<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 June 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
Common Stock, $.0033 par value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
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 June 30, l996 there were 13,964,380 shares of Common Stock
outstanding.
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Page
----
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
June 30, l996 and December 31, l995 3
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 30, l996 and l995 4
Consolidated Condensed Statements of Cash Flows
Three and Six Months Ended June 30, l996 and l995 5
Notes to Consolidated Condensed Financial
Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote
of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
<PAGE>
MicroTel International, Inc.
Consolidated Condensed Balance Sheets
(unaudited)
June 30, Dec 31,
1996 1995
----- -----
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 77 $ 432
Investments in marketable securities 113 152
Accounts receivable 2947 3582
Inventories
Finished goods 1734 1774
Work in process 907 960
Parts 1233 1414
----- -----
3874 4148
Other current assets 430 283
----- -----
Total current assets 7441 8597
Plant and equipment-net 737 866
Capitalized software 1440 1052
Foreign tax receivable 761 790
Other assets 19 20
----- -----
$10398 $11325
===== =====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to banks $ 1082 $ 769
Current portion long-term debt 194 252
Accounts payable 2035 2184
Accrued payroll and related expenses 997 1083
Other accrued liabilities 743 666
Deferred income 175 350
----- -----
Total current liabilities 5226 5294
Long-term debt 243 227
Deferred compensation liability 768 803
Deferred rent 21 45
----- -----
Total liabillties 6258 6369
Stockholders' equity:
Common stock 46 45
Additional paid-in capital 22426 22293
Accumulated deficit (17586) (16774)
Stockholder's note receivable (1337) (1337)
Deferred compensation (64) (88)
Cumulative translation adjustments 655 817
----- -----
Stockholder's equity 4140 4956
----- -----
$10398 $11325
===== =====
See notes to consolidated financial statements
3
<PAGE>
MicroTel International, Inc.
Consolidated Condensed Statements of Operations
(in thousands except per share amounts)
(Unaudited)
For the three For the six
months ended months ended
June 30, June 30,
l996 l995 l996 l995
-------- -------- -------- --------
Sales $ 3,960 $ 4,456 $ 8,094 $ 10,116
Cost and expenses:
Cost of sales 2,410 2,818 4,937 6,137
Engineering and product
development 244 284 787 719
Selling and marketing 1,003 897 2,041 1,999
Administration 504 421 1,297 1,093
Other expense/(income)-net (104) (34) (156) 10
-------- -------- -------- --------
4,057 4,386 8,906 9,958
-------- -------- -------- --------
Income (loss) before
income taxes $ (97) $ 70 $ (812) $ 158
Income tax expense -- -- -- --
-------- -------- -------- --------
Net income (loss) $ (97) $ 70 $ (812) $ 158
======== ======== ======== ========
Net income (loss) per
common share $ (.01) $ 0.0l $ (.06) $ 0.01
======== ======== ======== ========
Weighted average number of
shares used in calculating
net income (loss) per
share 13,911 13,044 13,864 13,042
======== ======== ======== ========
See notes to consolidated condensed financial statements.
4
<PAGE>
MicroTel International, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
For the six months Ended
June 30,
l996 l995
------- -------
Cash flows from operating activities:
Net income (loss) $ (812) $ 158
Reconciliation to cash provided by
(used in) operations:
Depreciation and amortization 158 145
Amortization of intangible assets 5 146
Changes in assets and liabilities:
Accounts receivable 634 1,739
Inventories 274 (502)
Other assets (118) 5
Accounts payable (149) (944)
Other accrued liabilities (55) (219)
Other noncurrent liabilities (232) (ll7)
------- -------
Cash provided by (used in) operations (295) 411
------- -------
Cash flows from investing activities:
Additions to plant and equipment
net of retirements (54) (131)
Capitalized software (424) (510)
Marketabled securities 39
------- -------
Cash used in investment activities (439) (641)
------- -------
Cash flow from financing activities:
Short-term borrowing 323 (470)
Long-term debt:
Additions 29 108
Repayments (55)
Common stock transactions, net 204 6
------- -------
Cash provided by (used in) financing activities 501 (356)
------- -------
Effect of exchange rate changes on cash (122) 2l8
------- -------
Net decrease in cash (355) (368)
Cash and cash equivalents
at beginning of period 432 947
------- -------
Cash and cash equivalents
at end of period $ 77 $ 579
======= =======
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.
2. Borrowing Arrangements
The Company's U.S. subsidiary, CXR Telcom Corporation, renegotiated
its bank credit facility, which matured on June 3, l996. Under CXR
Telcom's prior revolving line of credit, borrowings were available to
the Company based on an advance rate of 75% of eligible receivables
plus an additional $200,000 maximum advance against inventories. The
line of credit carried a maximum borrowing limit of $l,000,000 and
bore interest at prime plus 4%.
The replacement factoring line of credit with the same bank provides
borrowings based on an advance rate of 85% of eligible receivables
with no maximum cap. The line bears interest at prime plus 2% (l0.25%
currently) and an administrative fee of l% per month is charged on the
average factored invoiced balance for invoice processing.
3. Listing Matters
The American Stock Exchange (AMEX) advised the Company on June 14,
1996 that it had determined to delist the Company because it had
fallen below the AMEX's financial guidelines for continued listing.
The Company has appealed the AMEX's decision to delist its shares, as
management believes that the Company's future results of operations
will be adequate to meet AMEX guidelines within a few quarters and
that AMEX then should allow the continued listing of the Company's
shares on a conditional basis. The Company's shares will continue to
trade on the AMEX during the appeal process, however, there can be no
assurances as to the Company's success in the appeal and therefore,
the continued listing of its shares on the AMEX thereafter.
To insure the continued listing of the Company's shares in the
6
<PAGE>
event that the Company's appeal to the AMEX is unsuccessful, the
Company applied for listing on the NASDAQ Stock Market on June 17,
1996.
4. Stock Subscription Receivable
In June, l996, Hardee Capital Partners, L.P. (Hardee Capital)
defaulted on its promissory note to the Company. The promissory note
by Hardee Capital in the principal amount of $1,444,445 was made to
Elk International Corporation Limited (Elk), the Company's principal
shareholder, and assigned to the Company on November 8, 1994 as
payment of a stock subscription by Elk to acquire shares of common
stock of the Company. The due date of the promissory note, which was
originally due and payable on December 31, 1995, was extended to
December 15, 1996 by Hardee Capitals agreement to pay $358,300 to the
Company. Hardee Capital did not pay $8,300 of such amount as agreed
and consequently, the note is in default under its terms and
conditions, giving the Company the immediate right to vote the
collateral shares of Kleer-Vu Industries, Inc. (Kleer-Vu) (641,944
shares of common stock), as well as foreclosure rights, and the right
to proceed against the personal guarantee of David W. Hardee, General
Partner of Hardee Capital and Co-Chairman and Chief Executive Officer
of Kleer-Vu (Hardee).
Elk has the right to make alternative cash payment to the Company for
the stock subscription through December 15, 1996, and to receive a
corresponding assignment of proceeds from the promissory note when
collected. Elk has been making monthly payments against the stock
subscription, which payments aggregated $160,000 as of June 30, l996.
A lawsuit was filed in July, l996 by the Company against Hardee
Capital and Hardee, as guarantor, for collection of the note plus
attorneys' fees. Settlement discussions have been initiated by Hardee
Capital and Hardee and are ongoing.
5. Subsequent Events
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.
7
<PAGE>
On July 23, l996, the Company reached an agreement in principle to
settle this litigation. The definitive agreement is currently being
prepared. 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. Consulting fees thereunder are 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 in the third quarter of
l996.
Reverse Stock Split
On August 15, l996, the shareholders of the Company ratified a
one-for-five reverse stock split effective for holders of record on
August 29, l996. Giving retroactive effect to the reverse stock split,
the comparative earnings (loss) per share for the three and six months
ended June 30, l996 would have been $(.03) and $(.29) per share,
respectively, versus $.03 and $.06 per share, respectively, for the
same periods in the prior year.
8
<PAGE>
MICROTEL INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Results of Operations
Consolidated sales and gross margins for the quarter and six months'
ended June 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):
Qtr Ended June 30, 6 Months Ended June 30,
1996 l995 l996 l995
---- ---- ---- ----
Sales
CXR Telcom $2,040 $2,014 $3,836 $ 4,374
CXR S.A. 1,920 2,442 4,258 5,742
------ ------ ------ -------
Total $3,960 $4,456 $8,094 $10,116
====== ====== ====== =======
Gross Margins
CXR Telcom $ 854 $ 729 $1,499 $1,701
CXR S.A. 696 909 1,658 2,278
------ ------ ------ -------
Total $l,550 $1,638 $3,157 $3,979
====== ====== ====== =======
Second Quarter
Consolidated sales for the three months ended June 30, l996 declined by
$496,000 or 11% as compared to the second quarter of l995. This consolidated
decline was substantially due to reduced sales for CXR S.A., which resulted
from very strong price competition in the European modem market, a trend which
is expected to continue, a decline in sales to its major customer, France
Telecom, which is undergoing a reorganization to facilitate its privatization
and a generally weak French economy.
Consolidated gross margins increased from 37% in l995 to 39% in l996. CXR
Telcom's margins improved to 42% in l996 from 36% in l995 due to a product mix
shift to higher margin test instruments versus lower margin transmission
products. CXR S.A.'s margins slipped to 36% in l996 from 37% in l995, even
considering that second quarter l996 margins benefited from a redeployment of
certain direct customer service personnel to selling and marketing functions
(see additional discussion below).
Net engineering and product development costs decreased by $40,000 in the
second quarter of l996 from l995 levels due to a temporary reduction in
engineering staff. Gross engineering and product development costs, prior to
capitalization of software development costs, were $559,000 and $624,000 for
the three months ended June 30, l996 and l995, respectively.
Selling and marketing costs increased in relation to sales from 20%
9
<PAGE>
in l995 to 25% in l996 due principally to 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.
Administrative expenses increased by $83,000 due principally to continued
training costs incurred by CXR Telcom to achieve and maintain its ISO 9001
certification. The final training costs were incurred in the second quarter of
l996.
Other (income) expense-net improved by $70,000 due principally to the prorata
recognition over the year of l996 of a $350,000 extension fee received by the
Company to extend the due date of a stock subscription note receivable from
December 31, 1995 to December 15, 1996.
First Half
Consolidated sales declined by $2,022,000 or 20% in l996 as compared to the
first half of l995, comprised of declines of $538,000 and $l,484,000 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 Regional Bell Operating Companies (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 a result of the factors described above for the Second Quarter.
Consolidated gross margins were comparable between years at 39%, however, as
noted above, the margins for CXR S.A. were favorably impacted by a redeployment
of certain personnel such that the related costs are now included in selling
and marketing costs. Somewhat offsetting this effect was the negative impact in
l996 of underabsorption of fixed manufacturing overhead costs due to the
decline in production levels accompanying the lower sales volume.
Net engineering and product development costs increased by $68,000 in the first
half of l996 over l995, principally as a result of greater capitalization of
engineering costs in l995 due to the relative mix of product development versus
product maintenance efforts during the respective periods. Gross engineering
and product development costs, prior to capitalization of software development
costs, were $1,214,000 and $1,229,000 for the six months ended June 30, l996
and l995, respectively.
Selling and marketing costs increased in relation to sales from 20% in l995 to
25% in l996 due to the factors noted above for the second quarter.
Administrative expenses increased by $204,000 again due to the factors noted
above for the second quarter.
Other (income) expense-net improved by $l46,000 due principally to the prorata
recognition over the year of l996 of the $350,000 stock subscription extension
fee discussed above.
10
<PAGE>
Liquidity and Capital Resources
Cash used in operations during the first half of l996 was $295,000 versus
operations providing $411,000 in cash flow in the first half of l995. The most
significant cause of the fluctuation was the decline in results of operations,
with comparative asset and liability changes substantially offsetting each
other.
As discussed in Note 4 to the Consolidated Condensed Financial Statements, the
maker of the promissory note taken in satisfaction of the stock subscription by
the Company's principal stockholder, Elk International Corporation Limited
("Elk"), has defaulted on the obligation. It is expected that the stock
subscription will be collected by its due date either from the maker of the
note or alternatively from payments by Elk.
With improvement of results expected, management believes that cash flows from
operations and available borrowings will be sufficient to support its working
capital needs during l996. Aggressive planned product development efforts may,
however, 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 the 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 already received incremental orders in the third
quarter related to its customers' expansion of their markets.
Additionally, the trend of CXR Telcom's flagship test instrument, the 5200 test
set, to become the industry standard continues. Growth in sales of the unit
during the second quarter of l996 improved overall domestic gross margins from
36% in the first quarter to 42% in the second quarter. This margin improvement
was a primary factor in the improvement to a consolidated net loss of $(97,000)
in the second quarter versus a net loss of $(7l5,000) in the first quarter of
l996.
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. While currently selling O.E.M. products
in its test instrument business unit, CXR S.A. is jointly developing the next
generation of CXR Telcom's 5200 test set with its sister company and will
introduce a European version in l997.
11
<PAGE>
The new strategies are beginning to yield results, with the new networking
business unit showing l5% growth in the second quarter of l996 over that of the
first quarter.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 has 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 definitive agreement
is currently being prepared. 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. The consulting fees thereunder are 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 in the third quarter of l996.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
There were no reports on Form 8-K filed during the three
months ended June 30, l996.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MicroTel International, Inc.
/s/ Barry E. Reifler
August 20, 1996 --------------------------------------
Barry E. Reifler, CFO
(Principal Accounting and
Financial Officer)
14
<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 June
30, l996 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 77,000
<SECURITIES> 113,000
<RECEIVABLES> 3,264,000
<ALLOWANCES> 317,000
<INVENTORY> 3,874,000
<CURRENT-ASSETS> 7,441,000
<PP&E> 2,962,000
<DEPRECIATION> 2,225,000
<TOTAL-ASSETS> 10,398,000
<CURRENT-LIABILITIES> 5,226,000
<BONDS> 0
0
0
<COMMON> 46,000
<OTHER-SE> 4,094,000
<TOTAL-LIABILITY-AND-EQUITY> 10,398,000
<SALES> 8,094,000
<TOTAL-REVENUES> 8,094,000
<CGS> 4,937,000
<TOTAL-COSTS> 9,062,000
<OTHER-EXPENSES> 156,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (79,000)
<INCOME-PRETAX> (812,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (812,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (812,000)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
