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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
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 JUNE 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.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 77-0226211
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(Address of Principal Executive Offices)
(909) 987-9220
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address And Former
Fiscal Year, if Changed Since Last Report)
Indicated by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
As of 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 June 30, 2000 (unaudited) and
December 31, 1999...............................................F-1
Consolidated Condensed Statements of
Operations and Comprehensive Income
for the three and six months ended
June 30, 2000 and l999 (unaudited)..............................F-2
Consolidated Condensed Statements of
Cash Flows for the six months ended
June 30, 2000 and l999 (unaudited)..............................F-3
Notes to Consolidated Condensed Financial
Statements (unaudited)..........................................F-4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................3
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................20
ITEM 5. OTHER INFORMATION..................................................20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................20
SIGNATURES.................................................................21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30,
2000 Dec. 31,
(Restated) 1999
ASSETS --------- ---------
(Unaudited)
Cash and cash equivalents $ 391 $ 481
Short-term investments 799 --
Accounts receivable, net 6,256 6,519
Inventories 4,941 4,181
Other current assets 1,274 578
--------- ---------
Total current assets 13,661 11,759
Property, plant and equipment-net 1,378 1,393
Goodwill, net 2,544 1,507
Investment in unconsolidated affiliates -- 1,240
Other assets 492 722
--------- ---------
$ 18,075 $ 16,621
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 3,125 $ 2,107
Current portion of long-term debt 1,438 1,422
Accounts payable 5,263 4,771
Accrued expenses 2,867 2,985
--------- ---------
Total current liabilities 12,693 11,285
Long-term debt, less current portion 219 165
Other liabilities 652 782
--------- ---------
Total liabilities 13,564 12,232
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)
253 588
Stockholders' equity:
Preferred stock, $0.01 par value
Authorized 10,000,000 shares; 0
shares issued and outstanding -- --
Common stock, $.0033 par value
Authorized 25,000,000 shares;
issued and outstanding 20,509,000
and 16,812,000 shares 68 60
Additional paid-in capital 24,282 23,726
Accumulated deficit (19,726) (19,759)
Accumulated comprehensive loss (366) (226)
--------- ---------
Total stockholders' equity 4,258 3,801
--------- ---------
$ 18,075 $ 16,621
========= =========
See accompanying notes to consolidated condensed financial statements.
F-1
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
2000 1999
(Restated) (Restated) 2000 1999
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net sales $ 7,512 $ 6,801 $ 13,998 $ 14,311
Cost of sales 4,698 4,411 8,811 9,315
--------- --------- --------- ---------
Gross profit 2,814 2,390 5,187 4,996
Operating expenses:
Selling, general and administrative 2,362 2,876 4,612 6,592
Engineering and product development 253 477 496 1,035
--------- --------- --------- ---------
Income (loss) from operations 199 (963) 79 (2,631)
Other income (expense)
Interest expense (99) (83) (195) (202)
Gain on sale of subsidiary -- -- -- 331
Equity in earnings of unconsolidated affiliates -- 191 -- 727
Other 110 (54) 205 (101)
--------- --------- --------- ---------
Income (loss) before income taxes 210 (909) 89 (1,876)
Income tax expense 4 5 10 13
--------- --------- --------- ---------
Net income (loss) 206 (914) 79 (1,889)
Other comprehensive gain (loss)
Changes in unrealized gain on marketable securities (383) -- 78 --
Foreign currency translation adjustment (53) (161) (218) (424)
--------- --------- --------- ---------
Total comprehensive loss $ (230) $ (1,075) $ (61) $ (2,313)
========= ========= ========= =========
Basic earnings (loss) per share $ 0.010 $ (0.054) $ 0.002 $ (0.123)
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.009 $ (0.054) $ 0.002 $ (0.123)
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
2000
(Restated) 1999
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 79 $(1,889)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization 206 240
Amortization of intangibles 130 173
Gain on the sale of fixed assets (43) --
Gain on sale of subsidiary -- (331)
Equity in earnings of unconsolidated entities -- (727)
Stock and warrants issued as compensation 110 1,219
Other noncash items 221 463
Changes in operating assets and liabilities:
Accounts receivable 987 1,576
Inventories (19) 626
Other assets (185) 59
Accounts payable and accrued expenses (2,245) (1,081)
-------- --------
Cash provided by (used in) operating activities (759) 328
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (9) (52)
Proceeds from sale of fixed assets 43 --
Proceeds from the sale of DTS stock 520 --
Proceeds from sale of subsidiary -- 750
Investment in Belix Ltd. companies (592) --
Cash received from note receivable -- 9
-------- --------
Cash provided by (used in) investing activities (38) 707
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of notes payable
and long term debt 852 (1,063)
Proceeds from exercise of warrants and
employee stock options 73 --
Proceeds from sale of common stock -- 2
-------- --------
Cash provided by (used in) financing activities 925 (1,061)
-------- --------
Effect Of Exchange Rate Changes On Cash (218) (424)
-------- --------
Net Decrease In Cash And Cash Equivalents (90) (450)
-------- --------
Cash And Cash Equivalents At Beginning Of Period 481 572
-------- --------
Cash And Cash Equivalents At End Of Period $ 391 $ 122
======== ========
See accompanying notes to consolidated condensed financial statements
F-3
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MicroTel International, Inc. is an international telecommunications
electronics company comprised of three wholly owned subsidiaries - CXR Telcom
Corporation in Fremont, California, CXR, S. A. in Paris, France and XIT
Corporation in Rancho Cucamonga, California. CXR Telcom Corporation and CXR, S.
A. design, manufacture and market electronic telecommunications test
instruments, wireless and wireline voice, data and video transmission and
network access equipment. XIT Corporation designs, manufactures and markets
information technology products, including input and display components,
subsystem assemblies and power supplies. The Company operates out of facilities
in the United States, France, England and Japan.
The Company is organized into three segments - Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits. Through the sale
of various subsidiaries in 1998 and 1999, the Company has divested a majority of
its circuits operations.
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles.
The unaudited consolidated condensed financial statements do, however,
reflect all adjustments, consisting of only normal recurring adjustments, which
are, in the opinion of management, necessary to state fairly the financial
position as of June 30, 2000 and the results of operations and cash flows for
the related interim periods ended June 30, 2000 and 1999. However, these results
are not necessarily indicative of results for any other interim period or for
the year. It is suggested that the accompanying consolidated condensed financial
statements be read in conjunction with the Company's Consolidated Financial
Statements included in its 2000 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 7 should be accounted for in accordance with APB 25 and FIN 44
or FAS 123, depending on the date of the original grant and whether the warrant
was held by an employee or non-employee. See Note 7.
Accordingly, the accompanying consolidated condensed financial
statements as of and for the three and six months ended June 30, 2000, have been
restated to reflect a reduction in compensation expense related to the warrant
exchange offer of $58,000 and $20,000 for the three and six months ended June
30, 2000, respectively, with a corresponding decrease in additional paid in
capital.
F-4
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(2) RESTATEMENT OF FINANCIAL STATEMENTS (CONTINUED)
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 six months ended June 30, 2000 have been
restated to reflect a reduction in goodwill related to the Belix acquisition of
$618,000 with a corresponding reduction in current portion of long-term debt and
long-term debt, less current portion of $71,000 and $547,000, respectively. In
addition, the reduction in goodwill results in a reduction in accumulated
amortization and amortization expense of $39,000 for the three and six months
ended June 30, 2000.
EFFECT
The effect of the above changes was to increase net income by $97,000
and $59,000 for the three and six months ended June 30, 2000, respectively.
Basic and diluted earnings per share increased by $0.005 and $0.002 for the
three and six months ended June 30, 2000. Additional paid in capital decreased
by $20,000 to $24,282,000 at June 30, 2000. Goodwill, net of amortization,
decreased by $579,000 to $2,544,000 at June 30, 2000. In addition, current
portion of long-term debt decreased by $71,000 to $1,438,000 and long-term debt,
less current portion, decreased by $547,000 to $219,000.
F-5
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(3) EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and diluted
loss per share (in thousands, except per share amounts):
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
NUMERATOR:
Net income (loss) $ 206 $ (914) $ 79 $ (1,889)
Less: accretion of the excess of the
redemption value over the carrying value of
redeemable preferred stock 23 (11) 46 45
--------- --------- --------- ---------
Income (loss) attributable to common
stockholders 183 (903) 33 (1,934)
DENOMINATOR:
Weighted average number of common shares
outstanding during the period 18,712 16,594 18,443 15,685
Incremental shares from assumed conversions
of warrants, options and preferred stock 2,076 -- 2,250 --
--------- --------- --------- ---------
Adjusted weighted average shares 20,788 16,594 20,693 15,685
Basic earnings (loss) per share $ 0.010 $ (0.054) $ 0.002 $ (0.123)
========= ========= ========= =========
Diluted earnings (loss) per share $ 0.009 (0.054) $ 0.002 $ (0.123)
========= ========= ========= =========
The computation of diluted loss per share for the six and three month
period ended June 30, 1999 excludes the effect of incremental common shares
attributable to the exercise of outstanding common stock options and warrants
because their effect was antidilutive due to losses incurred by the Company or
such instruments had exercise prices greater than the average market price of
the common shares during the periods presented.
F-6
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(4) INVENTORIES
Inventories consist of the following:
June 30, 2000 December 31, 1999
----------------- -----------------
Raw materials $ 1,684,000 $ 1,728,000
Work-in-process 1,558,000 1,199,000
Finished goods 1,699,000 1,254,000
----------------- -----------------
$ 4,941,000 $ 4,181,000
================= =================
(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 effect 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. As of June 30, 2000 the value of
the Company's Wi-Lan shares had increased in value by $79,000 to $799,000. The
increase in value has been reflected in the carrying value of the investment and
the other comprehensive income or loss line of the equity section in the balance
sheet. Accordingly, the Wi-LAN investment is shown in the current asset section
of the balance sheet as short-term investments.
On July 7, 2000, the Company sold all its shares of Wi-LAN common stock
for net proceeds of $917,000. The sale resulted in a gain of approximately
$197,000 which will be included in the Company's results of operations in the
third quarter of 2000.
On April 17, 2000, the Company finalized its acquisition of Belix
Company, Ltd. ("Belix"), including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash and an earn-out for the former
stockholders based on sales. In addition, the Company has recorded an 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 in goodwill,
including $132,000 accrued for the earn-out at June 30, 2000. Belix is located
in England, U. K. and is in the business of manufacturing power supplies for
various applications. It will be integrated into the Company's existing power
supply producer, XCEL Power Systems, Ltd.
F-7
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(6) ACQUISITION AND DISPOSITION OF BUSINESSES (CONTINUED)
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 1,296,000
----------
Adjusted purchase price $ 922,000
==========
Initial purchase price $ 790,000
Earn-out accrual 132,000
----------
Adjusted purchase price $ 922,000
==========
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 June 30, 2000.
F-8
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(7) WARRANT EXCHANGE OFFER
During the first quarter of 2000, the Company offered to holders of
warrants with an exercise price of one dollar or more and ranging as high as
$3.79 the opportunity to exchange their warrants with new warrants for one half
the number of shares at one half the exercise price of the original warrants.
Neither the expiration dates, nor any other terms of the warrants, were changed
as a result of this offer. The offer was available to all warrant holders with
exercise prices of one dollar or more including Carmine T. Oliva, the Company's
President and Chairman of the Board, and the two other directors. The primary
reason for the offer was to reduce the quantity of shares allocated to warrants
so that the Company would have sufficient authorized stock for its needs until
an increase in the authorized stock could be voted on by the Company's
stockholders.
The offers and acceptances were finalized by April 24, 2000. Shares
represented by warrants were reduced by 1,384,602 shares. Income of $58,000 and
expense of $65,000 was recorded during the three and six months ended June 30,
2000, respectively, as compensation expense for the modification of the
warrants. Based on the nature and timing of the original grant of the warrants,
compensation expense was determined by various methods. For warrants issued to
employees and directors, compensation expense was determined by the intrinsic
value method and by treating the modified warrants as variable from the date of
modification in accordance with APB 25 and FIN 44. For warrants issued to
non-employees, compensation expense was determined in accordance with FAS 123 by
calculating the difference between the fair value of the new warrant and the old
warrant at the date of acceptance, with the exception of warrants initially
granted pre-FAS 123, in which case the entire fair value of the new warrant was
recorded as compensation expense. The estimated fair values of the old and new
warrants was calculated using a Black-Scholes pricing model with the following
assumptions: no dividend yield; expected volatility of 93%; a risk-free interest
rate of 6.2%; and expected lives ranging from 0.1 to 5 years.
(8) CONVERSION OF PREFERRED STOCK
During the three months ended June 30, 2000, certain holders of
convertible redeemable preferred stock converted 34.5 shares of preferred stock
into 1,743,285 shares of common stock. The same holders also exercised warrants
to purchase 172,500 shares of common stock for $0.25 per share.
(9) REPORTABLE SEGMENTS
The Company has three reportable segments: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits. The
Instrumentation and Test Equipment segment operates principally in the U.S. and
European markets and designs, manufactures and distributes telecommunications
test instruments and voice and data transmission and networking equipment. The
Components and Subsystems Assemblies segment operates in the U.S., European and
Asian markets and designs, manufactures and markets information technology
products, including input and display components, subsystem assemblies, and
power supplies. The Company has disposed of the majority of its Circuits segment
business operations and has only one such operation that is material as of June
30, 2000.
The Company evaluates performance based upon profit or loss from
operations before income taxes exclusive of nonrecurring gains and losses. The
Company accounts for intersegment sales at prices negotiated between the
individual segments.
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers, design,
manufacturing and marketing strategies.
There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's consolidated financial statements included in its 1999 Annual Report
on Form 10-K.
F-9
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(9) REPORTABLE SEGMENTS (CONTINUED)
Selected financial data for each of the Company's operating segments is
shown below:
Six months ended Six months ended
June 30, 2000 June 30, 1999
---------------- ----------------
SALES TO EXTERNAL CUSTOMERS:
Instruments $ 7,193,000 $ 7,357,000
Components 5,408,000 5,540,000
Circuits 1,397,000 1,414,000
---------------- ----------------
$ 13,998,000 $ 14,311,000
================ ================
INTERSEGMENT SALES:
Instruments $ -- $ --
Components -- 130,000
Circuits 153,000 321,000
---------------- ----------------
$ 153,000 $ 451,000
================ ================
SEGMENT PRETAX INCOME (LOSS)
Instruments $ 46,000 $ (971,000)
Components 1,115,000 722,000
Circuits (266,000) (892,000)
---------------- ----------------
$ 895,000 $ (1,141,000)
================ ================
June 30, December 31,
2000 1999
---------------- ----------------
SEGMENT ASSETS
Instruments $ 7,139,000 $ 7,960,000
Components 8,178,000 5,213,000
Circuits 1,319,000 1,379,000
---------------- ----------------
$ 16,636,000 $ 14,552,000
================ ================
F-10
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(9) REPORTABLE SEGMENTS (CONTINUED)
The following is a reconciliation of the reportable segment loss and
assets to the Company's consolidated totals:
Six months ended Six months ended
June 30, 2000 June 30, 1999
---------------- ----------------
Pretax income (loss)
--------------------
Total income (loss) loss for reportable
segments $ 895,000 $ (1,141,000)
Unallocated amounts:
Gain on sale of assets of subsidiary -- 331,000
Equity in earnings of unconsolidated
Write-down of note receivable -- (466,000)
Warranty reserve reversal 110,000 --
Unallocated general corporate expenses (916,000) (1,327,000)
---------------- ----------------
Consolidated loss before income taxes $ 89,000 $ (1,876,000)
================ ================
June 30, December 31,
2000 1999
---------------- ----------------
Assets
- ------
Total assets for reportable segments $ 16,636,000 $ 14,552,000
Other assets 1,439,000 2,069,000
---------------- ----------------
Total consolidated assets $ 18,075,000 $ 16,621,000
================ ================
F-11
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.
Although our operations as of the date of this report are organized
into two business segments, the financial statements and the discussion relating
to the financial statements contained in this report reflect our previous
organization into three segments because the discontinuation of our circuits
segment did not occur until October 2000.
4
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 1999
NET SALES
Consolidated net sales for the second quarter of 2000 increased by
$711,000 or 10.5% as compared with the same period in 1999. The table below
shows the composition of consolidated net sales by business segment.
Three Months Ended Three Months Ended Variance- Percent
Segment June 30, 2000 June 30, 1999 Increase (Decrease) Change
------- --------------- --------------- --------------- -------------
Test Equipment $ 3,641 $ 3,649 $ (8) (0.2)%
Components 3,143 2,622 521 19.9%
Circuits 728 530 198 37.4%
--------------- --------------- ---------------
Total $ 7,512 $ 6,801 $ 711 10.5%
=============== =============== ===============
The relative percent of net sales by segment between the respective
periods experienced the following changes:
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
--------------- ---------------
Segment
-------
Test Equipment 48.5% 53.7%
Components 41.8% 38.5%
Circuits 9.7% 7.8%
--------------- ---------------
Total 100.0% 100.0%
=============== ===============
Instrumentation and Test Equipment segment sales remained approximately
the same in the second quarter of 2000 as compared to the second quarter of
1999. CXR Telcom experienced a $665,000 increase in sales of its test equipment
in the second quarter of 2000 as compared to the prior year period as a result
of favorable acceptance of our new compact series 704 test equipment. This
increase was offset by lower than expected sales of transmission equipment from
CXR S. A. such as ISDN products and modems. The U. S. transmission product line
was transferred from CXR Telcom in Fremont, California to CXR S. A. in France
effective April 1, 2000.
Components segment sales increased $521,000 or 19.9% in the second
quarter of 2000 over such sales in the prior year period. The Rancho Cucamonga,
California based XIT Corporation ("XIT") increased its sales by $119,000 in the
second quarter of 2000 as compared to the second quarter of 1999 primarily due
to the acceleration of orders of one of XIT's largest customers for the final
year of a five year contract. Our Japanese subsidiary, XCEL Japan, Ltd.,
increased its sales by $140,000 in the current quarter as compared to the prior
year period primarily as result of improved economic conditions in Asian
markets. The remaining increase in sales of $262,000 for the second quarter of
2000 as compared to the second quarter of 1999 for the Components segment was
primarily due to the net addition to sales that the acquisition of Belix Ltd.
contributed to our U. K. subsidiary, XCEL Power Systems, Ltd. ("XPS"). Belix
contributed $658,000 of revenue in the second quarter of 2000.
The Circuits segment increased sales by $198,000 or 37.4% in the second
quarter of 2000 from the second quarter of 1999. The increase in sales was the
result of our effort to increase this segment's sales to unrelated third parties
in conjunction with a planned reduction of intercompany sales. However,
management believes it may be in our long-term interest to exit the Circuits
segment.
5
GROSS PROFIT
Consolidated gross profit as a percent of net sales increased to 37.5%
in the second quarter of 2000 from 35.1% in the second quarter of 1999. The
composition of consolidated gross profit by business sector and the percentages
of related net sales are shown in the following table for the periods indicated:
Three Months Ended Percent of Related Three Months Ended Percent of Related
Segment June 30, 2000 Net Sales June 30, 1999 Net Sales
- ------- --------------- --------------- --------------- ---------------
Test Equipment $ 1,490 40.9% $ 1,446 39.6%
Components 1,284 40.9% 933 35.6%
Circuits 40 5.5% 11 2.0%
--------------- ---------------
Total $ 2,814 37.5% $ 2,390 35.1%
=============== ===============
Gross profit for the Instrumentation and Test Equipment segment as a
percent of net sales improved to 40.9% in the second quarter of 2000 from 39.6%
in the second quarter of 1999. The gross profit improvement primarily resulted
from a greater percentage of higher margin test equipment sold in the current
quarter than in the prior year quarter in comparison to total sales of test
equipment and transmission equipment. The increase in relatively high margin
test equipment sales more than offset the lower margins related to the
transmission and modem sales. The gross profit at CXR Telcom improved to 50% in
the second quarter of 2000 as compared to 45% in the second quarter of 1999. For
the same comparison period, CXR S. A.'s gross profit fell to 35.4% from 37.4%.
This reduction in margin was primarily the result of lower quantities of
transmission and modem production sold and higher material costs due to the
lower valuation of the French Franc in relation to the U. S. dollar.
The Components segment improved its gross profit as a percentage of
sales substantially to 40.9% in the second quarter of 2000 from 35.6% in the
second quarter of 1999. XIT greatly improved its gross profit margin as a
percent of sales to 66.5% in the current quarter from 41.8% in the prior year
quarter. This highly improved performance primarily resulted from additional
manufacturing efficiencies, less overhead due to the relocation last November
into less costly facilities, the discontinuation of the less profitable
subsystem assemblies business and higher production volumes. Partially
offsetting such improvements was a reduction in gross profit as a percent of
sales at XPS to 15.4% in the second quarter of 2000 from 27.2% in the second
quarter of 1999. Incomplete engineering and delays in the receipt of components
negatively impacted Belix, and delays in production releases for existing
contracts unfavorably impacted XPS. Belix contributed $658,000 of revenue in the
second quarter of 2000.
The Circuits segment improved its gross profit as a percent of net
sales in the second quarter of 2000 to 5.5% from 2% in the second quarter of
1999. The improvement mainly was due to the to higher prices from more outside
business and improved efficiencies due to higher volumes.
6
OPERATING EXPENSES
Operating expense for the three months ended June 30, 2000 and 1999
comprised the following:
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
Commissions $ 209 $ 189
Other selling expense 796 850
------------- -------------
Total selling expense 1,005 1,039
General & administrative expense 1,357 1,837
------------- -------------
Total selling, general & admin. expense $ 2,362 $ 2,876
============= =============
Engineering & product develop. expense $ 253 $ 477
============= =============
Total selling expense as a percentage of net sales decrease to 13.3%
from 15.3% for the three months ended June 30, 2000 and 1999, respectively,
primarily due to cost reductions at CXR Telcom in Fremont, California.
Commissions, as a percentage of net sales, remained relatively stable at 2.8%
for both the current quarter and the prior year second quarter.
General and administrative expenses ("G&A") declined to $1,357,000 or
18.1% of net sales in the current quarter from $1,837,000 or 27.0% of net sales
in the second quarter of 1999. The G&A for the prior year period included an
expense of $452,000 to establish a reserve for a note receivable. Without this
charge, the prior year period G&A would have been $1,385,000 and would have
represented 20.4% of sales.
Engineering and product development costs were incurred by the
Instrumentation and Test Equipment segment in the second quarters of 2000 and
1999. Such costs were $253,000 or 3.4% of net sales in the second quarter of
2000 as compared to $477,000 or 7% of net sales in the second quarter of 1999.
The majority of the reduction in engineering and product expenses in the current
quarter as compared to the prior year period is due to the closing down of the
engineering function at the CXR Telcom facilities in Fremont, California and
concentrating the engineering efforts in the St. Charles, Illinois engineering
facility. Management believes a substantial engineering and product development
effort is necessary to maintain our Company's competitive position.
OTHER INCOME AND EXPENSE
Interest expense increased slightly in the second quarter of 2000 from
the second quarter of 1999. Other income of $110,000 included a reversal of a
warranty reserve related to the prior year sale of HyComp, Inc., a former
subsidiary of ours. The reserve was partially reversed due to the settlement of
a warranty issue and therefore we recorded other income of $116,000.
7
SIX MONTHS ENDED JUNE 30, 2000 VERSUS JUNE 30, 1999
NET SALES
Consolidated net sales for the first six months of 2000 decreased by
approximately $313,000 or 2.2% as compared with the same period in 1999. The
table below shows the composition of consolidated net sales by business sector:
Variance-
Six Months Ended Six Months Ended Increase/ Percent
Segment June 30, 2000 June 30, 1999 (Decrease) Change
------- ------------- ------------- ------------- -----------
Test Equipment $ 7,193 $ 7,357 $ (164) (2.2)%
Components 5,408 5,540 (132) (2.4)%
Circuits 1,397 1,414 (17) (1.2)%
------------- ------------- -------------
Total $ 13,998 $ 14,311 $ (313) (2.2)%
============= ============= =============
The relative percent of net sales by segment between the respective
periods experienced the following changes:
Six Months Ended Six Months Ended
Segment June 30, 2000 June 30, 1999
------- ------------- -------------
Test Equipment 51.4% 51.4%
Components 38.6% 38.7%
Circuits 10.0% 9.9%
------------- -------------
Total 100.0% 100.0%
============= =============
The Instrumentation and Test Equipment segment sales declined by 2.2%
in the first half of 2000 compared to the first half of 1999. However, CXR
Telcom experienced a $1,366,000 increase in sales of test equipment in the first
half of 2000 as compared to the prior year period in which $630,000 of test
equipment was sold. The increase was primarily due to favorable acceptance of
our new compact series 704 test equipment. This represents a 217% increase in
test equipment sales in the first half of 2000 from the first half of 1999. This
increase was offset by lower than expected sales of transmission equipment from
CXR S. A. such as ISDN products and modems. The U. S. transmission product line
was transferred from CXR Telcom in Fremont, California to CXR S. A. in France
effective April 1, 2000.
The Components segment sales decreased slightly by 2.4% in the
six-month period ended June 30, 2000 from the prior year six-month period. XPS
in the U. K. incurred a sales decline of 9.8% in the first half of 2000 as
compared to the first half of 1999 primarily due to delays in the release of
production for certain contracts. However, our Japanese subsidiary, XCEL Japan,
Ltd., increased its sales by $132,000, or 41.8% in the current six-month period
as compared to the prior year period due to strong sales in the Asian market for
components. Belix contributed $658,000 of revenue during the first half of 2000.
The Circuits segment sales remained relatively flat in the six-month
period ended June 30, 2000 as compared to the six-month period ending June 30,
1999. The first six-month period of 1999 included $456,000 sales of HyComp,
Inc., a former subsidiary that was sold on March 31, 1999. Excluding the HyComp
Inc. sales from the first half of 1999, the Circuits segment sales increased to
$1,397,000 in the first six-month period of 2000 from $958,000 in the first
six-month period of 1999 which represents a $439,000 increase in sales or a
45.8% increase. The dramatic improvement in sales volume has been attained by
concentrated effort to replace intercompany sales with more profitable third
party sales. Notwithstanding the remarkable progress that has been achieved in
this segment, management believes it may be in our long-term interest to leave
this segment.
8
GROSS PROFIT
Consolidated gross profit as a percentage of net sales increased to
37.1% in the first half of 2000 from 34.9% in the first half of 1999. The
composition of consolidated gross profit by business sector and the percentages
of related net sales are shown in the following table for the periods indicated:
Six Months Ended Percent of Related Six Months Ended Percent of Related
Segment June 30, 2000 Net Sales June 30, 1999 Net Sales
------- --------------- --------------- --------------- ---------------
Test Equipment $ 2,842 39.5% $ 2,900 39.4%
Components 2,230 41.2% 2,016 36.4%
Circuits 115 8.2% 81 5.7%
--------------- ---------------
Total $ 5,187 37.1% $ 4,997 34.9%
=============== ===============
Gross profit for the Instrumentation and Test Equipment segment as a
percent of net sales was relatively unchanged in the six-month period of 2000 as
compared to the six-month period of 1999. The gross profit at CXR Telcom
improved to 45% in the first half of 2000 as compared to 38.1% in the first half
of 1999. For the same comparison period, CXR S. A.'s gross profit fell to 36.2%
from 40%. This reduction in margin was primarily the result of higher material
costs due to the lower valuation of the French Franc in relation to the U. S.
dollar.
Components segment improved its gross profit as a percentage of sales
to 41.2% in the six-month period ending on June 30, 2000 from 36.4% in the
six-month period ending on June 30, 1999. XIT greatly improved its gross profit
margin as a percent of sales to 62.2% in the first half from 42.4% in the
comparable prior year period. This improved performance primarily resulted from
additional manufacturing efficiencies, less overhead due to the relocation last
November into less costly facilities, the discontinuation of the less profitable
subsystem assemblies business and higher production volumes. Partially
offsetting such improvements was a reduction in gross profit as a percent of
sales at XPS to 15.4% in the first half of 2000 from 28.7% in the first six
months of 1999. The reduction primarily resulted from the additional costs
associated with integrating the Belix operations into the XPS operations. Also,
both Belix and XPS experienced lower than expected sales. Incomplete engineering
and delays in the receipt of components negatively impacted Belix and delays in
production releases for existing contracts unfavorably impacted XPS. Belix
contributed $658,000 of revenue in the first half of 2000.
The Circuits segment improved its gross profit as a percent of net
sales in the first half of 2000 to 8.2% from 5.7% in the first half of 1999. The
improvement mainly was due to a 45.8% increase in sales of the our remaining
Circuits segment facilities, which was due to higher prices from more outside
business and improved efficiencies due to higher volumes.
9
OPERATING EXPENSES
Operating expense for the six months ended June 30, 2000 and 1999 were
comprised of the following.
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
------------- -------------
Commissions $ 414 $ 439
Other selling expense 1,541 1,788
------------- -------------
Total selling expense 1,955 2,227
General & administrative 2,657 4,365
------------- -------------
Total selling, general and administrative $ 4,612 $ 6,592
============= =============
Engineering & product development $ 496 $ 1,035
============= =============
Total selling expense as a percentage of net sales decrease to 13.9%
from 15.6% for the six months ended June 30, 2000 and 1999, respectively,
primarily due to cost reductions at CXR Telcom in Fremont, California.
Commissions, as a percentage of net sales, remained stable at 3% for both the
current six-month period and the prior year six-month period.
General and administrative expenses ("G&A") declined dramatically to
$2,657,000 or 19.0% of net sales in the first half of 2000 from $4,365,000 or
30.5% of net sales in the first half of 1999. The G&A for the prior year period
of 1999 included an expense of $452,000 to establish a reserve for a note
receivable, a charge of $522,000 associated with our investor relations efforts
and a $193,000 charge related to a 1997 acquisition. Without these charges the
prior year period G&A would have been $3,198,000 and would have represented
22.4% of sales. The reduction of G&A expenses to 19.0% of sales represents the
results of much of the company's cost cutting efforts of 1999 and early 2000.
Management is continuing to reevaluate all costs and intends to continue
reducing administrative expenses in relation to our business levels.
Engineering and product development costs were incurred by the
Instrumentation and Test Equipment segment in the first half of 2000 and 1999,
except for $32,000 of such costs incurred by the Circuits segment in the first
quarter of 1999. Engineering and product and development costs were $496,000 or
3.5% of net sales in the first half of 2000 as compared to $1,035,000 or 7.2% of
net sales in the first half of 1999. The majority of reduction in engineering
and product expenses in the current quarter as compared to the prior year period
is due to the closing down of the engineering function at the CXR Telcom
facilities in Fremont, California and concentrating the engineering efforts in
the St. Charles, Illinois engineering facility. Management believes a
substantial engineering and product development effort is necessary to maintain
our competitive position.
OTHER INCOME AND EXPENSE
Interest expense decreased slightly in the second half of 2000 from the
second half of 1999. Other income of $205,000 included a reversal of a warranty
reserve related to the prior year sale of HyComp, Inc. of approximately $116,000
and a gain on sale of fixed assets of approximately $45,000. The warranty
reserve was partially reversed due to the settlement of a warranty issue and
therefore we recorded other income of $116,000. The other income category for
the period ended June 30, 1999 included $331,000 gain on the sale of HyComp,
Inc. our and $727,000 of recorded earnings based on the equity method as result
of earnings of the Company's former ownership of 37% of the common stock of
Digital Transmission Systems, Inc.
10
LIQUIDITY AND CAPITAL RESOURCES
Cash of $759,000 was used by operations in the first six months of 2000
as compared to cash of $328,000 provided by operations in the first six months
of 1999. The decrease in cash used in operations resulted primarily from
substantial payments of accrued expenses and accounts payable. Accounts
receivables collection provided much of the cash to partially offset the cash
used in the reduction in accrued expenses and payables. Cash flows from
investing activities included cash received from the sale of the Company's 37%
interest in Digital Transmission Systems, Inc. ("DTS") offset with the
investment in Belix. Financing activities provided $925,000 of cash flow
primarily from additional debt related to the acquisition of Belix.
On January 7, 2000, we sold all of our interest in the common stock of
DTS to Wi-LAN, Inc., a publicly traded company based in Alberta, Canada. As
consideration, we received $520,000 in cash and 28,340 shares of Wi-LAN common
stock valued at approximately $720,000 at the time of the transaction. We used
the cash to pay down debt. In conjunction with the transaction, our lender,
Congress Financial Corporation ("Congress"), agreed to waive certain defaults of
the loan agreement relating to a $350,000 overdraft we were required to pay down
by September 22, 1999 and eliminated the requirement of a $350,000 target
reserve. The target reserve was a funding requirement to pay down the principal
of the term loan by $350,000 in addition to the regular monthly principal
payments secured by the Wi-LAN stock.
Due to rules of the Toronto Stock Exchange, where Wi-LAN, Inc. stock
trades, we were was prohibited from selling our interest in the Wi-LAN, Inc.
stock for six months after acquisition because the stock was acquired in a
transaction related to the sale or purchase of a company. However, our lender
did increase our borrowing availability by $400,000 on February 29, 2000 by
providing an authorized overdraft. On July 7, 2000, we sold all our shares of
Wi-LAN common stock for net proceeds of $917,000. The sale resulted in a gain of
approximately $197,000 which will be included in our results of operations in
the third quarter of 2000. The proceeds were used to pay down debt owed Congress
eliminating the overadvance and paying down the term loan balance to $55,000.
The financing facility provided by Congress expired on June 23, 2000.
Congress has twice amended its loan agreement with us to extend its credit
facility through August 14, 2000. We expect to have completed the process of
obtaining new financing with the business credit operations of a well-known
national lending institution and anticipates paying off its Congress debt by
August 14. However, there can be no assurance that the new financing will be
obtained.
Our cash situation continues to improve in the domestic operations. In
light of the recent efforts in cost cutting, reorganizing in the Instrumentation
and Test Equipment segment and the improvement in recent orders, management
believes our cash situation has improved substantially since the fourth quarter
of 1999. We expect to further improve our cash position on the effective date of
the new financing discussed above.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against us (see Note 5
to the Consolidated Condensed Financial Statements included elsewhere in this
report).
11
YEAR 2000
To date, we have experienced no material effects related to computer
operations and the arrival of the year 2000 as of the date of this report.
Management does not expect any disruptions due to the year 2000 as management
believes all its current systems are year 2000 compliant.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either us or our various
operating subsidiaries.
EURO CONVERSION
We have operating subsidiaries located in France and the U.K. with
combined net sales from these operations approximating 49% of our total net
sales for the first half of 2000. Net sales from the French subsidiary
participating in the Euro conversion were 32% of our net sales for the first
half of 2000. We continue to review the impact of the Euro conversion on our
operations.
In 1998, our European operations took steps to ensure their capability
of entering into Euro transactions as of January 1, 1999. No material changes to
information technology and other systems were necessary to accommodate these
transactions as such systems previously had the capability to utilize multiple
currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on our European operations, at this time we do not foresee any
material impediments to our ability to compete for orders from customers
requesting pricing using the new exchange rate. Since we have no significant
direct sales between our U. S. operations and Europe, exchange rate risk is
regarded as nominal.
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.
12
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT
FOREIGN CURRENCY THAT MUST BE CONVERTED INTO UNITED STATES DOLLARS FOR INCLUSION
IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT, EXCHANGE RATE
FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF OPERATIONS.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries. Sales
of our products and services to customers located outside of the United States
accounted for approximately 52.8% of our net sales for the year ended December
31, 2000. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2001. However,
because historically the majority of our currency exposure has related to
financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US. IN ORDER TO COMPETE
SUCCESSFULLY, WE MUST KEEP PACE WITH OUR COMPETITORS IN ANTICIPATING AND
RESPONDING TO THE RAPID CHANGES INVOLVING THE ELECTRONIC COMPONENTS AND
TELECOMMUNICATIONS INDUSTRIES.
Our future success will depend upon our ability to enhance our current
products and services and to develop and introduce new products and services
that keep pace with technological developments, respond to the growth in the
telecommunications and electronic components markets in which we compete,
encompass evolving customer requirements, provide a broad range of products and
achieve market acceptance of our products. Many of our existing and potential
competitors have larger technical staffs, more established and larger marketing
and sales organizations and significantly greater financial resources than we
do. Our lack of resources relative to our competitors may cause us to fail to
anticipate or respond adequately to technological developments and customer
requirements or to experience significant delays in developing or introducing
new products and services. These failures or delays could cause us to reduce our
competitiveness, revenues, profit margins or market share.
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.
13
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.
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
14
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
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.
15
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.
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.
16
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
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.
17
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
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.
18
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 June 2000, we issued an aggregate of 55,000 shares of common stock
to three employees upon exercise of warrants at an exercise price of $0.20 per
share.
In June 2000, we issued 1,743,285 shares of common stock to one
investor upon conversion of 34.5 shares of our Series A Preferred Stock.
In June 2000, we issued an aggregate of 217,500 shares of common stock
to five investors, including our Chief Executive Officer and his brother and
son, in connection with the exercise of warrants with an exercise price of $0.25
per share.
The issuances of our securities in the above-referenced transactions
were effected in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended, on the basis that such
transactions did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would provide.
Dividends
---------
To date we have not paid dividends on our common stock. Our line of
credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificates of designations related to our
Series A Preferred Stock and Series B Preferred Stock provide that shares of
those series of preferred stock are not entitled to receive cash dividends. We
currently intend to retain future earnings to fund the development and growth of
our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by the our board of directors.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As of June 30, 2000, we were in default of the tangible net worth
covenant of our domestic credit facility. The balance due under this facility
was $2,577,945 as of June 30, 2000. In August 2000, we replaced our domestic
credit facility with a new domestic credit facility with Wells Fargo Business
Credit, Inc. which expires in August 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Share Purchase Agreement dated April 17, 2000 between XCEL
Power Systems Limited and the stockholders of The Belix
Company Limited*
27.1 Financial Data Schedule*
- --------
* Filed as an exhibit to the initial filing of this Form 10-Q on August 14,
2000 and incorporated by reference.
(b) Reports on Form 8-K
-------------------
A report on Form 8-K was filed on May 5, 2000 to
report under Item 5 - Other Events the Registrant's acquisition of
Belix Company, Ltd.
A report on Form 8-K was filed on June 28, 2000 to
report under Item 5 - Other Events the extension of the
Registrant's credit facility with Congress Financial Corporation.
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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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