<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1996 or
------------------
( ) Transition report pursuant to Section l3 or l5(d) of the Securities
Exchange Act of l934
For the transition period N/A
---
Commission file Number 1-10346
-------
MICROTEL INTERNATIONAL, INC. (formerly CXR Corporation)
- -------------------------------------------------------
(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.)
2040 Fortune Dr. Suite 102 San Jose, California 95l3l
- -----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (408) 435-8520
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
-------------------- on which registered
---------------------
None
- -------------------------------------------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.0033 par value
- -------------------------------------------------------------------------------
Title of Class
Indicate by check mark 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
the 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 September 30, l996 there were 2,822,220 shares of Common Stock
outstanding.
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PAGE
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1996 and December 31, 1995 3
Consolidated Condensed Statements of Operations
Three Months and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Condensed Statements of Cash Flows
Three Months and Nine Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-10
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
-2-
<PAGE>
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1996 1995
ASSETS --------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 170 $ 432
Investments in marketable securities 152
Accounts receivable 2,406 3,582
Inventories 3,638 4,148
Other 697 283
-------- --------
Total current assets 6,911 8,597
Plant and equipment-net 688 866
Capitalized software 1,500 1,052
Foreign tax receivable 760 790
Other assets 111 20
-------- --------
$ 9,970 $ 11,325
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 1,271 $ 759
Current portion long-term debt 133 252
Accounts payable 1,895 2,184
Accrued payroll and related expenses 878 1,083
Other accrued liabilities 559 666
Deferred income 88 350
-------- --------
Total current liabilities 4,824 5,294
Long-term debt 41 227
Deferred compensation liability 750 803
Deferred rent 45
-------- --------
Total liabilities 5,615 6,369
Stockholders' equity:
Common stock 9 45
Additional paid-in capital 22,503 22,293
Accumulated deficit (17,715) (16,774)
Stockholder's note receivable (1,014) (1,337)
Deferred compensation (82) (88)
Cumulative translation adjustments 654 817
-------- --------
Stockholder's equity 4,355 4,956
-------- --------
$ 9,970 $ 11,325
-------- --------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
-3-
<PAGE>
MicroTel International, Inc.
Consolidated Condensed Statements of Operations
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 3,945 $ 3,975 $12,039 $14,091
Cost and expenses:
Cost of sales 2,422 2,330 7,359 8,467
Engineering and product development 238 452 1,025 1,171
Selling and marketing 816 906 2,857 2,905
Administration 540 477 1,837 1,570
Other expense/(income)- net 58 (35) (98) (25)
------- -------- -------- --------
4,074 4,130 12,980 14,088
------- -------- -------- --------
Income (loss) before income taxes (129) (155) (941) 3
------- -------- -------- --------
Income tax expense - - - -
------- -------- -------- --------
Net income (loss) $ (129) $ (155) $ (941) $ 3
------- -------- -------- --------
Net income (loss) per common share $ (0.05) $ (0.06) $ (0.34) $ -
------- -------- -------- --------
Weighted average number of shares used
in calculating net income (loss) per share 2,803 2,616 2,784 2,611
------- -------- -------- --------
</TABLE>
See notes to Consolidated Condensed Financial Statements
-4-
<PAGE>
<TABLE>
<CAPTION>
MicroTel International, Inc.
Consolidated Condensed Statements of Cash Flows
(in thousands)
(unaudited) For the nine months ended September 30,
1996 1995
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ (941) $ 3
Reconcilliation to cash used in operations:
Depreciation and amotization 203 220
Amortization of intangible assets 173 198
Reduction of development aid loan (194)
Changes in assets and liabilities:
Account Receivable 1,176 1,481
Inventories 510 (432)
Other assets (414) (18)
Accounts payable (289) (1,034)
Other accrued liabilities (577) (414)
Other noncurrent liabilities (95) (144)
-------- -------
Cash used in operations (448) (140)
-------- -------
Cash flows from investing activities:
Additions to plant and equipment
net of retirements (83) (204)
Capitalized software (705) (606)
Marketable securities 152
-------- -------
Cash used in investment activites (636) (810)
-------- -------
Cash flow from financing activities:
Short-term borrowing 512 (187)
Long-term debt:
Addtions 29 158
Repayments (92)
Common stock transactions, net 472 214
-------- -------
Cash provided by financing activities 921 185
-------- -------
Effect of exchange rate changes on cash (99) 187
-------- -------
Net decrease in cash (262) (578)
Cash and Cash equivalents at beginning of period 432 947
-------- -------
Cash and cash equivalents at end of period $ 170 $ 369
-------- -------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
-5-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The unaudited consolidated condensed financial statements reflect all
adjustments, consisting of only normal recurring adjustments, which are, in
the opinion of management, necessary to state fairly the results for the
periods presented. The results for the periods are not necessarily
indicative of the results to be expected for the full fiscal year. It is
suggested that these interim consolidated financial statements should be
read in conjunction with the Company's Annual Report on Form 10K for the
year ended December 31, l995.
The currency of the country in which the foreign subsidiary is located is
considered its functional currency. Cumulative translation adjustments
result from converting from the functional currency to U.S. dollars.
On August 15, 1996 the shareholders of the Company ratified a one-for-five
reverse stock split effective for holders of record on August 29, 1996. All
share and per share amounts in the accompanying consolidated condensed
financial statements have been restated to give retroactive affect to the
reverse split.
2. Listing Matters
On September 11, 1996, the Company began trading on the NASDAQ Small Cap
Market under the symbol MCTL. Prior thereto, it traded on the American
Stock Exchange under the symbol MOL
3. Litigation
In September, l994 Raymond Jacobson, a former director of the Company,
brought an action against the Company in the California Superior Court,
Santa Clara County, alleging that the Company had breached its contract to
pay Mr. Jacobson $3,495 bi-weekly under a deferred compensation agreement,
by discontinuing payment in August l994. Mr. Jacobson was claiming damages
of approximately $l,200,000 which he purported to be the present value of
all payment to be made under the agreement. In June l995 the Company paid
Mr. Jacobson all amounts past due under the contract plus interest and
reinstated the bi-weekly payments.
On July 23, l996, the Company reached an agreement in principle to settle
this litigation. The settlement provides for a reduction of 35% in the
stream of contractual future payments under the deferred compensation
agreement and further provides for a five-year consulting arrangement with
Mr. Jacobson with fees thereunder to be paid in whole or in part with
common stock of the Company, depending upon the price of the stock during
the term of the arrangement. The Company will recognize a nominal gain on
the transaction when consummated.
Final preparation and execution of the definitive agreement is currently
pending the return of Mr. Jacobson from a trip out of the United States. A
dismissal hearing has been set by the court for February 6, 1997, in the
event the definitive agreement is not executed and the filing of a dismissal
has not occurred at that time.
4. Subsequent Events
Proposed Merger
On October 21, 1996, the Company announced that it had executed a letter of
intent to merge with XCEL Corporation of Ontario, California, in a
transaction which is intended to be tax-free. XCEL would merge into a newly
formed subsidiary of the Company, and XCEL shareholders would obtain 65% of
the fully diluted ownership (common stock and derivatives) of the combined
company. XCEL, with vertically integrated operations in the U.S., England
and Japan, designs, manufactures and markets information display and input
products and printed circuit boards for the international
telecommunications, medical, industrial and military/aerospace markets.
Proforma annualized revenues of the combined companies approximates $60
million.
Carmine T. Oliva, Chairman and Chief Executive Officer of XCEL Corporation,
will become Chairman and Chief Executive Officer of the combined companies
and it is anticipated that all of the Company's and XCEL's subsidiaries and
divisions will continue their operations as presently constituted. The
transaction is
-6-
<PAGE>
subject to, among other things, the execution of a definitive merger
agreement, completion of customary due diligence, a satisfactory fairness
opinion and approval by the shareholders of XCEL
Chairman Resignation and Stock Subscription Cancellation
On November 15, 1996 Mr. Daniel Dror resigned as Chairman and Chief
Executive Officer of the Company in anticipation of the pending merger with
XCEL Corporation. Mr. Jack Talan, a director of the Company, was appointed
interim Chairman and Chief Executive Officer until consummation of the
transaction.
Upon his resignation, Mr. Dror (or his designee) received as a severance
award for past service: a) 300,000 shares of the Company's common stock
valued at the current market price of $2.,375 per share or $712,500 in the
aggregate; b) an extension of the exercise period to November 14, 1999 on
options he currently holds to purchase 25,000 shares of the Company's
common stock, and c) options to purchase 250,000 shares of the Company's
common stock at a price of $2.375 per share. The latter options are
exercisable for a period of 5 years, but only after Mr. Dror repays a
certain indebtedness to the Company of approximately $200,000, which amount
is due in 5 annual installments and which may be repaid by surrendering the
options for value equivalent to the lessor of the future appreciation of
the Company's common stock over the exercise price or $.50 per option.
Concurrent with Mr. Dror's resignation, the unpaid portion of the stock
subscription in favor of Elk International Limited (Elk), currently
representing rights to acquire approximately 482,000 shares of the
Company's common stock at a price of $2.00 per share , was canceled. In
exchange Elk received a) the promissory note of Hardee Capital Partners
Ltd. in the principal amount of $1,444,445 originally assigned to the
Company as payment of the subscription, b) options to purchase 500,000
shares of the Company's common stock at $2.375 per share, exercisable for a
period of 5 years, and c) an extension of the exercise period to November
14, 1999 on warrants it currently holds to acquire 90,000 shares of the
Company's common stock at a price of $2.50 per share.
-7-
<PAGE>
MICROTEL INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Consolidated sales and gross margins for the quarter and nine months' ended
September 30, 1996 were comprised of the following results for the Company's
U.S. operating subsidiary, CXR Telcom, and its French operating subsidiary, CXR
S.A. (in thousands):
<TABLE>
<CAPTION>
Qtr. Ended Sept 30, 9 Months Ended Sept 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
CXR Telcom $ 1,804 $ 1,929 $ 5,640 $ 6,303
CXR S.A. 2,141 2,046 6,399 7,788
Total $ 3,945 $ 3,975 $12,039 $14,091
Gross Margins
CXR Telcom $ 716 $ $730 $ 2,215 $ 2,431
CXR S.A. 807 915 2,465 3,193
Total $ 1,523 $ 1,645 $ 4,680 $ 5,624
</TABLE>
Third Quarter
Consolidated sales for the nine months ended September 30, l996 declined
nominally by $35,000 or .9% as compared to the third quarter of l995. A decline
in CXR Telcom's sales of $125,000 were substantially offset by an increase in
sales for CXR S.A. of $95,000. CXR Telcom's sales continue to be impacted by
delays in buying by its principal customers, AT&T and the Regional Bell
Operating Companies (RBOC's), which have resulted from the consolidation and/or
restructuring of these companies in the wake of the passage of the 1996
Telecommunications Bill. CXR S.A.'s improvement is the result of growth in its
new networking business unit outpacing a decline in transmission product sales
to its major customer, France Telecom, which is undergoing a reorganization to
facilitate its privatization.
Consolidated gross margins declined from 41% in 1995 to 39% in 1996. CXR
Telcom's margins improved to 40% in 1996 from 38% in 1995 due to a product mix
shift to higher margin test instruments versus lower margin transmission
products. CXR S.A.'s margins, however, dropped from 45% in 1995 to 38% in 1996,
although its 1996 margins benefited from a redeployment of certain direct
customer service personnel to selling and marketing functions (see additional
discussion below). CXR S.A.'s margins have been negatively impacted by extreme
pricing pressures in the European transmission product market and because
margins achieved by its new networking business unit are less than those
historically achieved from transmission product sales.
Net engineering and product development costs decreased by $214,000 in the
third quarter of 1996 versus 1995. The decrease was the combined result of
greater capitalization of engineering costs in 1996 due to the relative mix of
product development versus product maintenance efforts during the respective
periods and the net reduction of approximately $156,000 related to an
unsuccessful product development effort. The latter effect is comprised of the
forgiveness of a government development aid loan for the development of an
unsuccessful product by CXR S.A. less the write-off of related capitalized
software costs. Gross engineering and product development costs, prior to
capitalization of software development costs and the effects of the
unsuccessful product of CXR S.A., were $581,000 and $500,000 for the three
months ended September 30, 1996 and 1995, respectively.
Selling and marketing costs decreased in relation to sales from 23% in l995 to
21% in l996. The costs of a marketing initiative by CXR S.A. in the third
quarter of 1995 exceeded the positive effects in 1996 of a redeployment of (and
consequential reclassification of costs of) certain personnel whose job focus
has shifted from product service to product support in connection with changes
in CXR S.A.'s business strategy of increasing its O.E.M. sales to replace
declining modem revenues.
-8-
<PAGE>
Administrative expenses increased by $63,000 due principally to costs
associated with increased executive business development efforts.
Nine Months Ended September 30, 1996
Consolidated sales declined by $2,052,000 or 15% in l996 as compared to the
nine months ended September 30, l995, comprised of declines of $663,000 and
$1,389,000 for CXR Telcom and CXR S.A., respectively. CXR Telcom's sales of
both test instruments and transmission products were impacted by delays in
buying by its principal customers, AT&T and the RBOC's, which resulted from the
consolidation and/or restructuring of these companies in the wake of the
passage of the l996 Telecommunications Bill. CXR S.A.'s sales decline is the
combined result of very strong price competition in the European modem market,
a decline in sales to France Telecom during its reorganization as noted above,
and a generally weak French economy.
Consolidated gross margins declined from 40% in 1995 to 39% in 1996, due to
the factors discussed above for the Third Quarter.
Net engineering and product development costs decreased by $146,000 in the
first nine months of l996 over l995, principally as a result of the same
factors noted above for the Third Quarter. Gross engineering and product
development costs, prior to capitalization of software development costs and
the unsuccessful product of CXR S.A., were $1,703,000 and $1,718,000 for the
nine months ended September 30, l996 and l995, respectively.
Selling and marketing costs increased in relation to sales from 21% in 1995
to 24% in 1996 due principally to the redeployment of personnel by CXR S.A. as
noted above for the Third Quarter.
Administrative expenses increased by $267,000 due to increased business
development costs noted above for the Third Quarter and to training costs
incurred by CXR Telcom during the first half of 1996 to achieve and maintain
its ISO 9001 certification.
Liquidity and Capital Resources
Cash used in operations during the third quarter of l996 was $448,000 versus
$140,000 in the first nine months of l995. The increase in cash use was caused
by the decline in results of operations, offset by better working capital
management in 1996.
The Company's cash uses through September 30, 1996 have been financed through
short-term bank borrowings, the proceeds from the exercise of warrants and
options on the Company's common stock, and the collection of approximately
$323,000 of the stock subscription by Elk International Corporation Limited.
Management believes that cash flows from operations and available borrowings
will be sufficient to support working capital needs during l996, with the
possibility that aggressive planned product development efforts and anticipated
costs of the pending merger with XCEL Corporation (see Prospects below) may
require that the Company raise additional funds through the private placement
of its securities.
Prospects
In the U.S. the impact of the reorganizations of CXR Telcom's customers is a
temporary phenomenon, which repositioning is expected to result in significant
growth as the changed entities emerge and the long-distance carriers vie for
the local loop business of the RBOC's and the RBOC's compete for long distance
services. The final guidance has just recently been released by the Government
on the deregulation provided for in the Telecommunications Bill of l996 and CXR
Telcom has been working with its customers to prepare for their future needs in
the expansion of their markets.
To overcome the negative factors impacting the Company's French operation, CXR
S.A. has implemented various changes to its business strategy. It has
introduced a new line of ISDN Terminal Adapters to its transmission product
line, has begun a new business unit which provides networking solutions to the
business user utilizing O.E.M. products, and has refocused its marketing to
expand its markets outside of France.
On October 21, 1996, the Company announced that it had executed a letter of
intent to merge with XCEL Corporation of Ontario, California, in a transaction
which is intended to be tax-free. XCEL would merge into a newly formed
subsidiary of the Company, and XCEL shareholders would obtain 65% of the fully
diluted ownership (common stock and derivatives) of the combined company. XCEL,
with vertically integrated
-9-
<PAGE>
operations in the U.S., England and Japan, designs, manufactures and markets
information display and input products and printed circuit boards for the
international telecommunications, medical, industrial and military/aerospace
markets. Proforma annualized revenues of the combined companies approximates $60
million.
Carmine T. Oliva, Chairman and Chief Executive Officer of XCEL Corporation,
will become Chairman and Chief Executive Officer of the combined companies and
it is anticipated that all of the Company's and XCEL's subsidiaries and
divisions will continue their operations as presently constituted. The
transaction is subject to, among other things, the execution of a definitive
merger agreement, completion of customary due diligence, a satisfactory
fairness opinion and approval by the shareholders of XCEL.
On November 15, 1996, Mr. Daniel Dror resigned as Chairman and Chief Executive
Officer of the Company in anticipation of the pending merger. Mr. Jack Talan,
a director of the Company, was appointed interim Chairman and Chief Executive
Officer until the merger is consummated.
Mr. Dror received a severance award upon his resignation as described in
Footnote 4 to the accompanying Consolidated Condensed Financial Statements. The
value of the shares of common stock received as a severance payment of $712,500
will be recognized as an expense in the fourth quarter of 1996. Additionally,
concurrent with Mr. Dror's resignation, the unpaid portion of the stock
subscription by Elk International Corporation Limited was canceled as more
fully described in Footnote 4. However, this transaction will have no net
effect on the Company's Financial Statements, as the related note receivable
which is already recorded as a reduction to shareholder's equity will be
eliminated against related common stock amounts.
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
September, l994 Raymond Jacobson, a former director of the Company,
brought an action against the Company in the California Superior
Court, Santa Clara County, alleging that the Company had breached its
contract to pay Mr. Jacobson $3,495 bi-weekly under a deferred
compensation agreement, by discontinuing payment in August l994. Mr.
Jacobson was claiming damages of approximately $l,200,000 which he
purported to be the present value of all payment to be made under the
agreement. In June l995 the Company paid Mr. Jacobson all amounts
past due under the contract plus interest and reinstated the
bi-weekly payments.
On July 23, l996, the Company reached an agreement in principle to
settle this litigation. The settlement provides for a reduction of
35% in the stream of contractual future payments under the deferred
compensation agreement and further provides for a five-year
consulting arrangement with Mr. Jacobson with fees thereunder to be
paid in whole or in part with common stock of the Company, depending
upon the price of the stock during the term of the arrangement. The
Company will recognize a nominal gain on the transaction when
consummated.
Final preparation and execution of the definitive agreement is
currently pending the return of Mr. Jacobson out of the United
States. A dismissal hearing has been set by the court for February 6,
1997, in the event the definitive agreement is not executed and the
filing of a dismissal has not occurred at that time.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4 Submission of Matters to a Vote of Security Holders
On August 15, 1996, the Company held its Annual Meeting of
Stockholders. Matters voted on and results of the voting were
as follows:
A. Election of Directors:
Votes Received (Net)
Name of all Votes Withheld) Votes Withheld
---- ---------------------- --------------
Daniel Dror 10,899,451 535,425
William Lewisham 10,897,634 537,242
Jack Talan 10,897,845 537,031
B. One-for-five reverse split: 10,363,067 For, 997,575 Against
and 74,234 Abstain
C. Increase in preferred stock authorized to l0,000,000 shares:
5,630,116 For, 1,168,970 Against and 63,786 Abstain
D. Appointment of BDO Seidman as Independent Accountants:
11,239,584 For, 136,834 Against, and 58,458 Abstain
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended September 30, l996.
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of l934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MicroTel International, Inc.
// Barry E. Reifler //
November 20, 1996
-----------------------------
Barry E. Reifler, CFO
(Principal Accounting and
Financial Officer)
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information from the unaudited
financial statements of MicroTel International, Inc., for the quarter ended
September 30, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 170,000
<SECURITIES> 0
<RECEIVABLES> 2,406,000
<ALLOWANCES> 260,000
<INVENTORY> 3,638,000
<CURRENT-ASSETS> 6,911,000
<PP&E> 2,980,000
<DEPRECIATION> 2,292,000
<TOTAL-ASSETS> 9,970,000
<CURRENT-LIABILITIES> 4,824,000
<BONDS> 0
<COMMON> 0
0
9,000
<OTHER-SE> 4,346,000
<TOTAL-LIABILITY-AND-EQUITY> 9,970,000
<SALES> 12,039,000
<TOTAL-REVENUES> 12,039,000
<CGS> 7,359,000
<TOTAL-COSTS> 13,078,000
<OTHER-EXPENSES> (98,000)
<LOSS-PROVISION> (38,000)
<INTEREST-EXPENSE> 165,000
<INCOME-PRETAX> (941,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (941,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (941,000)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
