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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 SEPTEMBER 30, 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.
(Name of small business issuer 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)
NOT APPLICABLE
(Former name, former address and former
fiscal year, if changed since last report)
Check whether the issuer: (1) 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 May 15, 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
September 30, 2000 and December 31, 1999 (unaudited).....................F-1
Consolidated Condensed Statements of Operations
and Comprehensive Income for the three and nine
months ended September 30, 2000 and 1999 (unaudited).....................F-2
Consolidated Condensed Statement of Cash Flows
for the nine months ended September 30, 2000
and l999 (unaudited)....................................................F-3
Notes to Consolidated Condensed Financial Statements (unaudited)..........F-5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................3
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...............................................................18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................19
ITEM 5. OTHER INFORMATION..................................................19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................20
SIGNATURES.................................................................22
-2-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
September 30,
2000 December 31,
(Restated) 1999
--------- ---------
ASSETS
Cash and cash equivalents $ 694 $ 480
Accounts receivable, net 5,804 6,168
Inventories 6,198 4,047
Net assets of discontinued operations 475 1,133
Other current assets 1,116 427
--------- ---------
Total current assets 14,287 12,255
Property, plant and equipment-net 867 765
Goodwill, net 2,762 1,507
Investment in unconsolidated affiliates -- 1,240
Other assets 625 722
--------- ---------
$ 18,541 $ 16,489
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,904 $ 2,107
Current portion of long-term debt 711 1,388
Accounts payable 4,973 4,695
Accrued expenses 2,961 2,985
--------- ---------
Total current liabilities 11,549 11,175
Long-term debt, less current portion 708 143
Other liabilities 623 782
--------- ---------
Total liabilities 12,880 12,100
Convertible redeemable preferred stock,
$10,000 unit value. Authorized 200
shares; issued and outstanding 25
shares and 59.5 shares (aggregate
liquidation preference of $250 and
$595, respectively) 276 588
Stockholders' equity:
Preferred Stock, $0.01 par value. Authorized
10,000,000 shares Convertible Series B
preferred stock, $0.01 par value,
150,000 and 0 issued and outstanding
(aggregate liquidation preference of
$960 and $0, respectively) 938 --
Common stock, $0.0033 par value. Authorized
25,000,000 shares; issued and 68 60
Additional paid-in capital 24,359 23,726
Accumulated deficit (19,319) (19,759)
Accumulated other comprehensive loss (661) (226)
--------- ---------
Total stockholders' equity 5,385 3,801
--------- ---------
$ 18,541 $ 16,489
========= =========
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 Nine months ended
September 30, September 30,
Restated Restated
-------- --------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net sales $ 6,871 $ 6,448 $ 19,559 $ 19,444
Cost of sales 3,080 4,203 10,646 12,268
--------- --------- --------- ---------
Gross profit 3,791 2,245 8,913 7,176
Operating expenses:
Selling, general and administrative 2,431 2,385 6,826 8,480
Engineering and product development 277 459 773 1,462
--------- --------- --------- ---------
Income (loss) from operations 1,083 (599) 1,314 (2,766)
Other income (expense):
Interest expense (126) (99) (321) (302)
Equity in earnings of unconsolidated affiliates -- 28 -- 755
Other 177 (79) 382 (60)
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes 1,134 (749) 1,375 (2,373)
Income tax expense 2 12 13 25
--------- --------- --------- ---------
Income (loss) from continuing operations 1,132 (761) 1,362 (2,398)
--------- --------- --------- ---------
Discontinued operations:
Loss from operations of discontinued segment (68) (273) (219) (856)
Gain (loss) on disposal of discontinued segement,
including provision from phase out period of
$158 in 2000 periods (634) -- (634) 331
--------- --------- --------- ---------
(702) (273) (853) (525)
--------- --------- --------- ---------
Net income (loss) 430 (1,034) 509 (2,923)
Other comprehensive income (loss):
Changes in unrealized gain on marketable securities (78) -- -- --
Foreign currency translation adjustment (217) 244 (435) (180)
--------- --------- --------- ---------
Total comprehensive income (loss) $ 135 $ (790) $ 74 $ (3,103)
========= ========= ========= =========
Earnings (loss) per share:
Continuing operations:
Basic $ 0.06 $ (0.04) $ 0.07 $ (0.15)
========= ========= ========= =========
Diluted $ 0.05 $ (0.04) $ 0.06 $ (0.15)
========= ========= ========= =========
Discontinued operations:
Basic $ (0.04) $ (0.02) $ (0.05) $ (0.03)
========= ========= ========= =========
Diluted $ (0.03) $ (0.02) $ (0.04) $ (0.03)
========= ========= ========= =========
Net income (loss):
Basic $ 0.02 $ (0.06) $ 0.02 $ (0.18)
========= ========= ========= =========
Diluted $ 0.02 $ (0.06) $ 0.02 $ (0.18)
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
2000 1999
(Restated) (Restated)
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 509 $(2,923)
Adjustments to reconcile net income (loss) to
cash used in operating activities:
Depreciation 230 275
Amortization and intangibles 207 243
Write-off of note receivable -- 452
Gain on the sale of fixed assets (43) --
Gain on sale of Wi-LAN, Inc. stock (197) --
Loss on sale of subsidiary/investment -- 84
Equity in earnings of unconsolidated entities -- (755)
Stock and warrants issued as compensation 110 1,220
Other noncash items 648 1,245
Gain on disposal of discontinued operations -- (331)
Net change in operating assets of discontinued operations 658 225
Changes in operating assets and liabilities:
Accounts receivable 1,179 300
Inventories (986) 343
Other assets (58) 214
Accounts payable and accrued expenses (2,903) (720)
-------- --------
Cash used in operating activities (646) (128)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (15) (131)
Proceeds from sale of fixed assets 43 --
Proceeds from sale of DTS stock 520 --
Proceeds from sale of Wi-LAN, Inc. stock 918 --
Cash received from sale of discontinued operations -- 750
Investment in Belix Ltd. companies (592) --
Acquisition of T-Com, LLC assets (83) --
Cash received from note receivable -- 9
-------- --------
Cash provided by investing activities 791 628
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of notes payable
and long-term debt 330 (597)
Proceeds from exercise of warrants and employee
stock options 88 --
Proceeds from sale of common stock -- 2
-------- --------
Cash provided by (used in) financing activities 418 (595)
-------- --------
Effect of exchange rate changes on cash (349) (180)
-------- --------
Net increase (decrease) in cash and cash equivalents 214 (275)
-------- --------
Cash and cash equivalents at beginning of period 480 450
-------- --------
Cash and cash equivalents at end of period $ 694 $ 175
======== ========
See accompanying notes to consolidated condensed financial statements.
F-3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Nine months ended September 30,
2000 1999
-------- --------
(in thousands)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest $ 245 $ 219
======== ========
Income taxes $ 13 $ 108
======== ========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTMENT
AND FINANCING ACTIVITIES:
Common stock issued upon conversion of preferred stock $ 381 $ 924
======== ========
Accretion of preferred stock $ 69 $ 69
======== ========
Issuance of common stock and warrants in connection
with acquisitions $ 1,000 $ 1,000
======== ========
See accompanying notes to consolidated condensed financial statements.
F-4
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MicroTel International, Inc. is an international telecommunications
electronics company comprised of three wholly-owned subsidiaries - CXR Telcom
Corporation in Fremont, California, CXR, S.A. in Paris, France and XIT
Corporation in Rancho Cucamonga, California. CXR Telcom Corporation and CXR,
S.A. design, manufacture and market electronic telecommunications test
instruments, wireless and wireline voice, data and video transmission and
network access equipment. XIT Corporation designs, manufactures and markets
information technology products, including input and display components,
subsystem assemblies and power supplies. The Company operates out of facilities
in the United States, France, England and Japan.
The Company is organized into two segments - Telecommunications and
Electronic Components. Through the sale of various subsidiaries in 1998 and
1999, the Company has divested a majority of its circuits operations.
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. XCEL Etch Tek was offered for sale, see note 6.
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 September 30, 2000 and the results of operations and cash flows
for the related interim periods ended September 30, 2000 and 1999. However,
these results are not necessarily indicative of results for any other interim
period or for the year. It is suggested that the accompanying consolidated
condensed financial statements be read in conjunction with the Company's
Consolidated Financial Statements included in its 1999 annual report on Form
10-K.
(2) RESTATEMENT OF FINANCIAL STATEMENTS
ACCOUNTING FOR WARRANT EXCHANGE OFFER
In March 2001, it was determined that the warrant exchange offer
described in Note 8 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 8.
F-5
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(2) RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
Accordingly, the accompanying consolidated condensed financial
statements as of and for the three and nine months ended September 30, 2000,
have been restated to reflect a reduction in compensation expense related to the
warrant exchange offer of $0 and $20,000 for the three and nine months ended
September 30, 2000, respectively, with a corresponding decrease in additional
paid in capital.
ACCOUNTING FOR ACQUISITION OF BUSINESS
In March 2001, it was determined that the earn out provision in the
agreement to acquire Belix Company, Ltd. (See Note 6) should be accounted for as
contingent consideration in accordance with APB 16.
Accordingly, the accompanying consolidated condensed financial
statements as of and for the three and nine months ended September 30, 2000 have
been restated to reflect a reduction in goodwill related to the Belix
acquisition of $499,000 with a corresponding reduction in current portion of
long-term debt and long-term debt, less current portion of $21,000 and $478,000,
respectively. In addition, the reduction in goodwill results in a reduction in
accumulated amortization of $75,000 and a reduction in amortization expense of
$36,000 and $75,000 for the three and nine months ended September 30, 2000,
respectively.
ACCOUNTING FOR ALLOCATION OF INTEREST EXPENSE TO DISCONTINUED OPERATIONS
In March 2001, it was determined that interest expense allocated to
discontinued operations should be included in continuing operations in
accordance with EITF 87-24.
Accordingly, the accompanying consolidated condensed statement of
operations and comprehensive income for the three and nine months ended
September 30, 2000 and 1999 have been restated to reflect an increase in
interest expense of $16,000 and $58,000 for the three and nine months ended
September 30, 2000, respectively, and $19,000 and $93,000 for the three and nine
months ended September 30, 1999, respectively, with corresponding reductions in
loss from operations of discontinued segment.
EFFECT
The effect of the above changes was to increase net income from
continuing operations by $20,000 and $37,000 for the three and nine months ended
September 30, 2000, respectively and increase net loss from continuing
operations by $19,000 and $93,000 for the three and nine months ended September
30, 1999, respectively. Basic and diluted earnings per share from continuing
operations remained unchanged for the three and nine months ended September 30,
2000. Basic and diluted loss per share from continuing operations increased by
$0.01 and $0.00 for the three and nine months ended September 30, 1999,
respectively. Loss from operations of discontinued segment decreased by $16,000
and $58,000 for the three and nine months ended September 30, 2000,
respectively, and $19,000 and $93,000 for the three and nine months ended
September 30, 1999, respectively. Basic and diluted loss per share from
discontinued operations remained unchanged for the three and nine months ended
September 30, 2000. Basic and diluted loss per share from discontinued
operations decreased by $0.01 and $0.00 for the three and nine months ended
September 30, 1999. Total basic and diluted earnings (loss) per share remained
unchanged for all periods presented. Additional paid in capital decreased by
$20,000 to $24,359,000 at September 30, 2000. Goodwill, net of amortization,
decreased by $424,000 to $2,762,000 at September 30, 2000. In addition, current
portion of long-term debt decreased by $21,000 to $711,000 and long-term debt,
less current portion, decreased by $478,000 to $708,000.
F-6
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(3) 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 Nine months ended
September 30, September 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(in thousands, except per share amounts)
NUMERATOR:
Net income (loss) $ 430 $ (1,034) $ 509 $ (2,923)
Less: accretion of the excess of the
redemption value over the carrying value of
redeemable preferred stock 23 24 69 69
--------- --------- --------- ---------
Income (loss) attributable to common
stockholders 407 (1,058) 440 (2,992)
--------- --------- --------- ---------
DENOMINATOR:
Weighted average number of common shares
outstanding during the period 20,537 17,200 19,141 16,192
Incremental shares from assumed conversions
of warrants, options and preferred stock 1,921 -- 2,206 --
--------- --------- --------- ---------
Adjusted weighted average shares 22,458 17,200 21,347 16,192
--------- --------- --------- ---------
Basic earnings (loss) per share $ 0.02 $ (0.06) $ 0.02 $ (0.18)
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.02 $ (0.06) $ 0.02 $ (0.18)
========= ========= ========= =========
The computation of diluted loss per share for the nine and three month
periods ended September 30, 1999 excludes the effect of incremental common
shares attributable to the exercise of outstanding common stock options and
warrants because their effect was antidilutive due to losses incurred by the
Company or such instruments had exercise prices greater than the average market
price of the common shares during the periods presented.
(4) INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
Raw materials $ 2,472,000 $ 1,623,000
Work-in-process 1,942,000 1,174,000
Finished goods 1,784,000 1,250,000
------------ ------------
$ 6,198,000 $ 4,047,000
============ ============
F-7
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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.
(6) ACQUISITION AND DISPOSITION OF BUSINESSES
On January 7, 2000, the Company sold all of its interest in the common
stock in Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc. ("Wi-LAN"),
a company based in Alberta, Canada in exchange for $520,000 and 28,340 shares of
Wi-LAN common stock. Wi-LAN is a publicly traded company on the Toronto Stock
Exchange. The Wi-LAN common stock had a market value of $720,000 on the date of
the transaction. The Company was restricted from selling the Wi-LAN stock until
July 7, 2000 due to Toronto Stock Exchange rules that restrict sales of stock
obtained in an acquisition related transaction.
On July 7, 2000, the Company sold all its shares of Wi-LAN common stock
for net proceeds of $918,000. The sale resulted in a gain of approximately
$197,000 which is included in the Company's results of operations for the third
quarter of 2000.
On April 17, 2000, the Company finalized its acquisition of Belix
Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash and an earn-out for the former
stockholders based on sales. The Company has recorded an additional accrual of
approximately $384,000 for certain severance and relocation costs related to
Belix and accrued approximately $107,000 for legal and other costs related to
the acquisition. The Company has included accruals in the calculation of the
cost of the acquisition. The acquisition of Belix has been accounted for as a
purchase by the Company and resulted in approximately $1.3 million of goodwill,
including $176,000 accrued for the earn-out at September 30, 2000. Belix is
located in England, U. K. and is in the business of manufacturing power supplies
for various applications. Belix has been integrated into the Company's existing
power supply producer, XCEL Power Systems, Ltd. The assets acquired and
liabilities assumed were as follows:
Cash $ 208,000
Accounts receivable 689,000
Inventory 889,000
Other assets 311,000
Fixed assets 182,000
-----------
Total assets acquired $2,279,000
===========
Accounts payable $1,308,000
Line of credit 423,000
Notes payable 344,000
Other long term debt 87,000
-----------
Total liabilities assumed $2,162,000
===========
Net assets acquired $ 117,000
Accrual of severance and relocation costs (384,000)
Accrual of legal and other costs (107,000)
Goodwill 1,340,000
-----------
Adjusted purchase price $ 966,000
===========
Initial purchase price $ 790,000
Earn-out accrual 176,000
-----------
Adjusted purchase price $ 966,000
===========
F-8
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) ACQUISITION AND DISPOSITION OF BUSINESSES (CONTINUED)
The purchase price allocation is preliminary and is contingent upon a
final audit of the acquired company's financial statements. The potential effect
of such contingency would be to reduce the purchase price and allocation to the
actual amount of assets acquired and liabilities assumed. As any shortfall in
net assets acquired would result in a reduction of the purchase price, goodwill
should not be effected. The ultimate resolution of this contingency is not
expected to impact post-acquisition operating results. All dollar amounts
indicated in this paragraph are derived from the conversion of British pounds
into U. S. dollars at the conversion rate in effect at the time of the
acquisition, with the exception of the earn-out accrual which is converted at
the conversion rate in effect at September 30, 2000.
On September 22, 2000, the Company completed the acquisition, effective
as of August 1, 2000, of substantially all of the assets of T-Com, LLC, a
Delaware limited liability company ("T-Com"), and assumed certain liabilities of
T-Com. The liabilities assumed consisted mostly of accounts payable, accrued
payroll expenses and accrued commissions. The assets purchased are valued at
approximately $1,322,000, and the liabilities assumed are approximately $687,000
allocated as follows:
Accounts receivable $ 381,000
Inventory 787,000
Fixed assets 134,000
Other assets 20,000
-----------
Total assets acquired $1,322,000
===========
Bank overdraft $ 82,000
Accounts payable 338,000
Accrued compensation 122,000
Other accrued expenses 145,000
-----------
Total liabilities assumed $ 687,000
===========
Net assets acquired $ 635,000
Goodwill 365,000
-----------
Purchase price $1,000,000
===========
T-Com is a manufacturer of high performance digital transmission test
instruments used for the installation and maintenance of high speed telephone
line services for telephone central offices, competitive local exchange carriers
and private communications networks. The Company intends to use the acquired
assets for substantially the same purposes as such assets were used by T-Com.
F-9
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) ACQUISITION AND DISPOSITION OF BUSINESSES (CONTINUED)
The Company paid to T-Com for the net assets consideration valued at
$1,000,000, as itemized below:
150,000 shares of Series B Preferred Stock of the Company
("Series B Shares"). The Series B Shares become convertible into shares
of common stock of the Company in three equal lots of 50,000 Series B
Shares each at the end of six, twelve and eighteen months,
respectively, following the acquisition closing date of September 22,
2000. Each Series B Share will be convertible into ten common shares,
and conversion rights will be cumulative, with all 150,000 Series B
Shares being convertible into common stock after eighteen months. The
Series B Shares have a liquidation preference of $6.40 per share. The
Company may redeem outstanding and unconverted Series B Shares for cash
at a price per share equal to $7.36 by giving 20 days' prior written
notice to the holders of Series B Shares to be redeemed. If less than
all of the Series B Shares are to be optionally redeemed, the
particular Series B Shares to be redeemed shall be selected by lot or
by such other equitable manner determined by the Company's board of
directors. The Company may not, however, redeem Series B Shares if
there is an insufficient number of authorized and reserved shares of
common stock to permit conversion during the 20-day notice period, to
the extent the Series B Shares are subject to a lock-up, or to the
extent the Company receives a conversion notice for Series B Shares
prior to the redemption date. If the Company fails to pay the
redemption price after calling any Series B Shares for optional
redemption, the Company will have no further option to redeem Series B
Shares.
Warrants to purchase up to 250,000 shares of the Company's
common stock at a fixed exercise price of $1.25 per share, which are
exercisable for a period of twenty-four months following the
acquisition closing date of September 22, 2000. The warrants contain a
cashless exercise feature.
The consideration described above is valued at approximately $938,000
for the Series B Shares based on a value of $0.6253 per common share, the market
value of the Company's common stock at the time the agreement in principal was
signed, multiplied by the 1,500,000 common shares into which the preferred
shares can be converted. The warrants have been valued at approximately $62,000
based on a calculation using the Black-Scholes valuation formula. The
acquisition of T-Com has been accounted for as a purchase by the Company and
resulted in approximately $189,000 of goodwill.
F-10
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) ACQUISITION AND DISPOSITION OF BUSINESSES (CONTINUED)
The following represents the unaudited pro forma results of operations
as if the acquisition of T-Com had occurred on January 1, 1999:
Nine months ended September 30,
-------------------------------
2000 1999
------------ ------------
Net sales $ 21,189 $ 22,081
============ ============
Income (loss) from continuing operations $ 722 $ (2,888)
============ ============
Earniings (loss) per share from continuing
operations:
Basic $ 0.03 $ (0.18)
============ ============
Diluted $ 0.03 $ (0.18)
============ ============
(7) DISCONTINUED OPERATIONS
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 XIT Corporation, a wholly owned subsidiary of the Company. XCD is
essentially a captive supplier of printed circuit boards to the electronic
components segment with total sales to external customers of $125,000 and
$147,000 for the nine months ended September 30, 2000 and 1999, respectively.
XCD has been retained and is now included in the electronics components segment.
Accordingly, current and prior financial information related to the circuits
segment operations have been presented as discontinued operations in the
accompanying consolidated condensed financial statements. The Company
anticipates the sale of substantially all of the assets of XCEL Etch Tek in
November 2000 for consideration of $260,000 in cash, a $50,000 note and the
assumption of $75,000 in liabilities. The sale is expected to result in a loss
of approximately $476,000. As of September 30, 2000 the Company has accrued for
the expected loss on sale and a loss of approximately $158,000 related to the
operations of XCEL Etch Tek from October 1, 2000 through November 15, 2000.
While the Company has entered into a letter of intent for the sale of
XCEL EtchTek and expects the transaction to close on November 21, 2000, there
can be no assurance that the sale will be completed. If the sale does not occur,
the Company may need to record an additional loss related to XCEL Etch Tek in
the fourth quarter of 2000.
In March 1999, the Company sold substantially all of the assets and
liabilities of HyComp, a wholly owned circuits operations subsidiary, for
$750,000 in cash and a royalty on 1999 revenues generated from HyComp's customer
base in excess of a specified amount. The sale resulted in a gain of $331,000.
(8) 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.
F-11
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(8) WARRANT EXCHANGE OFFER (CONTINUED)
The offers and acceptances were finalized by April 24, 2000. Shares
represented by warrants were reduced by 1,384,602 shares. Expense of $0 and
$65,000 was recorded during the three and nine months ended September 30, 2000,
respectively, for the compensation expense for the modification of the warrant.
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 rate of
6.2%; and expected lives ranging from 0.1 to 5 years.
(9) WARRANT EXERCISES
In August and September 2000, warrants to purchase a total of 60,000
shares of the Company's common stock for $0.25 per share were exercised.
(10) DOMESTIC CREDIT FACILITY
On June 23, 2000, the Company's credit facility with Congress Financial
expired. Congress Financial extended this facility through August 14, 2000. On
August 16, 2000, the Company 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 the Company's inventory and accounts receivable and a term
loan in the amount of $687,000 secured by the Company's machinery and equipment.
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 the Company's current and expected financial performance,
the Company anticipates a reduction in the interest rate to the prime rate plus
1% upon completion of the audit of the Company's financial statements for the
year ended December 31, 2000. The balance outstanding under this credit facility
was $2,144,000 on September 30, 2000. There was $342,000 of additional borrowing
available as of September 30, 2000. The credit facility expires on August 23,
2003. The Company's foreign subsidiaries have obtained credit facilities with
Lloyds Bank in England, Banque National du Paris, Societe General and Banque
Hervet in France and Johan Tokyo Credit Bank in Japan.
(11) 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 network
equipment. The Electronic Components segment operates in the U.S., European and
Asian markets and designs, manufactures and markets digital switches,
information technology products, including input and display components,
subsystem assemblies, and power supplies.
F-12
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(11) REPORTABLE SEGMENTS (CONTINUED)
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
XIT Corporation, a wholly-owned subsidiary of the Company. XCEL Etch Tek was
offered for sale, see note 7. XCD is essentially a captive supplier of printed
circuit boards to the electronic components segment with total sales to external
customers of $125,000 and $147,000 for the nine months ended September 30, 2000
and 1999, respectively. XCD has been retained and is now included in the
electronics 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, with the exception of XCD which has been included in the current and
prior financial information related to the electronics components segment in the
accompanying consolidated condensed financial statements.
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 other 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. However, in this report, the two segments have been renamed to
better describe the respective businesses. The Instrumentation and Test
Equipment segment is now referred to as the Telecommunications segment, and the
Components and Subsystems Assemblies segment is now named the Electronic
Components segment.
F-13
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(11) REPORTABLE SEGMENTS (CONTINUED)
Selected financial data for each of the Company's operating
segments is shown below:
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
SALES TO EXTERNAL CUSTOMERS:
Telecommunications $ 10,680,000 $ 11,279,000
Components 8,879,000 8,165,000
------------- -------------
$ 19,559,000 $ 19,444,000
============= =============
INTERSEGMENT SALES:
Telecommunications $ -- $ --
Components -- 217,000
------------- -------------
$ -- $ 217,000
============= =============
SEGMENT PRETAX INCOME (LOSS):
Telecommunications $ 468,000 $ (2,120,000)
Components 2,232,000 189,000
------------- -------------
$ 2,700,000 $ (1,931,000)
============= =============
September 30, December 31,
2000 1999
------------ -------------
SEGMENT ASSETS:
Telecommunications $ 8,433,000 $ 8,070,000
Components 8,777,000 5,766,000
------------- -------------
$ 17,210,000 $ 13,836,000
============= =============
The following is a reconciliation of the reportable segment loss and
assets to the Company's consolidated totals:
Nine months ended Nine months ended
September 30, 2000 September 30, 1999
------------------ ------------------
Pretax income (loss) from continuing operations:
Total income (loss) for reportable segments $ 2,700,000 $ (1,931,000)
Unallocated amounts:
Gain on sale of Wi-Lan Stock 197,000 --
Equity in earnings of unconsolidated affiliates -- 755,000
Warranty reserve reversal 110,000 --
Unallocated general corporate expenses (1,632,000) (1,222,000)
------------ -------------
Consolidated income (loss) from continuing
operations before income taxes $ 1,375,000 $ (2,398,000)
============= =============
September 30, December 31,
2000 1999
------------ -------------
ASSETS
Total assets for reportable segments $ 17,210,000 $ 13,836,000
Other assets 1,331,000 2,653,000
------------- -------------
Total consolidated assets $ 18,541,000 $ 16,489,000
============= =============
F-14
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.
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 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.
-4-
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
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
SEPTEMBER 30,
2000 1999
------ ------
Net sales............................................. 100% 100%
Cost of sales......................................... 45 65
------ ------
Gross profit.......................................... 55 35
Engineering and product development expenses.......... 4 7
------ ------
Operating income (loss)............................... 16 (9)
Interest expense...................................... (2) (2)
Equity in earnings of unconsolidated affiliates....... -- --
Other expense......................................... 2 (1)
------ ------
Income (loss) from continuing operations before
income taxes......................................... 16 (12)
Income taxes.......................................... -- --
------ ------
Income (loss) from continuing operations.............. 16 (12)
Loss from discontinued operations..................... (1) (4)
Gain (loss) on disposal of discontinued segment....... (9) --
------ ------
Net income (loss)..................................... 6% (16)%
====== ======
CONTINUING OPERATIONS
NET SALES. Net sales for the three months ended September 30, 2000
increased by $423,000 (6.6%) to $6,871,000 as compared to $6,448,000 for the
three months ended September 30, 1999.
Net sales of our telecommunications products and services for the three
months ended September 30, 2000 decreased by $435,000 (11.1%) to $3,487,000, as
compared to $3,922,000 for the comparable period in 1999 primarily due to a
$1,337,000 decrease in sales of our CXR, S.A. subsidiary from $2,738,000 during
the three months ended September 30, 1999 to $1,401,000 during the comparable
period in 2000. This decrease in CXR, S.A. sales was primarily due to the late
release of budgets of some of CXR, S.A.'s customers and a decline in U.S. Dollar
revenue due to translation from the French Franc. An increase in net sales for
CXR Telcom in Fremont, California in the amount of $221,000 and the addition of
$681,000 in sales for T-Com, LLC, or T-Com, in Sunnyvale, California partially
offset this overall decline in net sales. The increase in sales for CXR Telcom
primarily resulted from the new CXR HALCYON 700 series test equipment that
replaced the older CXR 5200 model that was being phased out in the prior year.
The sales of test equipment increased by $401,000 in the first three months of
2000 as compared to the comparable period in 1999.
Net sales of electronic components for the three months ended September
30, 2000 increased by $858,000 (34.0%) to $3,384,000 as compared to $2,526,000
for the comparable period in 1999 primarily due to an increase in sales of
-5-
$826,000 of XIT Corporation's Digitran Division. Contributing to this increase
was a large order of switches placed by BAE Systems, Canada, which accounted for
$504,000 of this increase.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 55.2% for the three months ended September 30, 2000 as compared to 34.8% for
the comparable period in 1999. In dollar terms, total gross profit increased by
$1,546,000 (68.9%) to $3,791,000 for the three months ended September 30, 2000
as compared to $2,245,000 for the comparable period in 1999.
Gross profit for our telecommunications segment increased in dollar
terms by $522,000 (37.2%) to $1,924,000 for the three months ended September 30,
2000 as compared to $1,402,000 for the comparable period in 1999 and increased
as a percentage of related net sales from 35.7% in 1999 to 55.2% in 2000 due
largely to a more favorable gross profit on sales of products by newly acquired
T-Com, and higher gross profit on newer CXR products.
Gross profit for our electronic components segment increased in total
dollar terms by $1,024,000 (121.5%) to $1,867,000 for the three months ended
September 30, 2000 as compared to $843,000 for the comparable period in 1999 and
increased as a percentage of related net sales from 33.4% in 1999 to 55.2% in
2000 primarily due to improved profit margins in connection with sales made by
XIT Corporation which resulted from manufacturing efficiencies, reduced overhead
in connection with the move from the Ontario facility to our new Rancho
Cucamonga facility, higher production volumes and a larger percentage of higher
margin night vision switches. These increases were slightly offset by a decline
in profit margin of products sold by our U.K. subsidiary due to lower sales
volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $46,000 (1.9%) to $2,431,000 for the three
months ended September 30, 2000 as compared to $2,385,000 for the comparable
period in 1999. This increase is primarily due to an increase in our general and
administrative expenses associated with increases in wages due to accrued
incentives and administrative expenses from our newly acquired businesses.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment and decreased by $182,000 (39.7%)
to $277,000 for the three months ended September 30, 2000 as compared to
$459,000 for the comparable period in 1999. The majority of this reduction is
due to the transfer of two employees from design engineering to marketing and
manufacturing engineering and a reduction in overhead allocations and
depreciation at CXR Telcom. Engineering expenses were also reduced by $107,000
at CXR, S.A. in the current quarter primarily due to lower engineering
consulting services as compared to the comparable period in 1999.
OTHER INCOME AND EXPENSE. Interest expense was $126,000 for the three
months ended September 30, 2000 as compared to $99,000 for the comparable period
in 1999. This slight increase in interest expense was primarily a result of
higher interest rates and fees associated with our new credit facility with
Wells Fargo Business Credit, Inc. Other income of $177,000 in the 2000 period
included a $197,000 gain on the sale of stock of Wi-Lan, Inc.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes as we are in a loss carryforward position for
federal income tax purposes.
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
-6-
of $702,000 for the three months ended September 30, 2000 as compared to a net
loss of $273,000 for the three months ended September 30, 1999. The three months
ended September 30, 2000 included a loss of $634,000 from the disposal of our
discontinued operations.
Net sales for our circuits business for the three months ended
September 30, 2000 increased by $138,000 (25.0%) to $690,000 as compared to
$552,000 for the comparable period in 1999 primarily due to our efforts to
increase sales in this area to unrelated third parties in connection with a
reduction in intercompany sales.
Selling, general and administrative expenses related to discontinued
operations increased by $18,000 (14.0%) to $147,000 for the three months ended
September 30, 2000 as compared to $129,000 for the comparable period in 1999
primarily due to the cost of an environmental study that was performed in
anticipation of discontinuing operations at this location which as partially
offset by a reduction of $21,000 of administrative expenses incurred by HyComp,
Inc. in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------ ------
Net sales............................................. 100% 100%
Cost of sales......................................... 54 63
------ ------
Gross profit.......................................... 46 37
Selling, general and administrative expenses.......... 35 44
Engineering and product development expenses.......... 4 8
------ ------
Operating income (loss)............................... 7 (15)
Interest expense...................................... (2) (2)
Equity in earnings of unconsolidated affiliates....... -- 4
Other expense......................................... 2 --
------ ------
Income (loss) from continuing operations before
income taxes......................................... 7 (13)
Income taxes.......................................... -- --
------ ------
Income (loss) from continuing operations.............. 7 (13)
Loss from discontinued operations..................... (1) (4)
Gain (loss) on disposal of discontinued segment....... (3) 2
------ ------
Net income (loss)..................................... 3% (15)%
====== ======
-7-
CONTINUING OPERATIONS
NET SALES. Net sales for the nine months ended September 30, 2000
increased by $115,000 (0.6%) to $19,559,000 as compared to $19,444,000 for the
nine months ended September 30, 1999.
Net sales of our telecommunications products and services for the nine
months ended September 30, 2000 decreased by $599,000 (5.3%) to $10,680,000, as
compared to $11,279,000 for the comparable period in 1999 primarily due to a
$1,765,000 decrease in sales of our CXR, S.A. subsidiary from $7,651,000 during
the nine months ended September 30, 1999 to $5,886,000 during the comparable
period in 2000. This decrease in CXR, S.A. sales was primarily due to the late
release of budgets of some of CXR, S.A.'s customers. An increase in net sales
for CXR Telcom in Fremont, California in the amount of $485,000 and the addition
of $681,000 in sales for T-Com, LLC, or T-Com, in Sunnyvale, California
partially offset this overall decline in net sales. The increase in sales for
CXR Telcom primarily resulted from the new CXR HALCYON 700 series test equipment
that replaced the older CXR 5200 model that was being phased out in the prior
year. The sales of test equipment increased by $1,030,000 in the first nine
months of 2000 as compared to the comparable period in 1999.
Net sales of electronic components for the nine months ended September
30, 2000 increased by $714,000 (8.7%) to $8,879,000 as compared to $8,165,000
for the comparable period in 1999 primarily due to an increase in sales of
$619,000 of XIT Corporation's Digitran Division. Contributing to this increase
was a large order of switches placed by BAE Systems, Canada, which accounted for
$646,000 of this increase.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 45.6% for the nine months ended September 30, 2000 as compared to 36.9% for
the comparable period in 1999. In dollar terms, total gross profit increased by
$1,737,000 (24.2%) to $8,913,000 for the nine months ended September 30, 2000 as
compared to $7,176,000 for the comparable period in 1999.
Gross profit for our telecommunications segment increased in dollar
terms by $463,000 (10.8%) to $4,765,000 for the nine months ended September 30,
2000 as compared to $4,302,000 for the comparable period in 1999 and increased
as a percentage of related net sales from 38.1% in 1999 to 44.6% in 2000 due
largely to a more favorable gross profit on sales of products by newly acquired
T-Com, and higher gross profit on new CXR Telcom products.
Gross profit for our electronic components segment increased in total
dollar terms by $1,274,000 (44.4%) to $4,148,000 for the nine months ended
September 30, 2000 as compared to $2,874,000 for the comparable period in 1999
and increased as a percentage of related net sales from 35.2% in 1999 to 46.7%
in 2000 primarily due to improved profit margins in connection with sales made
by XIT Corporation which resulted from manufacturing efficiencies, reduced
overhead in connection with the move from the Ontario facility to our Rancho
Cucamonga facility, higher production volumes and a larger percentage of higher
margin night vision switches. These increases were slightly offset by a decline
in profit margin of sales of our U.K. subsidiary due to lower sales volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $1,654,000 (19.5%) to $6,826,000 for the
nine months ended September 30, 2000 as compared to $8,480,000 for the
comparable period in 1999. This decrease is attributable to a reduction in
selling expenses of $414,000 and a reduction in our general and administrative
expenses of $1,240,000 (23.1%) to $4,113,000 for the nine months ended September
30, 2000 as compared to $5,365,000 for the comparable period in 1999. This
decrease in general and administrative expense was primarily due to the fact
that certain expenses incurred in the comparable period of 1999 were not
-8-
incurred in 2000. These expenses include a $452,000 expense related to the
establishment of a reserve for a note receivable, a $522,000 charge related to
our investor relations efforts and a $193,000 charge related to a contingent
stock agreement. In addition, during the first nine months of 2000 we continued
in our overall cost cutting efforts.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment and decreased by $689,000 (47.2%)
to $773,000 for the nine months ended September 30, 2000 as compared to
$1,462,000 for the comparable period in 1999. The majority of this reduction is
due to eliminating the CXR engineering function in Fremont, California for test
instruments and concentrating our engineering efforts in our St. Charles,
Illinois facility and the transfer of transmission and network access product
engineering to CRS S.A. in France with no additional staffing.
OTHER INCOME AND EXPENSE. Interest expense was $321,000 for the nine
months ended September 30, 2000 as compared to $302,000 for the comparable
period in 1999. This increase in interest expense was primarily a result of
higher interest rates and fees associated with our new credit facility with
Wells Fargo Business Credit, Inc. Other income of $382,000 in the 2000 period
included a $197,000 gain on the sale of stock of Wi-Lan, Inc., and the reversal
of a warranty reserve of $116,000 for a warranty settlement related to sales
made by the Company's former subsidiary, HyComp, Inc. which was sold in April of
1999. In 1999, other income included $755,000 of recorded earnings based on the
equity method as a result of earnings related to our former investment in
Digital Transmission Systems, Inc., a $175,000 charge for a warranty expense
related to the sale of a subsidiary and a $84,000 loss on the sale of a
partnership interest. This expense was offset with the net effect of the equity
in earnings of the unconsolidated subsidiary and the write-down of our
investment in this subsidiary.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes as we are in a loss carryforward position for
federal income tax purposes.
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 $853,000 for the nine months ended September 30, 2000 as compared to a net
loss of $525,000 for the nine months ended September 30, 1999. The nine months
ended September 30, 2000 also included a loss of $634,000 from the disposal of
our discontinued operations as compared to a gain of $331,000 for the comparable
period in 1999 for the sale of HyComp, Inc., a subsidiary in our circuits
segment.
Net sales for our circuits business for the nine months ended September
30, 2000 increased by $122,000 (6.2%) to $2,088,000 as compared to $1,966,000
for the comparable period in 1999 primarily due to our efforts to increase sales
in this area to unrelated third parties in connection with a reduction in
intercompany sales.
Selling, general and administrative expenses related to our
discontinued operations declined by $298,000 (39.6%) to $454,000 for the nine
months ended September 30, 2000 as compared to $752,000 for the comparable
period in 1999 primarily due to the sale of HyComp, Inc. in 1999.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1999, we funded our operations
primarily through proceeds from our prior line of credit with Congress Financial
Corporation or Congress Financial, and revenue generated from our operations.
-9-
During the nine months ended September 30, 2000, we continued to fund our
operations through revenue generated from our operations and through a new 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 new line
of credit, have had a positive impact on our company.
As of December 31, 1999 we had working capital of $1,080,000 and an
accumulated deficit of $19,759,000. As of that date, we had $480,000 in cash and
cash equivalents and $6,168,000 of accounts receivable. As of September 30, 2000
we had working capital of $2,738,000 and an accumulated deficit of $19,319,000.
As of that date, we had $694,000 in cash and cash equivalents and $5,804,000 of
accounts receivable.
Cash used in our operating activities totaled $(646,000) and $(128,000)
for the nine months ended September 30, 2000 and 1999, respectively. This
increase in cash used in operations during the nine months ended September 30,
2000 resulted primarily from payments of $2,903,000 to reduce accounts payable
and accrued expenses. This decrease was partially offset by our vigorous
accounts receivable collection efforts which provided cash of $1,179,000 during
this period.
Cash provided by our investing activities totaled $791,000 and $628,000
for the nine months ended September 30, 2000 and 1999, respectively. Included in
the current period's results is $520,000 from the sale of shares of common stock
we held in Digital Transmission Systems, Inc. and $918,000 from the sale of
shares of common stock we held in Wi-Lan, Inc. Partially offsetting this
investing cash flow was the acquisition of Belix, Inc. which used net cash of
$592,000 and the acquisition of the assets of T-Com which used $83,000 in cash.
Cash provided by financing activities totaled $418,000 for the nine
months ended September 30, 2000 as compared to cash used of $595,000 for the
nine months ended September 30, 1999 primarily due to the increase in notes
payable and long term debt.
On June 23, 2000, our credit facility with Congress Financial expired.
Congress Financial extended this facility through August 14, 2000. On August 16,
2000, we 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. 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 current and
expected financial performance, we anticipate a reduction in the interest rate
to the prime rate plus 1% upon completion of the audit of our financial
statements for the year ended December 31, 2000. The balance outstanding under
this credit facility was $2,144,000 on September 30, 2000. There was $342,000 of
additional borrowings available as of September 30, 2000. The credit facility
expires on August 23, 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.
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
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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.
The consolidated condensed financial statements included in this report
have been prepared assuming we will continue as a going concern. During the
years ended December 31, 1999, 1998 and 1997, we experienced significant
operating losses. Additionally, we were in default of our previously outstanding
domestic credit facility agreement because we were not in compliance with an
adjusted net worth covenant contained in that agreement. These factors raised
substantial doubt about our ability to continue as a going concern and led our
independent certified public accountants to modify their unqualified opinion to
include an explanatory paragraph related to our ability to continue as a going
concern. The consolidated condensed financial statements included in this report
do not include any adjustments that might result from the outcome of this
uncertainty. Although we are reporting income from continuing operations for the
three and nine months ended September 30, 2000 and we have replaced our previous
domestic credit facility, there can be no assurance that we will continue to be
profitable or that we will be able to generate necessary additional capital in
the future.
IMPACT OF YEAR 2000
To date, we have not experienced any material effects related to
computer operations and the arrival of the year 2000. Management does not expect
any disruptions due to the year 2000, because management believes all its
current systems are year 2000 compliant.
At some of our domestic facilities, we installed accounting and
operations management computer applications that are year 2000 compliant and
operate on computer operating systems that are also year 2000 compliant. We did
not initiate these changes in application and operating software systems in
order to accommodate the year 2000 issue but rather to upgrade and enhance its
management information systems capability. As a part of our selection criteria,
we considered the impact of the year 2000 issue. We have not experienced year
2000 disruptions with our suppliers or customers, and management believes that
our suppliers and customers are year 2000 compliant with respect to their
systems that could affect us.
Although no significant problems have materialized to date, we will
continue to monitor our systems.
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 36% of our total net sales
for the nine months ended September 30, 2000. Net sales from the French
subsidiary participating in the Euro conversion were 27% of our net sales for
the nine months ended September 30, 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
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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.
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
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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.
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.
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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.
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
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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.
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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
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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 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 under this prospectus.
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 under this prospectus, 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.
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
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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.
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
---------------------------------------
In July 2000, we issued options to purchase up to 100,0000 shares of
common stock at an exercise price of $.50 per share to each of our two
non-employee directors.
In August 2000, we issued 40,000 shares of common stock to one investor
in connection with the exercise of warrants with an exercise price of $.25 per
share.
In September 2000, we issued 20,000 shares of common stock to one
investor in connection with the exercise of warrants with an exercise price of
$.25 per share.
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In September 2000, we issued 150,000 shares of Series B Preferred Stock
("Series B Shares") in connection with the acquisition of substantially all of
the assets of T-Com, LLC, a Delaware limited liability company. The Series B
Shares become convertible into shares of common stock of the Company in three
equal lots of 50,000 Series B Shares each at the end of six, twelve and eighteen
months, respectively, following the acquisition closing date of September 22,
2000. Each Series B Share will be convertible into ten common shares, and
conversion rights will be cumulative, with all 150,000 Series B Shares being
convertible into common stock after eighteen months. The Series B Shares have a
liquidation preference of $6.40 per share. This liquidation preference means
that upon any voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of Series B Shares will be entitled to receive, subject
to prior preference and distribution to holders of Series A Preferred Stock, but
prior and in preference to any distribution of our assets to the holders of
common stock by reason of their ownership of shares of common stock, $6.40 per
Series B Share.
We may redeem outstanding and unconverted Series B Shares for cash at a
price per share equal to $7.36 by giving 20 days' prior written notice to the
holders of Series B Shares to be redeemed. If less than all of the Series B
Shares are to be optionally redeemed, the particular Series B Shares to be
redeemed shall be selected by lot or by such other equitable manner determined
by our board of directors. We may not, however, redeem Series B Shares if there
is an insufficient number of authorized and reserved shares of common stock to
permit conversion of the Series B Shares during the 20-day notice period, to the
extent the Series B Shares are subject to a lock-up, or to the extent we receive
a conversion notice for Series B Shares prior to the redemption date. If we fail
to pay the redemption price after calling any Series B Shares for optional
redemption, we will have no further option to redeem Series B Shares.
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
---------
No dividends on our common stock have been paid by us to date. Our line
of credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. 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 our
board of directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
4.1 Certificate of Designations, Preferences and Rights of Series
B Preferred Stock of the Company*
10.1 Asset Purchase Agreement effective September 1, 2000 by and
among the Company, CXR Telcom Corporation and T-Com, LLC*
10.2 Letter agreement dated October 2, 2000 among the Company, CXR
Telcom Corporation and T-Com, LLC relating to Asset Purchase
Agreement by and among the same parties*
10.3 Bill of Sale and Assignment and Assumption Agreement dated as
of September 22, 2000 between T-Com, LLC and CXR Telcom
Corporation*
10.4 Credit and Security Agreement dated as of August 16, 2000 by
and among XIT Corporation, CXR Telcom Corporation and Wells
Fargo Business Credit, Inc.*
10.5 Revolving Note dated August 16, 2000 in the principal sum of
$3,000,000 made by CXR Telcom Corporation and XIT Corporation
in favor of Wells Fargo Business Credit, Inc.*
10.6 Term Note dated August 16, 2000 in the principal sum of
$646,765 made by XIT Corporation in favor of Wells Fargo
Business Credit, Inc.*
10.7 Term Note dated August 16, 2000 in the principal sum of
$40,235 made by CXR Telcom Corporation in favor of Wells Fargo
Business Credit, Inc.*
10.8 Guarantee dated August 16, 2000 made by Carmine T. Oliva in
favor of Wells Fargo Business Credit, Inc.*
10.9 Waiver of Interest dated August 16, 2000 made by Georgeann
Oliva in favor of Wells Fargo Business Credit, Inc.*
10.10 Guarantee dated August 16, 2000 made by the Company in favor
of Wells Fargo Business Credit, Inc.*
10.11 Guarantor Security Agreement dated August 16, 2000 made by the
Company in favor of Wells Fargo Business Credit, Inc.*
10.12 Letter dated January 26, 2001 from Wells Fargo Business
Credit, Inc. confirming the release of Guarantee dated August
16, 2000**
27.1 Financial Data Schedule*
---------------
* Filed as an exhibit to the initial filing of this report on
November 20, 2000 and incorporated by reference.
** Filed as an exhibit to the Company's annual report on Form 10-K for
the year ended December 31, 2000 and incorporated by reference.
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(b) Reports on Form 8-K
-------------------
A report on Form 8-K was filed on August 21, 2000 to report under Item
5 - Other Events the Registrant's entry into a credit agreement with Wells Fargo
Business Credit, Inc.
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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 22, 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)
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