U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2001
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-10346
MICROTEL INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 77-0226211
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(Address of Principal Executive Offices)
(909) 987-9220
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address And Former Fiscal Year, if Changed Since Last
Report)
Indicated by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No | |
As of August 10, 2001, there were 20,570,703 shares of the issuer's
common stock, $.0033 par value, outstanding.
================================================================================
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Condensed Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000................................................................. 2
Consolidated Condensed Statements of Operations and Comprehensive Income for the
three and six months ended June 30, 2001 and 2000 (unaudited)......................... 3
Consolidated Condensed Statements of Cash Flows for the six months ended
June 30, 2001 and 2000 (unaudited).................................................... 4
Notes to Consolidated Condensed Financial Statements (unaudited)......................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................................. 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.......................................................................... 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................... 25
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................ 25
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...................................................... 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................. 25
ITEM 5. OTHER INFORMATION.................................................................... 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................................... 26
SIGNATURES .................................................................................. 27
1
ITEM 1. FINANCIAL STATEMENTS.
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31,
2001 2000
--------- ---------
ASSETS (unaudited)
Cash and cash equivalents $ 532 $ 756
Accounts receivable - net 7,327 7,440
Notes receivable 80 130
Inventories 6,931 6,298
Other current assets 604 750
--------- ---------
Total current assets 15,474 15,374
Property, plant and equipment-net 728 809
Goodwill-net 2,622 2,737
Other assets 490 564
--------- ---------
$ 19,314 $ 19,484
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 3,196 $ 3,661
Current portion of long-term debt 658 614
Accounts payable 5,136 5,222
Accrued expenses 3,196 3,082
Net liability of discontinued operations -- 15
--------- ---------
Total current liabilities 12,186 12,594
Long-term debt, less current portion 805 282
Other liabilities 413 542
--------- ---------
Total liabilities 13,404 13,418
Convertible redeemable preferred stock, $10,000
unit value. Authorized 200 shares; issued and
outstanding 25 shares (aggregate liquidation
preference of $250) 264 259
Stockholders' equity:
Convertible Series B Preferred stock, $0.01 par
value. Authorized 10,000,000 shares; 150,000
shares issued and outstanding (aggregate
liquidation preference of $960) 938 938
Common stock, $.0033 par value. Authorized
50,000,000 shares; 20,570,000 shares issued
and outstanding 68 68
Additional paid-in capital 24,317 24,307
Accumulated deficit (18,620) (18,775)
Accumulated other comprehensive loss (1,057) (731)
--------- ---------
Total stockholders' equity 5,646 5,807
--------- ---------
$ 19,314 $ 19,484
========= =========
See accompanying notes to consolidated condensed financial statements.
2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net sales $ 7,083 6,828 $ 14,548 $ 12,688
Cost of sales 3,732 4,032 8,082 7,566
--------- --------- --------- ---------
Gross profit 3,351 2,796 6,466 5,122
Operating expenses:
Selling, general and administrative 2,905 2,248 5,486 4,395
Engineering and product development 303 253 662 496
--------- --------- --------- ---------
Income (loss) from operations 143 295 318 231
Other income (expense):
Interest expense (105) (98) (198) (195)
Other income 22 108 50 205
--------- --------- --------- ---------
Income from continuing operations
before income taxes 60 305 170 241
Income tax expense 6 4 9 11
--------- --------- --------- ---------
Income from continuing operations 54 301 161 230
--------- --------- --------- ---------
Discontinued operations:
Loss from operations of discontinued segment -- (95) -- (151)
--------- --------- --------- ---------
Net income 54 206 161 79
--------- --------- --------- ---------
Other comprehensive loss:
Changes in unrealized gain in marketable
securities -- (383) -- 78
Foreign currency translation adjustment (104) (53) (326) (218)
--------- --------- --------- ---------
Total comprehensive loss $ (50) $ (230) $ (165) $ (61)
========= ========= ========= =========
Earnings (loss) per share:
Continuing operations:
Basic $ 0.00 $ 0.02 $ 0.01 $ 0.01
========= ========= ========= =========
Diluted $ 0.00 $ 0.02 $ 0.01 $ 0.01
========= ========= ========= =========
Discontinued operations:
Basic $ -- $ (0.01) $ -- $ (0.01)
========= ========= ========= =========
Diluted $ -- $ (0.01) $ -- $ (0.01)
========= ========= ========= =========
Net income:
Basic $ 0.00 $ 0.01 $ 0.01 $ 0.00
========= ========= ========= =========
Diluted $ 0.00 $ 0.01 $ 0.01 $ 0.00
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
-------------------
2001 2000
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 161 $ 79
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization 168 206
Amortization of intangibles 195 130
Stock and warrants issued as compensation 10 110
Gain on sale of fixed assets -- (43)
Other noncash items -- 221
Net change in operating assets of discontinued operations
Changes in operating assets and liabilities:
Accounts receivable 121 987
Inventories (591) (19)
Other assets 219 (185)
Accounts payable and accrued expenses (118) (2,245)
-------- --------
Cash provided by (used in) operating activities 165 (759)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable 50 --
Net purchases of property, plant and equipment (123) (9)
Cash received for sale of DTS stock -- 520
Proceeds from sale of fixed assets -- 43
Investment in Belix Ltd. companies -- (592)
-------- --------
Cash used in investing activities (73) (38)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable and long-term debt 102 852
Proceeds from exercise of employee stock options -- 73
-------- --------
Cash provided by financing activities 102 925
-------- --------
Effect Of Exchange Rate Changes (418) (218)
-------- --------
Net Decrease In Cash and Cash Equivalents (224) (90)
-------- --------
Cash and Cash Equivalents At Beginning Of Period 756 481
-------- --------
Cash and Cash Equivalents At End Of Period $ 532 $ 391
======== ========
Cash paid for:
Income taxes 34 11
======== ========
Interest 186 219
======== ========
See accompanying notes to consolidated condensed financial statements.
4
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the "Company") operates through three
wholly-owned subsidiaries: CXR Telcom Corporation, CXR, S.A. and XET
Corporation, formerly XIT Corporation ("XET"). CXR Telcom Corporation and CXR,
S.A. (collectively "CXR") design, manufacture and market electronic
telecommunication test equipment and transmission and network access products.
XET and its subsidiaries design, manufacture and market digital switches and
power supplies. The Company conducts its operations out of various facilities in
the U.S., France, England and Japan and organizes itself in two product line
segments: telecommunications and electronic components.
In October 2000, the Company decided to discontinue its circuits
segment operations. At that time, the circuits segment operations consisted of
XCEL Etch Tek, a wholly-owned subsidiary, and XCEL Circuits Division ("XCD"), a
division of XET. XCEL Etch Tek was offered for sale and sold in November 2000.
XCD, predominantly a captive supplier of printed circuit boards to the
electronic components segment, has been retained and is now included in the
electronic components segment. Accordingly, all prior financial information
related to the circuits segment operations has 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 June 30, 2001 and December 31, 2000 and the results of operations
and cash flows for the related interim periods ended June 30, 2001 and 2000.
However, these results are not necessarily indicative of results for any other
interim period or for the year. It is suggested that the accompanying
consolidated condensed financial statements be read in conjunction with the
Company's Consolidated Financial Statements included in Amendment No. 2 to its
2000 Annual Report on Form 10-K.
5
(2) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands, except per share amounts)
NUMERATOR:
Net income $ 54 $ 206 $ 161 $ 79
Less: accretion of the excess of the redemption
value over the carrying value of redeemable
preferred stock 3 23 6 46
-------- -------- -------- --------
Income attributable to common stockholders $ 51 $ 183 $ 155 $ 33
======== ======== ======== ========
DENOMINATOR:
Weighted average number of common shares outstanding
during the period 20,570 18,712 20,570 18,443
Incremental shares from assumed conversions of
warrants, options and preferred stock 3,309 2,076 3,277 2,250
-------- -------- -------- --------
Adjusted weighted average shares 23,879 20,788 23,847 20,693
======== ======== ======== ========
Basic and diluted earnings per share $ 0.00 $ 0.01 $ 0.01 $ 0.00
======== ======== ======== ========
(3) INVENTORIES
Inventories consist of the following.
June 30, 2001 December 31, 2000
---------- ----------
Raw materials $3,130,000 $2,777,000
Work-in-process 2,457,000 1,914,000
Finished goods 1,344,000 1,607,000
---------- ----------
$6,931,000 $6,298,000
========== ==========
(4) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries from time to time become involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
may not be predictable because of considerable uncertainties that may exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a material
adverse affect on the Company's consolidated financial position, results of
operations or cash flows.
6
(5) REPORTABLE SEGMENTS
The Company has two reportable segments: telecommunications and
electronic components. The telecommunications segment operates principally in
the U.S. and European markets and designs, manufactures and distributes
telecommunications test instruments and voice and data transmission and
networking equipment. The electronic components segment operates in the U.S.,
European and Asian markets and designs, manufactures and markets primarily
digital switches and power supplies.
The Company evaluates performance based upon profit or loss from
operations before income taxes exclusive of nonrecurring gains and losses. The
Company accounts for intersegment sales at prices negotiated between the
individual segments.
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 Amendment No. 2 to its
2000 Annual Report on Form 10-K. Selected financial data for each of the
Company's operating segments is shown below:
Six months Six months
ended June 30, ended June 30,
2001 2000
------------ ------------
Sales to external customers:
Telecommunications $ 7,968,000 $ 7,193,000
Electronic Components 6,580,000 5,495,000
------------ ------------
$ 14,548,000 $ 12,688,000
============ ============
Intersegment sales:
Telecommunications $ -- $ --
Electronic Components -- --
------------ ------------
$ -- $ --
============ ============
Segment pretax profits:
Telecommunications $ 107,000 $ 46,000
Electronic Components 1,613,000 1,095,000
------------ -----------
$ 1,720,000 $ 1,141,000
============ ===========
June 30, December 31,
2001 2000
------------ ------------
Segment assets:
Telecommunications $ 8,725,000 $ 9,901,000
Electronic Components 9,811,000 8,876,000
------------ ------------
$ 18,536,000 $ 18,777,000
============ ============
7
The following is a reconciliation of the reportable segment income and
(loss) from continuing operations and assets to the Company's consolidated
totals:
Six months ended Six months ended
June 30, 2001 June 30, 2000
------------ ------------
Pretax income
Total income for reportable segments $ 1,720,000 $ 1,141,000
Unallocated amounts:
Unallocated general corporate expenses (1,550,000) (900,000)
------------ ------------
Consolidated income before income taxes $ 170,000 $ 241,000
============ ============
June 30, December 31,
2001 2000
------------ ------------
Assets
Total assets for reportable segments $18,536,000 $18,777,000
Other assets 778,000 707,000
------------ ------------
Total consolidated assets $19,314,000 $19,484,000
============ ============
(6) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 to have
a material impact on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets," which revises
the accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be
amortized and will be tested for impairment annually. SFAS 142 is effective
for fiscal years beginning after December 15, 2001, with earlier adoption
permitted. The Company does not expect SFAS 142 to have a material impact on
the Company's financial position or results of operations.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with our consolidated condensed financial statements and notes to financial
statements included elsewhere in this report. This report and our consolidated
condensed financial statements and notes to financial statements contain
forward-looking statements, which generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance and our current beliefs regarding revenues we might
earn if we are successful in implementing our business strategies. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:
o the projected growth in the telecommunications and electronic
components markets;
o our business strategy for expanding our presence in these markets;
o anticipated trends in our financial condition and results of
operations; and
o our ability to distinguish ourselves from our current and future
competitors.
We do not undertake to update, revise or correct any forward-looking
statements.
The information contained in this report is not a complete description
of our business or the risks associated with an investment in our common stock.
Before deciding to buy or maintain a position in our common stock, you should
carefully review and consider the various disclosures we made in this report,
and in our other materials filed with the Securities and Exchange Commission
that discuss our business in greater detail and that disclose various risks,
uncertainties and other factors that may affect our business, results of
operations or financial condition.
Any of the factors described above or in the "Risk Factors" section
below could cause our financial results, including our net income (loss) or
growth in net income (loss) to differ materially from prior results, which in
turn could, among other things, cause the price of our common stock to fluctuate
substantially.
OVERVIEW
We previously organized our operations in three business segments:
o Instrumentation and Test Equipment;
o Components and Subsystem Assemblies; and
o Circuits.
In an effort to focus our attention and working capital on our
telecommunications test instruments and our transmission and network access
products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc.
in April 1998 and sold substantially all of the assets of HyComp, Inc., a
manufacturer of hybrid circuits, in April 1999.
In October 2000, we decided to discontinue our circuits segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of our wholly-owned subsidiary, XET
Corporation (formerly XIT Corporation). We intend to retain our small Monrovia,
California circuit board manufacturing facility as a captive supplier of circuit
boards to XET Corporation's Digitran Division.
9
Effective August 1, 2000, we acquired the assets and business
operations of T-Com, LLC, or T-Com, a telecommunications test instruments
manufacturer located in Sunnyvale, California. T-Com produced central office
equipment, which is equipment that is typically employed in switching and
network operating centers.
Through our three direct wholly-owned operating subsidiaries, XET
Corporation, CXR Telcom Corporation and CXR, S.A., and through the divisions and
subsidiaries of our subsidiaries, we presently design, manufacture, assemble,
and market products and services in the following two material business
segments:
o Telecommunications
-- Telecommunications Test Instruments (analog and digital test
instruments used in the installation, maintenance, management
and optimization of public and private communication networks)
-- Transmission and Network Access Products (range of products
for accessing public and private networks for the transmission
of data, voice and video)
o Electronic Components (digital switches and electronic power
supplies)
Our sales are primarily in North America, Europe and Asia. In the first
two quarters of 2001, approximately 55% of our sales were to customers in the
telecommunications industry, and the remainder of our sales were to industrial,
aerospace and military contractor customers.
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
10
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED
JUNE 30, 2000
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:
THREE MONTHS ENDED
JUNE 30,
--------------------
2001 2000
---- ----
Net sales............................................. 100.0% 100.0%
Cost of sales......................................... 52.7 59.1
------ ------
Gross profit.......................................... 47.3 40.9
Selling, general and administrative expenses.......... 41.0 32.9
Engineering and product development expenses.......... 4.3 3.7
------ ------
Operating income ..................................... 2.0 4.3
Interest expense...................................... (1.5) (1.4)
Other expense......................................... 0.3 1.6
------ ------
Income from continuing operations before income taxes. 0.8 4.5
Income taxes.......................................... 0.0 0.1
------ ------
Income from continuing operations..................... 0.8 4.4
Loss from discontinued operations..................... 0.0 (1.4)
------ -------
Net income ........................................... 0.8% 3.0%
====== ======
CONTINUING OPERATIONS
NET SALES. Net sales for the three months ended June 30, 2001 increased
by $255,000 (3.7%) to $7,083,000, as compared to $6,828,000 for the three months
ended June 30, 2000.
Net sales of our telecommunications products for the three months ended
June 30, 2001 increased by $556,000 (15.3%) to $4,196,000, as compared to
$3,640,000 for the comparable period in 2000. Net sales of our U.S.-based
telecom operation of CXR Telcom for the three months ended June 30, 2001
increased by $886,000 (63.7%) to $2,277,000, as compared to $1,391,000 for the
comparable period in 2000. This increase was partially due to the addition of
$384,000 of net sales of T-Com, LLC products and an increase in sales of our CXR
HALCYON test equipment. CXR Telcom sales excluding sales of T-Com, LLC products
increased by 36.0% in the current quarter as compared to the quarter ended June
30, 2000. Net sales of our French subsidiary, CXR, S.A., for the three months
ended June 30, 2001 decreased by $330,000 (14.7%) to $1,918,000, as compared to
$2,248,000 for the comparable prior year period. This decrease would have been
5% if not for the decline in the value of the French Franc in relation to the
value of the U.S. dollar in the quarter ended June 30, 2001 as compared to their
relative values for the quarter ended June 30, 2000. The majority of the decline
in sales of CXR, S.A. is due to the closure of the Networking Division, which
had sales of $327,000 in the three months ended June 30, 2000. Transmission
sales in Europe increased $341,000 in the current quarter as compared to the
quarter ended June 30, 2000, which increase was offset with a $343,000 decline
in the resale of original equipment manufactured instruments in Europe.
11
Net sales of electronic components for the three months ended June 30,
2001 decreased by $301,000 (9.4%) to $2,887,000, as compared to $3,188,000 for
the comparable period in 2000. The decrease was primarily due to a decline in
sales of power supplies of our U.K. subsidiary, XCEL Corporation, Ltd., or XCL,
as measured in U.S. dollars. The volume of sales was only down 2.9% as measured
in XCL's functional currency, the British pound sterling, but because the
British pound sterling has declined against the value of the U.S. dollar, the
sales volume of XCL in the U.K. declined by $218,000 (14.6%) to $1,274,000 for
the quarter ended June 30, 2001, as compared to $1,492,000 in the quarter ended
June 30, 2000.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 47.3% for the three months ended June 30, 2001, as compared to 40.9% for the
comparable period in 2000. In dollar terms, total gross profit increased by
$555,000 (19.8%) to $3,351,000 for the three months ended June 30, 2001, as
compared to $2,796,000 for the comparable period in 2000.
Gross profit for our telecommunications segment increased in dollar
terms by $598,000 (40.2%) to $2,088,000 for the three months ended June 30,
2001, as compared to $1,490,000 for the comparable period in 2000, and increased
as a percentage of net sales from 40.9% in 2000 to 49.8% in 2001. The increase
in gross profit as a percentage of net sales was due primarily to the increased
sales volume of the CXR HALCYON test instruments, which reduced per unit costs.
Gross profit for our electronic components segment decreased in dollar
terms by $45,000 (3.4%) to $1,261,000 for the three months ended June 30, 2001,
as compared to $1,306,000 for the comparable period in 2000, and increased as a
percentage of related net sales from 41.0% in 2000 to 43.7% in 2001. This
percentage increase was primarily the result of improved gross margins at XCL in
the U.K. as a result of an increase in sales of custom military power supplies,
or PSUs, in relation to the PSUs sold in the commercial market. For the quarter
ended June 30, 2001, custom PSU sales increased to 69.06% of the total PSUs
sold, as compared to 39.6% in the three month period ended June 30, 2000. The
custom military PSUs carry higher margins than the commercial PSUs. Also, the
costs of integrating the acquisition of the Belix Ltd. companies reduced the
gross margin in the prior year period. As a result of these matters, XCL's gross
margin improved from 15.4% of net sales in the second quarter of 2000 to 32.5%
of net sales in the current three-month period. The improvement in XCL's gross
margins was partially offset with a decline in gross margins of digital switch
products manufactured in Rancho Cucamonga, California at our XET Corporation
subsidiary. These gross margins fell from 66.5% of net sales for the prior year
period to 53.7% of net sales for the three-month period ended June 30, 2001.
This reduction was primarily due to the lower volume caused by the completion of
the BAE Systems, Canada contract during the first quarter of 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $657,000 (29.2%) to $2,905,000 for the
three-month period ended June 30, 2001, as compared to $2,248,000 for the
comparable period in 2000. This increase was primarily due to increases of
$307,000 in legal and accounting fees, $161,000 of compensation expenses and
$171,000 of administrative expenses at CXR Telcom due to the initial
consolidation of the business acquired with the acquisition of T-Com, LLC. These
increases were partially offset with a reduction in administrative costs of
$208,000 at XPS due to the completion of the integration of the Belix Ltd.
companies that were acquired in April 2000. The legal and accounting fees in the
three-month period ended June 30, 2001 include $312,000 incurred in connection
with non-routine Securities and Exchange Commission filings.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses increased by
$50,000 (19.8%) to $303,000 for the three months ended June 30, 2001, as
compared to $253,000 for the comparable prior year period. The increase
primarily was due to the addition of engineering staff and related costs at CXR
Telcom.
12
OTHER INCOME AND EXPENSE. Interest expense increased slightly to
$105,000 for the three months ended June 30, 2001, from $98,000 in the
comparable period in 2000. Other income of $22,000 in the second quarter of 2001
declined from $108,000 in the second quarter of 2000 primarily due to a $137,000
reduction in a warranty reserve in the second quarter of 2000.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $95,000 for the three months ended June 30, 2000. Net sales, gross profit and
selling, general and administrative expenses for our circuits business for the
three months ended June 30, 2000 were $683,000, $17,000 and $57,000,
respectively.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:
SIX MONTHS ENDED
JUNE 30,
--------------------
2001 2000
---- ----
Net sales............................................. 100.0% 100.0%
Cost of sales......................................... 55.6 59.6
------ ------
Gross profit.......................................... 44.4 40.4
Selling, general and administrative expenses.......... 37.7 34.6
Engineering and product development expenses.......... 4.5 4.0
------ ------
Operating income...................................... 2.2 1.8
Interest expense...................................... (1.4) (1.5)
Other income......................................... 0.4 1.6
------ ------
Income from continuing operations before income taxes. 1.2 1.9
Income taxes.......................................... 0.1 0.1
------ ------
Income from continuing operations..................... 1.1 1.8
Loss from discontinued operations..................... 0.0 (1.2)
------ ------
Net income............................................ 1.1% 0.6%
====== =====
CONTINUING OPERATIONS
NET SALES. Net sales for the six months ended June 30, 2001 increased
by $1,860,000 (14.7%) to $14,548,000, as compared to $12,688,000 for the six
months ended June 30, 2000.
Net sales of our telecommunications products for the six months ended
June 30, 2001 increased by $775,000 (10.8%) to $7,968,000, as compared to
$7,193,000 for the comparable period in 2000. Net sales of our U.S.-based
telecom operation of CXR Telcom for the six months ended June 30, 2001 increased
by $1,033,000 (38.1%) to $3,741,000, as compared to $2,708,000 for the
comparable period in 2000. This increase was mainly due to the addition of
$815,000 of net sales of T-Com products that were acquired effective August 2000
with the acquisition of T-Com, LLC. Excluding sales of T-Com, LLC products, CXR
Telcom sales increased by 8.0% in the first half of 2001 as compared to the
comparable prior year period. Net sales of our transmission and original
equipment manufactured test instruments by our French subsidiary, CXR, S.A., for
the six months ended June 30, 2001 decreased by $258,000 (5.8%) to $4,227,000,
13
as compared to $4,485,000 for the comparable prior year period. This decrease
would have been 4.3% if not for the decline in the value of the French Franc in
relation to the value of the U.S. dollar in the six months ended June 30, 2001
as compared to their relative values for the six months ended June 30, 2000. The
major reason for the decrease in sales of CXR, S.A. was the closure of the
Networking Division, which had sales of $699,000 in the first six months of 2000
and negligible sales in the first six months of 2001. This decrease more than
offset sales increases of transmission products and telecommunications test
instruments, which increased by $455,000 (12.1%) in the first six months of 2001
to $4,202,000, as compared to $3,747,000 in the first six months of 2000.
Net sales of our electronic components for the six months ended June
30, 2001 increased by $1,085,000 (19.7%) to $6,580,000, as compared to
$5,495,000 for the comparable period in 2000, primarily due to a $655,000
increase in sales of XCL. This increase in net sales was primarily due to an
increase in deliveries of outstanding contracts. Also contributing to the
increase in sales of our electronic components segment was XET Corporation's
Digitran Division in Rancho Cucamonga, California, which increased its sales in
the six months ended June 30, 2001 by $411,000 (16.0%) to $2,985,000, as
compared to $2,574,000 for the comparable prior year period. This increase was
mainly due to shipments of digital switches under its contract with BAE Systems,
Canada. Although shipments under this contract ended during the first quarter of
2001, we anticipate that higher revenues from our power conversion products will
offset the reduction in sales caused by the completion of our contract with BAE
Systems, Canada.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 44.4% for the six months ended June 30, 2001, as compared to 40.4% for the
comparable period in 2000. In dollar terms, total gross profit increased by
$1,344,000 (26.2%) to $6,466,000 for the six months ended June 30, 2001, as
compared to $5,122,000 for the comparable period in 2000.
Gross profit for our telecommunications segment increased in dollar
terms by $636,000 (22.3%) to $3,477,000 for the six months ended June 30, 2001,
as compared to $2,841,000 for the comparable period in 2000, and increased as a
percentage of net sales from 39.5% in 2000 to 43.6% in 2001. The increase in
gross profit as a percentage of net sales was due primarily to the increased
volume and efficiencies at CXR Telcom in Fremont, California and sales of higher
margin products at CXR, S.A. in France.
Gross profit for our electronic components segment increased in dollar
terms by $708,000 (31.0%) to $2,989,000 for the six months ended June 30, 2001,
as compared to $2,281,000 for the comparable period in 2000, and increased as a
percentage of related net sales from 41.5% in 2000 to 45.4% in 2001. This
increase was primarily the result of improved profit margins in connection with
higher production volumes and a higher margin product mix at XCL in the U.K.,
which contributed $461,000 of the increase in gross profit. XIT's Digitran
Division contributed $260,000 to the increase in gross profit primarily due to
sales of higher margin products sold under the BAE Systems, Canada contract.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1,091,000 (24.8%) to $5,486,000 for the
six-month period ended June 30, 2001, as compared to $4,395,000 for the
comparable period in 2000. The increase was due to increases of $460,000 in
legal and accounting fees, $325,000 of compensation expenses and $330,000 of
administrative expenses at CXR Telcom due to the consolidation of the business
acquired with the acquisition of T-Com, LLC. This increase was partially offset
with a reduction in administrative costs of $165,000 at XCL due to the
completion of the integration of the Belix Ltd. companies that were acquired in
April 2000. The legal and accounting fees in the first half of 2001 include
$452,000 incurred in connection with non-routine Securities and Exchange
Commission filings.
14
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses increased by
$166,000 (33.5%) to $662,000 for the six months ended June 30, 2001, as compared
to $496,000 for the comparable prior year period, reflecting new product
development activities. This increase primarily was due to the addition of
engineering staff.
OTHER INCOME AND EXPENSE. Interest expense increased slightly to
$198,000 for the six months ended June 30, 2001 from $195,000 in the comparable
period in 2000. Other income of $50,000 in the first half of 2001 declined from
$205,000 in the first half of 2000 primarily due to a $137,000 reduction in a
warranty reserve in the second quarter of 2000.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $151,000 for the six months ended June 30, 2000. Net sales, gross profit and
selling, general and administrative expenses for our circuits business for the
six months ended June 30, 2000 were $1,310,000, $64,000 and $215,000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended June 30, 2001, we funded our operations
primarily through revenue generated from our operations and through our line of
credit with Wells Fargo Business Credit, Inc. During the latter part of 1999, we
embarked on a cost reduction program in an effort to improve our cash flow
position and profitability. This program included a significant reduction in
personnel, the downsizing and relocation of our corporate headquarters and the
sale of investments we had in other companies. As described below, these cost
measures, together with our line of credit, have had a positive impact on
MicroTel.
As of December 31, 2000, we had working capital of $2,780,000 and an
accumulated deficit of $18,775,000. As of that date, we had $756,000 in cash and
cash equivalents and $7,440,000 of accounts receivable. As of June 30, 2001, we
had working capital of $3,288,000, an accumulated deficit of $18,620,000 and an
accumulated other comprehensive loss of $1,057,000. As of that date, we had
$532,000 in cash and cash equivalents and $7,327,000 of accounts receivable.
Cash provided by our operating activities totaled $165,000 for the six
months ended June 30, 2001. Cash used by operations for the six months ended
June 30, 2000 was $759,000. This increase in cash provided by operations during
the six months ended June 30, 2001 resulted primarily from increased
profitability in operations and a reduction in the pay down of accounts payable,
partially offset by the reduction of cash collected from accounts receivable and
the purchase of additional inventories.
Cash used in our investing activities totaled $73,000 for the six
months ended June 30, 2001 as compared to cash used in investing activities of
$38,000 for the six months ended June 30, 2000. Included in the 2000 results is
$520,000 from the sale of shares of common stock we held in Digital Transmission
Systems, Inc. and a usage of $592,000 for the purchase of the Belix Ltd.
companies in the U.K.
15
Cash provided by financing activities totaled $102,000 for the six
months ended June 30, 2001, as compared to cash provided by financing activities
of $925,000 for the six months ended June 30, 2000, primarily due to the
increase in notes payable and long-term debt that was mainly incurred due to the
acquisition of the Belix Ltd. companies in April 2000.
On June 23, 2000, our credit facility with our previous lender,
Congress Financial Corporation, or Congress Financial, expired while we were out
of compliance with the adjusted net worth covenant of this facility. Congress
Financial extended this facility through August 14, 2000. On August 16, 2000,
our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting
as guarantor, obtained a credit facility from Wells Fargo Business Credit, Inc.
This facility provides for a revolving loan of up to $3,000,000 secured by our
inventory and accounts receivable and a term loan in the amount of $687,000
secured by our machinery and equipment. As a condition of extending this credit
facility to our subsidiaries, Wells Fargo Business Credit, Inc. required our
President and Chief Executive Officer, Carmine Oliva, to personally guaranty a
portion of our indebtedness under the facility. On January 26, 2001, Mr. Oliva
was released from this guaranty. The initial annual interest rate on both
portions of the credit facility was the prime rate plus 2%. The facility
contains a performance-based interest reduction feature. Based upon our 2000
financial performance, we obtained a reduction in the interest rate to the prime
rate plus 1% effective April 1, 2001. The balance outstanding under this credit
facility was $1,753,000 on June 30, 2001. There was $361,000 of additional
borrowings available as of June 30, 2001. The credit facility expires on August
16, 2003. Our foreign subsidiaries have obtained credit facilities with Lloyds
Bank in England, Banc National du Paris, Societe General and Banque Hervet in
France and Johan Tokyo Credit Bank in Japan. The balances outstanding under our
U.K. and France credit facilities were $1,236,000 and $508,000, respectively, on
June 30, 2001. During the quarter ended June 30, 3001, our U.K. subsidiary
converted $705,000 of its credit facility to a five-year term loan with a
variable interest rate of the bank's base rate plus 2.5% and monthly payments of
principal plus interest.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including our credit facility with Wells Fargo Business Credit, Inc., will be
adequate to meet our anticipated working capital and capital expenditure
requirements for at least the next twelve months. If, however, our capital
requirements or cash flow vary materially from our current projections or if
unforeseen circumstances occur, we may require additional financing. Failure to
raise such necessary capital could restrict our growth, limit our development of
new products or hinder our ability to compete.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against us (see Note 4
to the Consolidated Condensed Financial Statements included elsewhere in this
report).
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either us or our operating
subsidiaries.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 141, or SFAS 141, "Business
Combinations," which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. We do not expect SFAS 141 to have a material
impact on our financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, or SFAS 142, "Goodwill and Intangible Assets," which revises
the accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be
amortized and will be tested for impairment annually. SFAS 142 is effective
for fiscal years beginning after December 15, 2001, with earlier adoption
permitted. We do not expect SFAS 142 to have a material impact on our
financial position or results of operations.
16
EURO CONVERSION
Our operating subsidiaries located in France and the United Kingdom
have combined net sales from operations approximating 50% of our total net sales
for the six months ended June 30, 2001. Net sales from the French subsidiary
participating in the Euro conversion were 29% of our net sales for the six
months ended June 30, 2001. We continue to review the impact of the Euro
conversion on our operations.
In 1998, our European operations took steps to ensure their capability
of entering into Euro transactions as of January 1, 1999. No material changes to
information technology and other systems were necessary to accommodate these
transactions because such systems already were capable of using multiple
currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on our European operations, at this time we do not foresee any
material impediments to our ability to compete for orders from customers
requesting pricing using the new exchange rate. Since we have no significant
direct sales between our United States and European operations, we regard
exchange rate as nominal.
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider, among other things, the following factors carefully before
deciding to purchase or hold any shares of our common stock.
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT THAT MAY CONTINUE IN THE
FUTURE AND THAT MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.
We incurred significant net operating losses in each of the years ended
December 31, 1999 and 1998 and incurred a net operating profit in the year ended
December 31, 2000 and the six months ended June 30, 2001. We realized a net loss
of approximately $4.6 million for the twelve months ended December 31, 1999, as
compared to incurring a net loss of approximately $1.2 million for the twelve
months ended December 31, 1998. For the twelve months ended December 31, 2000,
we recorded net income of $1.0 million. For the six months ended June 30, 2001,
we recorded net income of $161,000. Our accumulated deficit and accumulated
other comprehensive loss through June 30, 2001 were approximately $18,620,000
and $1,057,000, respectively, and as of that date we had a total stockholders'
equity of approximately $5,646,000. Although we recently reported profitable
operations, there is no assurance that we will continue to maintain profitable
operations in the future. If we are unable to do so, there may be a material
adverse effect on our cash flows, which could cause us to violate covenants
under our credit facility and could impede our ability to raise capital through
debt or equity financing to the extent we may need it for our continued
operations or for planned expansion. Consequently, future losses may have a
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows.
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT
FOREIGN CURRENCY THAT MUST BE CONVERTED INTO UNITED STATES DOLLARS FOR INCLUSION
IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT, EXCHANGE RATE
FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF OPERATIONS.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries. Sales
of our products and services to customers located outside of the United States
accounted for approximately 53% of our net sales for the year ended December 31,
2000 and approximately 50% of our net sales for the six months ended June 30,
2001. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2001. However,
because historically the majority of our currency exposure has related to
financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
17
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 and the six months ended June
30, 2001, the sale of telecommunications equipment and related services
accounted for approximately 56% and 55%, respectively, of our total sales, and
the sale of electronic components accounted for approximately 44% and 45%,
respectively, of our total sales. In many cases we have long-term contracts with
our telecommunications and electronic components customers that cover the
general terms and conditions of our relationships with them but that do not
include long-term purchase orders or commitments. Rather, our customers issue
purchase orders requesting the quantities of telecommunications equipment they
desire to purchase from us, and if we are able and willing to fill those orders,
then we fill them under the terms of the contracts. Accordingly, we cannot rely
on long-term purchase orders or commitments to protect us from the negative
financial effects of a reduced demand for our products that could result from a
general economic downturn, from changes in the telecommunications and electronic
components industries, including the entry of new competitors into the market,
from the introduction by others of new or improved technology, from an
unanticipated shift in the needs of our customers, or from other causes.
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR PRODUCTS
FROM OUTSIDE SUPPLIERS.
The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications products have been in short supply and are frequently on
allocation by semiconductor manufacturers. We have, from time to time,
experienced difficulty in obtaining some components. We do not have guaranteed
supply arrangements with any of our suppliers, and there can be no assurance
that our suppliers will continue to meet our requirements. If our existing
suppliers are unable to meet our requirements, we could be required to alter
product designs to use alternative components or, if alterations are not
feasible, we could be required to eliminate products from our product line.
18
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 XET Corporation and has developed
personal contacts and other skills that we rely upon in connection with our
financing, acquisition and general business strategies. Mr. Jefferies is a
long-time employee of MicroTel who we have relied upon in connection with our
United Kingdom acquisitions and who fulfills significant operational
responsibilities in connection with our foreign operations. Consequently, the
loss of Mr. Oliva, Mr. Jefferies or one or more other key members of management
could have a material adverse effect on us. Although we have entered into
employment agreements with several key employees, we have not entered into any
employment agreement with any of our executive officers other than with Mr.
Oliva, Mr. Jefferies and our Senior Vice President and Chief Financial Officer,
Randolph Foote. 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.
19
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.
BECAUSE WE MAY HAVE INADVERTENTLY FAILED TO COMPLY WITH THE FEDERAL TENDER OFFER
RULES, WE COULD FACE SIGNIFICANT LIABILITIES WHICH, IN TURN, COULD ADVERSELY
IMPACT OUR FINANCIAL CONDITION.
During 1998 and 1999 we modified the terms of some of our outstanding
warrants and the terms of our Series A Preferred Stock. These transactions may
have been subject to the federal tender offer rules which would have required us
to make filings with the Securities and Exchange Commission and to conduct our
activities in a manner prescribed by the tender offer rules. We did not make any
of these filings nor did we comply with the other requirements of the tender
offer rules. Although we believe that our activities surrounding the
modifications to our warrants and Series A Preferred Stock are not subject to
the federal tender offer rules, the Securities and Exchange Commission, as well
as those security holders who participated in the modification transactions, may
20
disagree with us. If that were to happen, we may be subject to fines by the
Securities and Exchange Commission and may be required by the Securities and
Exchange Commission and/or the security holders to rescind the transactions. The
dollar amount of any fines and the costs associated with rescission, including
the related legal and accounting costs, are difficult for us to quantify, yet
they could be significant. If they are significant, our financial condition
would be adversely impacted.
IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE COULD FACE SIGNIFICANT
LIABILITIES.
We are subject to a variety of environmental regulations relating to
the use, storage, discharge and disposal of hazardous chemicals used in our
circuit board manufacturing processes. Any failure to comply with present and
future regulations could subject us to future liabilities or the suspension of
production. These regulations could also require us to acquire costly equipment
or to incur other significant expenses to comply with environmental regulations.
We may also from time to time be subject to lawsuits with respect to
environmental matters. The extent of our liability under any suit is not
determinable and may have a material adverse effect on us.
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 OPERATION 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 OF OUR COMMON STOCK.
The market prices of securities of technology-based companies,
including electronics hardware companies, currently are highly volatile. The
market price of our common stock has fluctuated significantly in the past. The
market price of our common stock may continue to exhibit significant
fluctuations in response to the following factors, many of which are beyond our
control:
o variations in our quarterly operating results;
o changes in market valuations of similar companies and stock market
price and volume fluctuations generally;
o economic conditions specific to the electronics hardware industry;
21
o announcements by us or our competitors of new or enhanced
products, technologies or services or significant contracts,
acquisitions, strategic relationships, joint ventures or capital
commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other securities.
The price at which you purchase shares of common stock 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
ACTIVITIES 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 TO US ON ACCEPTABLE TERMS OR AT ALL. IF WE OBTAIN FINANCING THROUGH
THE ISSUANCE OF EQUITY SECURITIES, FURTHER DILUTION TO EXISTING STOCKHOLDERS MAY
RESULT. WE MAY BE REQUIRED TO OBTAIN FINANCING THROUGH ARRANGEMENTS THAT MAY
REQUIRE US TO RELINQUISH RIGHTS OR CONTROL TO SOME OF OUR PROPRIETARY
TECHNOLOGIES.
Our future capital requirements will depend upon many factors,
including the magnitude of our sales and marketing efforts, the development of
new products and services, possible future strategic acquisitions, the progress
of our research and development efforts and the status of competitive products
and services. We believe that current and future available capital resources
will be adequate to fund our operations for the foreseeable future. However, to
the extent we are in need of any additional financing, there can be no assurance
that any additional financing will be available to us on acceptable terms, or at
all. If we raise additional funds by issuing equity securities, further dilution
to the existing stockholders may result. If adequate funds are not available, we
may be required to delay, scale back or eliminate portions of our operations and
product development and marketing efforts or to obtain funds through
22
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 August 10, 2001, we had outstanding 20,570,703 shares of common
stock, all of which shares were either unrestricted, registered for resale under
the Securities Act of 1933, or eligible for resale without registration under
Rule 144 of the Securities Act of 1933. As of August 10, 2001, we also had
outstanding options, warrants and preferred stock that were exercisable for or
convertible into 6,643,930 shares of common stock. Of these, 1,673,924 shares
of common stock underlying options, 1,712,305 shares of common stock underlying
warrants and 2,763,250 shares of common stock underlying preferred stock were
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.
23
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.
A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or lender's base
rate, which exposes us to risk of earnings loss due to changes in such interest
rates.
The following table provides information about our debt obligations
that are sensitive to changes in interest rates. All dollars are in thousands.
The symbol "P" represents the prime rate. The symbol "B" represents lender's
base rate. Balances are as of December 31, 2000.
FAIR
VALUE
LIABILITIES 2001 2002 2003 2004 2005 THEREAFTER TOTAL 12/31/00
----------- ---- ---- ---- ---- ---- ---------- ----- --------
Line of Credit $1,798 $1,798 $1,798
(domestic)
Average Interest P+ 1%
Rate
Line of Credit $1,377 $1,377 $1,377
(Foreign)
Average Interest B+ 2.5%
Rate
Term Loan $137 $137 $83 $8 $5 $370 $370
Average Interest P+ 2% P+ 2% P+ 2% P+ 2% P+ 2%
Rate
24
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 April 2001, we issued warrants to purchase up to 35,000 shares of
common stock at an exercise price of $0.39 per share to one entity in
consideration for investor relations services. Exemption from the registration
provisions of the Securities Act of 1933 for this transaction is claimed under
Section 4(2) of the Securities Act of 1933, among others, on the basis that this
transaction did not involve any public offering and the purchaser was
sophisticated with access to the kind of information registration would provide.
Dividends
---------
To date we have not paid dividends on our common stock. Our line of
credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificates of designations related to our
Series A Preferred Stock and Series B Preferred Stock provide that shares of
those series of preferred stock are not entitled to receive cash dividends. We
currently intend to retain future earnings to fund the development and growth of
our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by the our board of directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 22, 2001, we held our 2001 annual meeting of stockholders. Our
stockholders were asked:
1. To elect Laurence P. Finnegan, Jr. as a Class II director to serve
a three-year term on our board of directors; and
2. To ratify the appointment of BDO Seidman, LLP as our independent
auditors for fiscal 2001.
25
Results of the vote are as follows:
Proposal For Against Abstain Withheld Total Voted
-------- --- ------- ------- -------- -----------
1 16,062,162 0 0 38,774 16,100,936
2 16,075,543 7,786 17,607 0 16,100,936
The total number of outstanding votable shares was 20,570,415. The
percentage of votable shares that was voted was 78.27%.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
3.1 Amendments to Bylaws effective as of June 1, 2001 (1)
- -----------
(1) Incorporated by reference to the MicroTel International, Inc. Registration
Statement on Form S-1 (Registration Statement No. 333-63024).
(b) Reports on Form 8-K
-------------------
We filed Amendment No. 3 to Form 8-K for September 22, 2000 on April
10, 2001 in connection with our acquisition of substantially all of the assets
and our assumption of certain of the liabilities of T-Com, LLC, a Delaware
limited liability company. The filing included "Item 2 - Acquisition or
Disposition of Assets" and "Item 7 - Financial Statements and Exhibits."
26
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: August 14, 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)
27