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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 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 November 9, 2001, there were 20,670,703 shares of the issuer's
common stock, $.0033 par value, outstanding.
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ITEM 1. FINANCIAL STATEMENTS.
Consolidated Condensed Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000............................................................. 2
Consolidated Condensed Statements of Operations and Comprehensive Income for the
three and nine months ended September 30, 2001 and 2000 (unaudited)............... 3
Consolidated Condensed Statements of Cash Flows for the nine months ended
September 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................................................ 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK........................................................................ 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................. 29
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................... 29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................... 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 29
ITEM 5. OTHER INFORMATION.................................................................. 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 30
SIGNATURES ................................................................................... 31
1
ITEM 1. FINANCIAL STATEMENTS.
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 30, December 31,
2001 2000
------------- -------------
ASSETS (unaudited)
Cash and cash equivalents $ 437 $ 756
Accounts receivable - net 5,631 7,440
Notes receivable 53 130
Inventories 7,514 6,298
Other current assets 411 750
------------- -------------
Total current assets 14,046 15,374
Property, plant and equipment-net 710 809
Goodwill-net 2,644 2,737
Other assets 538 564
------------- -------------
$ 17,938 $ 19,484
============= =============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,746 $ 3,661
Current portion of long-term debt 591 614
Accounts payable 4,718 5,222
Accrued expenses 2,871 3,082
Net liability of discontinued operations -- 15
------------- -------------
Total current liabilities 10,926 12,594
Long-term debt, less current portion 783 282
Other liabilities 369 542
------------- -------------
Total liabilities 12,078 13,418
Convertible redeemable preferred stock, $10,000
unit value. Authorized 200 shares; issued and
outstanding 25 shares (aggregate liquidation
preference of $250) 267 259
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; 20,571,000 and 20,570,000
shares issued and outstanding at September 30,
2001 and December 31, 2000, respectively 68 68
Additional paid-in capital 24,317 24,307
Accumulated deficit (18,903) (18,775)
Accumulated other comprehensive loss (827) (731)
------------- -------------
Total stockholders' equity 5,593 5,807
------------- -------------
$ 17,938 $ 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 Nine months ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net sales $ 6,345 $ 6,871 $ 20,893 $ 19,559
Cost of sales 3,853 $ 3,080 11,935 10,646
--------- --------- --------- ---------
Gross profit 2,492 3,791 8,958 8,913
Operating expenses:
Selling, general and administrative 2,457 2,431 7,943 6,826
Engineering and product development 235 277 897 773
--------- --------- --------- ---------
Income (loss) from operations (200) 1,083 118 1,314
Other income (expense):
Interest expense (113) (126) (311) (321)
Other income 33 177 83 382
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes (280) 1,134 (110) 1,375
Income tax expense 1 2 10 13
--------- --------- --------- ---------
Income (loss) from continuing operations (281) 1,132 (120) 1,362
--------- --------- --------- ---------
Discontinued operations:
Loss from operations of discontinued segment -- (68) -- (219)
Loss on disposal of discontinued segment,
including provision for phase out period
of $158 in 2000 periods -- (634) -- (634)
--------- --------- --------- ---------
-- (702) -- (853)
--------- --------- --------- ---------
Net income (loss) (281) 430 (120) 509
--------- --------- --------- ---------
Other comprehensive income (loss):
Changes in unrealized gain in marketable
securities -- (78) -- --
Foreign currency translation adjustment 230 (217) (96) (435)
--------- --------- --------- ---------
Total comprehensive income (loss) $ (51) $ 135 $ (216) $ 74
========= ========= ========= =========
Earnings (loss) per share:
Continuing operations:
Basic $ (0.01) $ 0.06 $ (0.01) $ 0.07
========= ========= ========= =========
Diluted $ (0.01) $ 0.05 $ (0.01) $ 0.06
========= ========= ========= =========
Discontinued operations:
Basic $ -- $ (0.04) $ -- (0.05)
========= ========= ========= =========
Diluted $ -- $ (0.03) $ -- (0.04)
========= ========= ========= =========
Net income (loss):
Basic $ (0.01) $ 0.02 $ (0.01) $ 0.02
========= ========= ========= =========
Diluted $ (0.01) $ 0.02 $ (0.01) $ 0.02
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
-------------
2001 2000
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (120) $ 509
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 272 230
Amortization of intangibles 303 207
Stock and warrants issued as compensation 10 110
Gain on sale of fixed assets -- (43)
Gain on sale of Wi-LAN, Inc. stock -- (197)
Other noncash items -- 648
Net change in operating assets of discontinued operations -- 658
Changes in operating assets and liabilities:
Accounts receivable 1,818 1,179
Inventories (1,205) (986)
Other assets 366 (58)
Accounts payable and accrued expenses (903) (2,903)
-------- --------
Cash provided by (used in) operating activities 541 (646)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable 77 --
Net purchases of property, plant and equipment (84) (15)
Cash received for sale of DTS stock -- 520
Proceeds from sale of fixed assets -- 43
Proceeds from sale of Wi-LAN, Inc. stock -- 918
Acquisition of T-Com, LLC assets -- (83)
Investment in Belix Ltd. companies -- (592)
-------- --------
Cash provided by (used in) investing activities (7) 791
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable and long-term debt (772) 330
Proceeds from exercise of warrants and employee stock options -- 88
-------- --------
Cash provided by (used in) financing activities (772) 418
-------- --------
Effect Of Exchange Rate Changes (81) (349)
-------- --------
Net Increase (Decrease) In Cash and Cash Equivalents (319) 214
-------- --------
Cash and Cash Equivalents At Beginning Of Period 756 480
-------- --------
Cash and Cash Equivalents At End Of Period $ 437 $ 694
======== ========
Cash paid for:
Income taxes $ 34 $ 13
======== ========
Interest $ 304 $ 245
======== ========
See accompanying notes to consolidated condensed financial statements.
4
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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. 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 September 30, 2001 and December 31, 2000 and the results of
operations and cash flows for the related interim periods ended September 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
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(2) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands, except per share amounts)
NUMERATOR:
Net income (loss) $ (281) $ 430 $ (120) $ 509
Less: accretion of the excess of the redemption
value over the carrying value of redeemable
preferred stock 3 23 9 69
--------- --------- --------- ---------
Net income (loss) attributable to common
stockholders $ (284) $ 407 $ (129) $ 440
========= ========= ========= =========
DENOMINATOR:
Weighted average number of common shares
outstanding during the period 20,571 20,537 20,570 19,141
Incremental shares from assumed conversions of
warrants, options and preferred stock -- 1,921 -- 2,206
--------- --------- --------- ---------
Adjusted weighted average shares 20,571 22,458 20,570 21,347
========= ========= ========= =========
Basic earnings (loss) per share $ (0.01) $ 0.02 $ (0.01) $ 0.02
========= ========= ========= =========
Diluted earnings (loss) per share $ (0.01) $ 0.02 $ (0.01) $ 0.02
========= ========= ========= =========
The computation of diluted loss per share for the three and nine month
periods ended September 30, 2001 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 in 2001 or because such instruments had exercise prices greater than the
average market price of the common shares during the periods presented.
(3) INVENTORIES
Inventories consist of the following.
September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials $ 2,949,000 $ 2,777,000
Work-in-process 2,917,000 1,914,000
Finished goods 1,648,000 1,607,000
------------ ------------
$ 7,514,000 $ 6,298,000
============ ============
6
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(4) NOTES PAYABLE
The domestic credit facility agreement with Wells Fargo Business
Credit, Inc. contains restrictive financial and non-financial covenants that
were revised effective September 20, 2001. As of September 30, 2001, the Company
was in compliance with such covenants.
(5) 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.
The Internal Revenue Service is currently examining the Company's 1997
federal income tax return, the effect of which examination cannot be determined
at this time.
(6) REPORTABLE SEGMENTS
The Company has two reportable segments: telecommunications and
electronic components. The telecommunications segment operates principally in
the U.S. and European markets and designs, manufactures and distributes
telecommunications test instruments and voice and data transmission and
networking equipment. The electronic components segment operates in the U.S.,
European and Asian markets and designs, manufactures and markets primarily
digital switches and power supplies.
The Company evaluates performance based upon profit or loss from
operations before income taxes, exclusive of nonrecurring gains and losses. The
Company accounts for intersegment sales at prices negotiated between the
individual segments.
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.
7
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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:
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Sales to external customers:
Telecommunications $ 3,483,000 $ 3,487,000 $11,451,000 $10,680,000
Electronic Components 2,862,000 3,384,000 9,442,000 8,879,000
------------ ------------ ------------ ------------
$ 6,345,000 $ 6,871,000 $20,893,000 $19,559,000
============ ============ ============ ============
Segment pretax profits:
Telecommunications $ 53,000 $ 422,000 $ 180,000 $ 468,000
Electronic Components 322,000 1,137,000 1,969,000 2,232,000
------------ ------------ ------------ ------------
$ 375,000 $ 1,559,000 $ 2,149,000 $ 2,700,000
============ ============ ============ ============
Sept. 30, December 31,
2001 2000
------------- -------------
Segment assets:
Telecommunications $ 8,009,000 $ 9,901,000
Electronic Components 9,233,000 8,876,000
------------- -------------
$ 17,242,000 $ 18,777,000
============= =============
The following is a reconciliation of the reportable segment income and
(loss) from continuing operations and assets to the Company's consolidated
totals:
Three months Three months Nine months Nine months
ended ended ended ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Pretax income
- -------------
Total income for reportable $ 375,000 $ 1,559,000 $ 2,149,000 $ 2,700,000
segments
Unallocated amounts:
Gain on sale of -- 197,000 -- 197,000
Wi-LAN, Inc. stock
Warranty reserve reversal -- 110,000 -- 110,000
Unallocated general corporate
expenses (655,000) (732,000) (2,259,000) (1,632,000)
------------ ------------ ------------ ------------
Consolidated income before
income taxes $ (280,000) $ 1,134,000 $ (110,000) $ 1,375,000
============ ============ ============ ============
Sept. 30, December 31,
2001 2000
------------- -------------
Assets
------
Total assets for reportable segments $ 17,242,000 $ 18,777,000
Other assets 696,000 707,000
------------- -------------
Total consolidated assets $ 17,938,000 $ 19,484,000
============= =============
8
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB")
finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No.
142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires upon adoption of SFAS 142 that the Company reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. As of September 30, 2001, the net carrying amount of
goodwill was $2,643,000. Amortization expense during the nine-month period ended
September 30, 2001 was $303,000. Currently, the Company is assessing but has not
yet determined how the adoption of SFAS 141 and SFAS 142 will impact its
financial position and results of operations.
In October 2001, the FASB issued FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, is to be applied prospectively.
9
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;
o the impact of the continuing threat of terrorism and the
responses to such threat by military, government, businesses
and the public; 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.
10
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 primarily as a captive supplier
of circuit boards to XET Corporation's Digitran Division.
Effective August 1, 2000, we acquired the assets and business
operations of T-Com, LLC, or T-Com, a telecommunications test instrument
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, or CXR Telcom, 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
three quarters of 2001, approximately 55% of our sales were to customers in the
telecommunications industry, and the remainder of our sales were to aerospace,
military contractors and industrial customers.
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
11
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 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
SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
Net sales ........................................... 100.0% 100.0%
Cost of sales ....................................... 60.7 44.8
--------- ---------
Gross profit ........................................ 39.3 55.2
Selling, general and administrative expenses ........ 38.8 35.4
Engineering and product development expenses ........ 3.7 4.0
--------- ---------
Operating income .................................... (3.2) 15.8
Interest expense .................................... (1.8) (1.8)
Other expense ....................................... 0.6 2.5
--------- ---------
Income from continuing operations before income taxes (4.4) 16.5
Income taxes ........................................ -- --
--------- ---------
Income from continuing operations ................... (4.4) 16.5
Loss from discontinued operations ................... -- (1.0)
--------- ---------
Gain (loss) on disposal of discontinued segment ..... -- (9.2)
--------- ---------
Net income .......................................... (4.4)% 6.3%
--------- =========
CONTINUING OPERATIONS
NET SALES. Net sales for the three months ended September 30, 2001
decreased by $526,000 (7.7%) to $6,345,000, as compared to $6,871,000 for the
three months ended September 30, 2000.
Net sales of our telecommunications products for the three months ended
September 30, 2001 remained approximately unchanged at $3,483,000, as compared
to $3,487,000 for the comparable period in 2000. Net sales of our U.S.-based
telecom operation of CXR Telcom for the three months ended September 30, 2001
decreased by $443,000 (21.2%) to $1,643,000, as compared to $2,086,000 for the
comparable period in 2000. This decrease was partially due to a $423,000
reduction in net sales of our CXR HALCYON 704 series test equipment and a
$474,000 reduction in sales of T-Com central office test equipment. These
reductions were partially offset by a $309,000 increase in net U.S. sales of our
transmission products and a $146,000 increase in service and other revenues. Net
sales of our French subsidiary, CXR, S.A., for the three months ended September
30, 2001 increased by $439,000 (31.3%) to $1,840,000 as compared to $1,401,000
for the comparable prior year period. This increase was primarily due to a
$364,000 increase in net sales of transmission equipment and a $148,000 increase
in net sales of test equipment. These increases were offset with a $73,000
reduction in net sales for the Networking Division due to its closure.
Net sales of electronic components for the three months ended September
30, 2001 decreased by $522,000 (15.5%) to $2,862,000, as compared to $3,384,000
for the comparable period in 2000. The decrease primarily was due to a decline
in sales of electronic switches by the Digitran Division of our subsidiary, XET
Corporation, in Rancho Cucamonga, California. The Digitran Division's net sales
decreased $842,000 (44.7%) to $1,040,000 in the three months ended September 30,
12
2001 from $1,882,000 in the prior year period. The decrease was due to the
completion of the BAE Systems order earlier this year, which order contributed
$504,000 to sales in the third quarter of 2000. This decrease was offset by a
$245,000 (19.9%) increase in net sales of power supplies of our U.K. subsidiary,
XCEL Corporation, Ltd., or XCL, as measured in U.S. dollars, which net sales
increased from $1,229,000 for the three months ended September 30, 2000 to
$1,474,000 for the three months ended September 30, 2001. In addition, our
Japanese subsidiary, XCEL Japan Ltd., or XJL, increased its sales by $86,000
(36.4%) to $322,000 for the three months ended September 30, 2001 from $236,000
for the comparable period in 2000.
GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 39.3% for the three months ended September 30, 2001, as compared to 55.2% for
the comparable period in 2000. In dollar terms, total gross profit decreased by
$1,299,000 (34.3%) to $2,492,000 for the three months ended September 30, 2001,
as compared to $3,791,000 for the comparable period in 2000.
Gross profit for our telecommunications segment decreased in dollar
terms by $465,000 (24.2%) to $1,459,000 for the three months ended September 30,
2001, as compared to $1,924,000 for the comparable period in 2000, and decreased
as a percentage of net sales from 55.2% in 2000 to 41.9% in 2001. The decrease
in gross profit as a percentage of net sales was due primarily to the decrease
in sales of telecommunication test instruments which increased per unit costs.
In addition, sales of transmissions products increased, which products generally
carry a lower gross profit margin than test equipment.
Gross profit for our electronic components segment decreased in dollar
terms by $834,000 (44.7%) to $1,033,000 for the three months ended September 30,
2001, as compared to $1,867,000 for the comparable period in 2000, and decreased
as a percentage of related net sales from 55.2% in 2000 to 36.1% in 2001. This
percentage decrease was primarily the result of the completion of the BAE
Systems order that provided a substantial contribution to gross margin in the
third and fourth quarters of 2000 but was completed in the first quarter of 2001
so that there was no contribution from this contract in the current quarter. The
decrease was offset by improved gross margins at XCL in the U.K. as a result of
an increase in sales of custom military power supply units, or PSUs, in relation
to the PSUs sold in the commercial market. For the quarter ended September 30,
2001, custom PSU sales increased to 74.5% of the total PSUs sold, as compared to
61.5% in the three-month period ended September 30, 2000. The custom military
PSUs carry higher margins than the commercial PSUs. XCL's gross margin improved
from 28.1% of net sales in the third quarter of 2000 to 30.4% of net sales in
the current three-month period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased slightly by $26,000 (0.1%) to $2,457,000 for
the three-month period ended September 30, 2001, as compared to $2,431,000 for
the comparable period in 2000. These expenses included approximately $156,000 of
legal and accounting expenses for non-routine SEC filings in the three-month
period ended September 30, 2001. However, this is the last quarter in which we
expect to incur such expenses.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses decreased by
$42,000 (15.2%) to $235,000 for the three months ended September 30, 2001, as
compared to $277,000 for the comparable prior year period. The decrease
primarily was due to the closure of our St. Charles, Illinois engineering
facility and the layoff of four engineers. Engineering functions have been
transferred to the Fremont, California facility.
13
OTHER INCOME AND EXPENSE. Interest expense decreased to $113,000 for
the three months ended September 30, 2001, from $126,000 in the comparable
period in 2000 due to lower debt balances. Other income of $33,000 in the third
quarter of 2001 declined from $177,000 in the third quarter of 2000 primarily
because we recorded a $197,000 gain on the sale of Wi-LAN, Inc. common stock in
the three months ended September 30, 2000.
NET INCOME OR LOSS. Net loss for the three months ended September 30,
2001 was $281,000 as compared to net income from continuing operations of
$1,132,000 for the prior year period. The current period loss included expenses
of approximately $156,000 for non-routine SEC filings and $72,000 in severance
pay related to staff reductions. The net income of the prior year period
included a $197,000 gain from the sale of Wi-LAN, Inc. common stock and a
$116,000 gain related to the settlement of a warranty claim from the sale of our
former subsidiary, HyComp, Inc.
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 $702,000 for the three months ended September 30, 2000. Net sales, gross
profit and selling, general and administrative expenses for our circuits
business for the three months ended September 30, 2000 were $690,000, $51,000
and $147,000, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:
NINE MONTHS ENDED
SEPTEMBER 30,
2001 2000
-------- --------
Net sales.............................................. 100.0% 100.0%
Cost of sales.......................................... 57.1 54.4
-------- --------
Gross profit........................................... 42.9 45.6
Selling, general and administrative expenses........... 38.0 34.9
Engineering and product development expenses........... 4.3 4.0
-------- --------
Operating income....................................... 0.6 6.7
Interest expense....................................... (1.5) (1.7)
Other income........................................... 0.3 2.0
-------- --------
Income from continuing operations before income taxes.. (0.6) 7.0
Income taxes........................................... -- --
-------- --------
Income from continuing operations...................... (0.6) 7.0
Loss from discontinued operations...................... -- (1.1)
Gain (loss) on disposal of discontinued segment........ -- (3.3)
-------- --------
Net income............................................. (0.6)% 2.6%
======== ========
14
CONTINUING OPERATIONS
NET SALES. Net sales for the nine months ended September 30, 2001
increased by $1,334,000 (6.8%) to $20,893,000, as compared to $19,559,000 for
the nine months ended September 30, 2000.
Net sales of our telecommunications products for the nine months ended
September 30, 2001 increased by $771,000 (7.2%) to $11,451,000, as compared to
$10,680,000 for the comparable period in 2000. Net sales of our U.S.-based
telecom operation of CXR Telcom for the nine months ended September 30, 2001
increased by $590,000 (12.3%) to $5,384,000, as compared to $4,794,000 for the
comparable period in 2000. This increase was mainly due to a $203,000 increase
in service revenues and a $187,000 increase in net sales of T-Com, LLC products
that were acquired effective August 2000 with the acquisition of T-Com. CXR
Telcom sales of CXR HALCYON 704 series test equipment increased by $150,000
(4.9)% in the first three quarters of 2001 as compared to the comparable prior
year period. Net sales of our transmission and original equipment manufactured
test instruments by CXR, S.A. for the nine months ended September 30, 2001
increased by $181,000 (3.1%) to $6,067,000, as compared to $5,886,000 for the
comparable prior year period. This increase would have been 7.9% if not for the
decline in the value of the French Franc in relation to the value of the U.S.
dollar in the nine months ended September 30, 2001 as compared to their relative
values for the nine months ended September 30, 2000. The major reasons for the
increase in CXR, S.A.'s sale were a $719,000 increase in net sales of
transmission equipment and a $248,000 increase in net sales of test equipment.
These increases were partially offset by a $783,000 reduction of networking
products sales due to the closure of the Networking Division last year.
Net sales of our electronic components for the nine months ended
September 30, 2001 increased by $563,000 (6.3%) to $9,442,000, as compared to
$8,879,000 for the comparable period in 2000, primarily due to a $899,000
increase in sales of XCL, our U.K. subsidiary. This increase in net sales was
primarily due to an increase in deliveries of outstanding contracts of power
supplies. Also contributing to the increase in sales of our electronic
components segment was XJL, our Japanese subsidiary, which increased its sales
in the nine months ended September 30, 2001 by $118,000 (17.2%) to $803,000, as
compared to $685,000 for the comparable prior year period. This increase was
offset by a $430,000 decrease in XET's sales primarily due to a decline in
shipments of digital switches under its contract with BAE Systems, Canada due to
the completion of that contract in the first quarter of this year.
GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 42.9% for the nine months ended September 30, 2001, as compared to 45.6% for
the comparable period in 2000. In dollar terms, total gross profit increased
slightly by $45,000 (0.5%) to $8,958,000 for the nine months ended September 30,
2001, as compared to $8,913,000 for the comparable period in 2000.
Gross profit for our telecommunications segment increased in dollar
terms by $171,000 (3.6%) to $4,936,000 for the nine months ended September 30,
2001, as compared to $4,765,000 for the comparable period in 2000, and decreased
as a percentage of net sales from 44.6% in 2000 to 43.1% in 2001.
Gross profit for our electronic components segment decreased in dollar
terms by $126,000 (3.0%) to $4,022,000 for the nine months ended September 30,
2001, as compared to $4,148,000 for the comparable period in 2000, and decreased
as a percentage of related net sales from 46.7% in 2000 to 42.6% in 2001. This
decrease was primarily the result of the completion of the BAE Systems, Canada
contract in the first quarter of this year, which contract had provided for
sales of higher margin products and contributed to higher sales in the prior
15
year and the first quarter of this year at XET's Digitran Division in Rancho
Cucamonga, California. This decrease was partially offset by the improved profit
margins in connection with higher production volumes and a higher margin product
mix at XCL in the U.K., which contributed to a $564,000 increase in gross
profit. Also, XJL's gross profit margin increased by $44,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1,117,000 (16.4%) to $7,943,000 for the
nine-month period ended September 30, 2001, as compared to $6,826,000 for the
comparable period in 2000. The increase was primarily due to increases of
$705,000 in legal and accounting fees, $107,000 of compensation expenses, and
$296,000 of administrative expenses at CXR Telcom due to the consolidation of
the business acquired with the acquisition of T-Com, LLC. The legal and
accounting fees in the first three quarters of 2001 include approximately
$608,000 incurred in connection with non-routine Securities and Exchange
Commission filings. However, we do not expect to incur any further such
expenses.
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
$124,000 (16.0%) to $897,000 for the nine months ended September 30, 2001, as
compared to $773,000 for the comparable prior year period, reflecting new
product development activities. This increase primarily was due to the addition
of engineering staff during the earlier part of the year which was partially
offset by layoffs in August 2001 and the closure of the St. Charles, Illinois
engineering facility.
OTHER INCOME AND EXPENSE. Interest expense decreased to $311,000 for
the nine months ended September 30, 2001 from $321,000 in the comparable period
in 2000. Other income of $83,000 in the first three quarters of 2001 declined
from $381,000 in the first three quarters of 2000 primarily because in the
nine-month period ended September 30, 2000 we recorded a $197,000 gain on the
sale of stock of Wi-LAN, Inc. and the reversal of a warranty reserve of $116,000
for a warranty settlement related to sales made by the Company's former
subsidiary, HyComp, Inc., which was sold in April 1999.
NET INCOME OR LOSS. Net loss for the nine months ended September 30,
2001 was $120,000 as compared to net income from continuing operations of
$1,362,000 for the prior year period. The current nine-month period loss
included expenses of approximately $608,000 for non-routine SEC filings and
$72,000 in severance pay related to staff reductions. The net income of the
prior year period included a $197,000 gain from the sale of Wi-LAN, Inc. common
stock.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $853,000 for the nine months ended September 30, 2000. Net sales, gross
profit and selling, general and administrative expenses for our circuits
business for the nine months ended September 30, 2000 were $2,088,000, $166,000
and $454,000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 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. As of September 30,
2001, we had working capital of $3,120,000, up 12.2% from working capital of
16
$2,780,000 as of December 31, 2000, an accumulated deficit of $18,903,000 and an
accumulated other comprehensive loss of $827,000. As of September 30, 2001, we
had $437,000 in cash and cash equivalents and $5,631,000 of accounts receivable.
As of December 31, 2000, we had an accumulated deficit of $18,775,000, $756,000
in cash and cash equivalents and $7,440,000 of accounts receivable.
Cash provided by our operating activities totaled $541,000 for the nine
months ended September 30, 2001. Cash used by operations for the nine months
ended September 30, 2000 was $646,000. This increase in cash provided by
operations during the nine months ended September 30, 2001 resulted primarily
from collection of accounts receivable, offset by increase in inventory and
payments of accounts payable.
Cash used in our investing activities totaled $7,000 for the nine
months ended September 30, 2001 as compared to cash provided by our investing
activities of $791,000 for the nine months ended September 30, 2000. We are
currently installing an enterprise resource planning system software that we
acquired under a capital lease in order to improve efficiencies. Included in the
2000 results are $520,000 from the sale of shares of common stock we held in
Digital Transmission Systems, Inc. and $918,000 from the sale of shares of
common stock we held in Wi-LAN, Inc. and usages of $592,000 and $83,000 for the
purchases of the Belix Ltd. companies in the U.K. and T-Com, respectively.
Cash used in financing activities totaled by $772,000 for the nine
months ended September 30, 2001, as compared to cash provided by financing
activities of $418,000 for the nine months ended September 30, 2000, primarily
due to our payments against our bank debt, which reduced the balances of our
notes payable.
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 loan, however, requires a minimum
interest charge of $13,500 per month. The balance outstanding under this credit
facility was $1,128,000 on September 30, 2001. There was $281,000 of additional
borrowings available as of September 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., France and Japan credit facilities were $731,000, $645,000, and
$0, respectively, on September 30, 2001.
Our backlog is substantial and has increased to $14,542,000 as of
September 30, 2001, an increase of 16.3%, as compared to $12,500,000 as of
December 31, 2000. Our backlog as of September 30, 2001 is related approximately
95% to our electronic components business, which business tends to provide us
with long lead times for our manufacturing processes due to the custom nature of
the products, and 5% to our telecommunications business, which business tends to
17
deliver standard products from stock as orders are received. The amount of
backlog orders represents revenue that we anticipate recognizing in the future,
as evidenced by purchase orders and other purchase commitments received from
customers, but on which work has not yet been initiated or with respect to which
work is currently in progress. However, there can be no assurance that we will
be successful in fulfilling such orders and commitments in a timely manner or
that we will ultimately recognize as revenue the amounts reflected as backlog.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including the credit facilities we and our subsidiaries have with Wells Fargo
Business Credit, Inc., Lloyds Bank in England, and Banc National du Paris and
Banque Hervet in France, 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. Deteriorating global economic conditions and the effects
of ongoing military actions against terrorists may cause prolonged declines in
investor confidence in and accessibility to capital markets. Our failure to
raise capital, if needed, 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 5
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 June 2001, the Financial Accounting Standards Board, or FASB,
finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No.
142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that we recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires upon adoption of SFAS 142 that we reclassify the
carrying amounts of intangible assets and goodwill based on the criteria in SFAS
141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that we identify reporting units for the purpose
of assessing potential future impairments of goodwill, reassess the useful lives
of other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires us to complete a transitional goodwill impairment
test six months from the date of adoption. We are also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.
18
Our previous business combinations were accounted for using the
purchase method. As of September 30, 2001, the net carrying amount of goodwill
was $2,643,000. Amortization expense during the nine-month period ended
September 30, 2001 was $303,000. Currently, we are assessing but have not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact our financial
position and results of operations.
In October 2001, the FASB issued FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," or SFAS 144. SFAS No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, is to be applied prospectively.
EURO CONVERSION
Our operating subsidiaries located in France and the United Kingdom
have combined net sales from operations approximating 51% of our total net sales
for the nine months ended September 30, 2001. Net sales from the French
subsidiary participating in the Euro conversion were 29% of our net sales for
the nine months ended September 30, 2001. We continue to review the impact of
the Euro conversion on our operations.
Our European operations took steps to ensure their capability of
entering into Euro transactions. No material changes to information technology
and other systems are necessary to accommodate these multiple currency
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 risk 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 the year ended December
31, 1999 and recorded 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. For the twelve months ended December 31, 2000, we
recorded net income of $1.0 million. For the nine months ended September 30,
2001, we recorded a net loss of $120,000. Our accumulated deficit and
accumulated other comprehensive loss through September 30, 2001 were
approximately $18,903,000 and $827,000, respectively, and as of that date we had
a total stockholders' equity of approximately $5,593,000. There is no assurance
that we will attain or 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
19
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 54% of our net sales for the nine months ended September
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.
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 nine months ended
September 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,
20
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.
IF WE ARE UNABLE TO FULFILL BACKLOG ORDERS DUE TO CIRCUMSTANCES
INVOLVING US OR ONE OR MORE OF OUR SUPPLIERS OR CUSTOMERS, OUR
ANTICIPATED RESULTS OF OPERATIONS AND CASH FLOWS WILL SUFFER.
As of September 30, 2001, we had approximately $14,542,000 in backlog
orders for our products, which orders were due in large part to the long lead
times associated with our electronic components products. The amount of backlog
orders represents revenue that we anticipate recognizing in the future, as
evidenced by purchase orders and other purchase commitments received from
customers, but on which work has not yet been initiated or with respect to which
work is currently in progress. However, there can be no assurance that we will
be successful in fulfilling orders and commitments in a timely manner or that we
will ultimately recognize as revenue the amounts reflected as backlog.
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. Further, disruption
in transportation services as a result of the terrorist attacks in the United
States on September 11, 2001 and further enhanced security measures in response
to the attacks may cause some increases in costs and timing for both our receipt
of components and shipment of products to our customers. 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 products from us, 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.
21
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 issue equity
securities that could result in dilution to existing stockholders and 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, to raise the necessary funds, particularly while our stock
price is low, 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 and domestic 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.
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.
22
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
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
23
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 OF OUR COMMON STOCK.
The market prices of securities of technology-based companies,
especially telecommunications electronics 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 telecommunications
electronics industry;
o announcements by us or our competitors of new or enhanced
products, technologies or services or significant contracts,
acquisitions, strategic relationships, joint ventures or
capital commitments;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other securities.
24
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. Deteriorating global economic conditions and the effects of ongoing
military actions against terrorists may cause prolonged declines in investor
confidence in and accessibility to capital markets. 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.
25
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 November 9, 2001, we had outstanding 20,670,703 shares of common
stock, 20,570,703 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 November 9,
2001, we also had outstanding options, warrants and preferred stock that were
exercisable for or convertible into 6,314,930 shares of common stock. Of these,
1,594,924 shares of common stock underlying options, 1,956,756 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.
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.
26
WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF
TERRORISM AND THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT,
BUSINESS AND THE PUBLIC MAY HAVE ON OUR BUSINESS, PROSPECTS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS.
The recent terrorist attacks in the United States, which have brought
devastation to many people and shaken consumer confidence, have disrupted
commerce throughout the world. The continuing threat of terrorism in the United
States and other countries and heightened security measures, as well as current
and any future military action in response to such threat, may cause significant
disruption to the global economy, including widespread recession. To the extent
that such disruptions result in a general decrease in spending that could
decrease demand for our current and planned products and services, in our
inability to effectively market, manufacture or ship our products and services,
or in financial or operational difficulties for various vendors on which we
rely, our business and results of operations could be materially and adversely
affected. We are unable to predict whether the continuing threat of terrorism or
the responses to such threat will result in any long-term commercial disruptions
or whether such terrorist activities or responses will have any long-term
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows.
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.
27
The following table provides information about our domestic and foreign
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
28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Securities
---------------------------------------
None.
Dividends
---------
To date we have not paid dividends on our common stock. Our line of
credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificates of designations related to our
Series A Preferred Stock and Series B Preferred Stock provide that shares of
those series of preferred stock are not entitled to receive cash dividends. We
currently intend to retain future earnings to fund the development and growth of
our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by the our board of directors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
10.1 Amended and Restated 2000 Stock Option Plan (#)(1)
10.2 Employment Agreement dated as of July 2, 2001 between MicroTel
International, Inc. and Randolph D. Foote (#)(1)
10.3 Employment Agreement dated as of January 1, 2001 between
MicroTel International, Inc. and Graham Jefferies (#)(1)
10.4 First Amendment to Credit and Security Agreement dated as of
September 29, 2000 by and between CXR Telcom Corporation, XET
Corporation and Wells Fargo Business Credit, Inc.
10.5 Second Amendment to Credit and Security Agreement dated as of
November 29, 2000 by and between CXR Telcom Corporation, XET
Corporation and Wells Fargo Business Credit, Inc.
10.6 Third Amendment to Credit and Security Agreement dated as of
September 20, 2001 by and between CXR Telcom Corporation, XET
Corporation and Wells Fargo Business Credit, Inc.
- -----------
(#) Management contract or compensatory plan, contract or arrangement required
to be filed as an exhibit.
(1) Incorporated by reference to Post-Effective Amendment No. 1 to the MicroTel
International, Inc. Registration Statement on Form S-1 (Registration
Statement No. 333-63024).
(b) Reports on Form 8-K
-------------------
None.
30
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: November 13, 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)
31
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
10.4 First Amendment to Credit and Security Agreement dated as of
September 29, 2000 by and between CXR Telcom Corporation, XET
Corporation and Wells Fargo Business Credit, Inc.
10.5 Second Amendment to Credit and Security Agreement dated as of
November 29, 2000 by and between CXR Telcom Corporation, XET
Corporation and Wells Fargo Business Credit, Inc.
10.6 Third Amendment to Credit and Security Agreement dated as of
September 20, 2001 by and between CXR Telcom Corporation, XET
Corporation and Wells Fargo Business Credit, Inc.
32