changes in market valuations of similar companies and stock
market price and volume fluctuations generally;
o economic conditions specific to the electronics hardware
industry;
o 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;
o regulatory developments;
o additions or departures of key personnel; and
o 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
13
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
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 TO US ON ACCEPTABLE TERMS, OR AT ALL. IF WE OBTAIN FINANCING THROUGH
THE ISSUANCE OF EQUITY SECURITIES, FURTHER DILUTION TO EXISTING STOCKHOLDERS MAY
RESULT. WE MAY BE REQUIRED TO OBTAIN FINANCING THROUGH ARRANGEMENTS THAT MAY
REQUIRE US TO RELINQUISH RIGHTS OR CONTROL TO SOME OF OUR PROPRIETARY
TECHNOLOGIES.
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 OR TO BECOME ELIGIBLE FOR PUBLIC SALE
COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO
RAISE ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of May 15, 2001, we had outstanding 20,570,415 shares of common
stock, of which 20,352,915 shares were unrestricted or were eligible for resale
without registration under Rule 144 of the Securities Act of 1933 and 217,500
shares were in the process of being registered for resale. As of May 15, 2001,
we also had outstanding options, warrants and preferred stock that were
exercisable for or convertible into 6,618,930 shares of common stock. Of these,
1,648,924 shares of common stock underlying options were registered for resale,
1,505,430 shares of common stock underlying warrants were in the process of
being registered for resale, and 2,763,250 shares of common stock underlying
preferred stock and 250,000 shares of common stock underlying warrants were
entitled to be registered for resale. 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.
14
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.
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.
15
A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or lender's base
rate, which exposes us to risk of earnings loss due to changes in such interest
rates.
The following table provides information about our debt obligations
that are sensitive to changes in interest rates. All dollars are in thousands.
The symbol "P" represents the prime rate. The symbol "B" represents lender's
base rate.
FAIR
VALUE
LIABILITIES 2001 2002 2003 2004 2005 THEREAFTER TOTAL 12/31/00
----------- ---- ---- ---- ---- ---- ---------- ----- --------
Line of Credit $1,798 $1,798 $1,798
(domestic)
Average Interest P+ 2%
Rate
Line of Credit $1,377 $1,377 $1,377
(Foreign)
Average Interest B+ 2.5%
Rate
Term Loan $137 $137 $83 $8 $5 $370 $370
Average Interest P+ 2% P+ 2% P+ 2% P+ 2% P+ 2%
Rate
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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
- ---------------------------------------
None.
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.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On January 16, 2001, we held a special meeting of stockholders. Our
stockholders were asked:
1. To consider and vote upon a proposal to approve an amendment to
our certificate of incorporation to increase our authorized shares
of common stock from 25,000,000 shares to 50,000,000 shares.
2. To consider and vote upon a proposal to approve a 2000 Stock
Option Plan, pursuant to which we may grant to key employees,
officers, directors and consultants and employees of companies
that do business with our company, options to purchase up to
2,000,000 shares of our common stock.
3. To consider and vote upon a proposal to approve an amendment to
our certificate of designations, preferences and rights of
preferred stock relating to our Series A Preferred Stock.
4. To ratify the appointment of BDO Seidman, LLP as our independent
auditors for fiscal 2000.
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Results of the vote are as follows:
Proposal For Against Abstain Not Voted Total Voted
-------- --- ------- ------- --------- -----------
1 15,964,573 695,944 33,933 0 16,694,450
2 10,574,723 1,516,361 64,804 4,538,562 12,155,888
3 11,336,666 679,660 139,562 4,538,562 12,155,888
4 16,502,252 111,554 80,644 0 16,694,450
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--- --------
3.1 Certificate of Amendment of Certificate of Incorporation of
the Registrant as filed with the Delaware Secretary of State
on January 22, 2001 (1)
3.2 Certificate of Amendment of Certificate of Designation of the
Registrant as filed with the Delaware Secretary of State on
January 22, 2001 (1)
10.1 Employment Agreement dated as of January 1, 2001 between the
Registrant and Carmine T. Oliva (#) (1)
- ---------
(#) Management contract or compensatory plan, contract or arrangement
required to be filed as an exhibit.
(1) Incorporated by reference to the Registrant's annual report on Form
10-K for the year ended December 31, 2000 (File No. 1-10346)
(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: May 21, 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