<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
( ) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended N/A or
(X) Transition report pursuant to Section l3 or l5(d) of the Securities
Exchange Act of l934
For the transition period from October 1, 1996 to December 31, 1996
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.)
4290 E. Brickell Street, Ontario California 91761
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (909) 391-4321
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange
on which registered
----------------------
<S> <C>
Common Stock $.0033 par value None
- --------------------------------------------------------------------------
</TABLE>
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 July 3, 1997, there were 11,391,179 shares of common stock outstanding.
<PAGE> 2
MICROTEL INTERNATIONAL, INC.
INDEX TO TRANSITION REPORT ON FORM 10-Q
<TABLE>
<CAPTION>
PAGE
<S> <C>
Part I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
December 31, 1996 and September 30, 1996 3
Consolidated Condensed Statements of Operations
Three Months Ended December 31, l996 and l995 4
Consolidated Condensed Statements of Cash Flows
Three Months Ended December 31, l996 and l995 5
Notes to Consolidated Condensed Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-15
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART 1-FINANCIAL INFORMATION
MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DEC. 31, SEPT. 30,
1996 1996
---- ----
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 886 $ 785
Accounts receivable 4,734 4,568
Inventories 6,297 6,505
Other current assets 714 556
------------------ --------------------
Total current assets 12,631 12,414
Plant and equipment-net 5,006 5,060
Goodwill-net 1,836 1,903
Other assets 1,091 236
------------------ --------------------
$ 20,564 $ 19,613
================== ====================
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties $ 352 $ 27
Notes payable to institutional lenders 3,140 2,837
Current portion of long term debt 1,073 912
Accounts payable and accrued expenses 6,526 6,475
------------------ --------------------
Total current liabilities 11,091 10,251
Long term debt 3,549 2,678
Minority interest 68 64
------------------ ---------------------
Total long-term liabilities 3,617 2,742
Redeemable preferred stock 794 775
Stockholders' equity:
Common stock 9,018 9,018
Accumulated deficit (4,109) (3,201)
Foreign currency translation adjustments 153 28
------------------ --------------------
Total stockholders' equity 5,062 5,845
------------------ --------------------
$ 20,564 $ 19,613
================== ====================
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
MicroTel International, Inc.
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
1996 1995
---- ----
(in thousands except
per share amounts)
<S> <C> <C>
Net sales $ 7,887 $ 6,796
Cost of sales 6,524 5,073
------------------ ------------------
Gross profit 1,363 1,723
Operating expenses:
Selling, general and administrative 1,975 1,371
Engineering and product development 68 76
------------------ ------------------
INCOME (LOSS) FROM OPERATIONS (680) 276
Other income (expense)
Interest expense (183) (98)
Other (12) (27)
------------------ ------------------
INCOME (LOSS) BEFORE INCOME TAXES (875) 151
Income taxes 14
------------------ ------------------
NET INCOME (LOSS) $ (889) $ 151
================== ==================
NET INCOME (LOSS) PER COMMON SHARE $ (0.15) $ 0.02
================== ==================
WEIGHTED AVERAGE NUMBER OF
SHARES USED IN CALCULATING
NET INCOME (LOSS) PER SHARE 6,063 5,814
================== ==================
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
MicroTel International, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
DECEMBER 31,
1996 1995
---- ----
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (889) $ 151
Reconciliation to cash provided by
(used in) operations:
Depreciation and amortization 209 134
Amortization of intangible assets 67 67
Minority interest 4 (5)
Equity in loss of real estate partnership 13
Changes in operating assets and liabilities:
Accounts receivable (166) (34)
Inventories 208 329
Other assets (157) (333)
Accounts payable and accrued expenses 51 (112)
------------ ---------------
Cash provided by (used in) operations (660) 197
------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (155) (92)
Investment in and loan to real estate partnership (868)
------------ ---------------
Cash used in investment activities (1,023) (92)
------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments to) related parties 325 (4)
Net borrowings (repayments) of other short-term debt 303 (279)
Net borrowings (repayments) of long-term debt 1,032 (384)
------------ ---------------
Cash provided by (used in) financing activities 1,660 (667)
------------ ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 124 (24)
------------ ---------------
NET INCREASE (DECREASE) IN CASH 101 (586)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 785 978
------------ ---------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 886 $ 392
============ ===============
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE
WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT,"
"INTEND", "SHOULD", "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING
EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE
PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION.
SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTES 2,4, AND 6
HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS
AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE
INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the Company) is a holding company for its
three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A., and,
effective March 26, 1997, XIT Corporation (XIT). CXR Telcom Corporation
and CXR S.A.(collectively "CXR") design, manufacture and market
electronic telecommunication test equipment and data communications
equipment. XIT designs, manufactures, and markets information
technology products, including displays and input components, subsystem
assemblies, printed circuits, and hybrid microelectronic circuits. The
Company conducts its operations out of various facilities in the U.S.,
France, England, and Japan and organizes itself in three product line
sectors- Circuits, Components and Subsystem Assemblies, and
Instrumentation and Test Equipment. The Company's Instrumentation and
Test Equipment Sector business is conducted solely by CXR and therefore
its results of operations are not included in the accompanying
consolidated condensed financial statements for the three months ended
December 31, 1996 and 1995.
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 Company's
financial position as of December 31, 1996 and September 30, 1996 and
its results of operations and cash flows for the three months ended
December 31, 1996 and 1995. It is suggested that the accompanying
consolidated condensed financial statements be read in conjunction with
the Company's Consolidated Financial Statements for the three years
ended September 30, 1996, 1995 and 1994 included in its Registration
Statement on Form S-1 (No. 33-29925) filed on June 24, 1997.
6
<PAGE> 7
As discussed more fully in Note 2, the Company merged with XIT on March
26, 1997. The merger was accounted for as a purchase of the Company by
XIT in a "reverse acquisition" because the existing shareholders of the
Company prior to the merger did not have voting control of the combined
entity after the merger. In a reverse acquisition, the accounting
treatment differs from the legal form of the transaction, as the
continuing legal parent company, the Company, is not assumed to be the
acquiror and the financial statements of the combined entity are those of
the accounting acquiror (XIT), including any comparative prior year
financial statements presented by the combined entity after the business
combination. Consequently,the consolidated condensed financial
statements include the accounts of XIT and its wholly and majority-owned
subsidiaries, and beginning March 26, 1997, will include the Company and
its other subsidiaries, CXR Telcom Corporation and CXR S.A. (the Former
Company). XIT's 50% investment in a real estate partnership (see Note 5)
is accounted for using the equity method.
Intercompany balances and transactions are eliminated in consolidation
and the currencies of the countries in which foreign subsidiaries are
located are considered their functional currencies. Cumulative
translation adjustments result from converting from these functional
currencies to U.S. dollars.
FISCAL YEAR END CHANGE
In connection with the reverse acquisition accounting treatment described
above, XIT changed its fiscal year end from September 30 to December 31
to adopt the fiscal year end of the Former Company. This report provides
the financial information for XIT for the transition period between its
fiscal year ended September 30, 1996 and the beginning of its new fiscal
year, January 1, 1997.
STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
In accord with the reverse acquisition accounting treatment, the capital
accounts of XIT will be restated at the merger date to give effect to the
merger exchange ratio (1.451478 common shares of the Company for each
common share of XIT) and to convert XIT's no par value common stock to
$.0033 par value common stock of the Company. Weighted average shares
used in the net income (loss) per share computations presented have been
restated to reflect the exchange.
Net income (loss) per share is computed using the weighted average number
of common shares outstanding during the period. Common stock equivalents
were antidilutive and therefore not part of the shares used in
calculating net income (loss) per share for the three months ended
December 31, 1996 and 1995, respectively. The accretion of the excess of
the redemption value over the carrying value of redeemable preferred
stock of $19,000 and $20,000 have been deducted from net income (loss)
for the three months ended December 31, 1996 and 1995, respectively, in
arriving at net income (loss) applicable to common stockholders used in
the calculations of net income (loss) in those periods.
On March 3, 1997 the Financial Accounting Standards Board issued FAS No.
128 "Earnings per Share" (FAS 128), which will become effective for the
Company for its year end December 31, 1997, requiring restatement of
quarterly and prior year financial information, if applicable. This
pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with APB No. 15 "Earnings per
Share". FAS No. 128 provides for the calculation of Basic and Diluted
earnings per share. Basic earnings per share includes no dilution and is
computed by dividing income available to common shareholders by the
7
<PAGE> 8
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity, similar to fully diluted
earnings per share of APB No. 15. As common stock equivalents have
historically been antidilutive, implementation is expected to have no
effect on previously reported EPS. However, based on the current trading
value of the Company's common stock and assuming the Company is
profitable, it is expected that future presentations of EPS will include
differing values for Basic and Diluted EPS due to the effects of common
stock equivalents.
(2) MERGER WITH XIT
On March 26, 1997, XIT of Ontario, California merged with a wholly-owned,
newly formed subsidiary of the Company, with XIT as the surviving
subsidiary. Pursuant to the transaction, the former shareholders of XIT
were issued approximately 6,119,000 shares of common stock of the
Company, or approximately 66% of the issued and outstanding common stock.
In addition, holders of XIT stock options and warrants collectively have
the right to acquire an additional 2,153,240 shares of common stock.
Collectively, then the former XIT shareholders own, or have the right to
acquire,approximately 65% of the Common Stock of the Company on a
fully-diluted basis as of the date of the transaction.
As noted above, the merger is accounted for as a purchase of the Former
Company by XIT. Accordingly, the purchase price consists of the value of
the common stock outstanding of the Former Company at the date of the
merger of $5,011,000 plus estimated direct costs of the acquisition of
$636,000 and the acquired assets and liabilities of the Former Company
have been recorded at their estimated fair values at the date of the
merger. The excess of $4,904,000 of the purchase price over the
preliminary valuation of the net assets acquired was recorded as goodwill
and is being amortized on a straight-line basis over 15 years. The
preliminary purchase price allocation is subject to change when
additional information concerning asset and liability valuations is
obtained.
The following represents the unaudited pro forma results of operations as
if the merger had occurred at the beginning of the periods indicated and
combines the Former Company's results of operations for the year ended
December 31, 1996 and the three months ended December 31, 1996 with
those of XIT's for its year ended September 30, 1996 and the three months
ended December 31, 1996, respectively, with adjustments to reflect
amortization of the estimated excess price over the fair value of the net
assets acquired.
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
3 Months Year
Ended Ended
Dec 31, September 30,
1996 1996
---- ----
<S> <C> <C>
Net sales $12,151 $47,552
======= =======
Net loss $(4,627) $(3,841)
======= =======
Net loss per common share $ (.50) $ (.42)
======= =======
</TABLE>
The pro forma results of operations above do not purport to be indicative
of the results that would have occurred had the merger taken place at the
beginning of the periods presented or of results which may occur in the
future.
8
<PAGE> 9
(3) INVENTORIES
Inventories consist of the following at December 31, 1996 and
September 30, 1996:
<TABLE>
<CAPTION>
(in thousands, except
per share amounts)
December 31, September 30,
1996 1996
---- ----
<S> <C> <C>
Raw materials $2,718 $3,072
Work-in-process 2,642 2,950
Finished goods 1,289 805
Reserves (352) (322)
---- ----
$6,297 $6,505
====== ======
</TABLE>
(4) BANKING ARRANGEMENTS
Both XIT and a subsidiary have bank lines of credit which expired
originally on January 15, 1997, and which currently expire under
extension arrangements on August 30, 1997. Additionally, both XIT and the
subsidiary are in violation of certain covenants under the related loan
agreements. Although the bank has not waived these defaults, it has
agreed to forbear from taking any action with respect to same until the
extended expiration date. Based on discussion with the bank, management
believes that these lines will be renewed with more favorable advance
rates against related collateralized assets and with less restrictive
financial covenants. However, there can be no assurance that this will
occur. Outstanding borrowings under these lines of credit were $2,027,000
and $1,999,000 at December 31, 1997 and September 30, 1996, respectively.
(5) INVESTMENT IN PARTNERSHIP
On December 19, 1996, XIT Corporation formed an equal partnership with
P&S Development, a California general partnership. The partnership,
"Capital Source Partners, A Real Estate Partnership," obtained ownership
rights to the 93,000 square foot facility at 4290 East Brickell Street,
Ontario, California, 63,000 square feet of which the Company presently
leases as its corporate headquarters and as an administrative and factory
facility for the Digitran Division of XIT. The lease term currently
expires in September 2000, but may be extended to September 2010; and the
monthly rent is approximately $36,000.
XIT's investment in the partnership totalled $118,000 and it has loaned
the partnership $750,000, which is due in varying monthly installments
through 2001. XIT's 50% ownership in the net assets of the partnership
was $768,000 at the date of formation. The $650,000 excess of this amount
over XIT's cost of $118,000 (negative goodwill) is netted against the
recorded percentage ownership in the net assets of the partnership, such
that the net carrying value of the investment at the date of formation of
the partnership is XIT's cost. Equity in the loss of the partnership from
the date of formation to December 31, 1996 approximated $13,000 and is
included in other income(expense) in the consolidated condensed statement
of operations for the three months ended December 31, 1996.
9
<PAGE> 10
(6) LITIGATION
In September, 1994 Raymond Jacobson, a former officer and director of the
Company and a participant in the Company's deferred compensation plan,
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 for life under his deferred
compensation agreement dated May 11, 1993 (the "1993 Agreement"), by
discontinuing payment in August 1994. The 1993 Agreement superseded a
previous deferred compensation agreement dated April 1, 1977 (the "1977
Agreement") which had provided for twice the level of payments. Mr.
Jacobson was claiming damages of approximately $1,200,000, which he
purported to be the present value of all payments to be made under the
1993 Agreement. In June 1995 the Company paid Mr. Jacobson all amounts
past due under the contract plus interest and reinstated the bi-weekly
payments, which have continued to date.
On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit
against Mr. Jacobson in the District Court for Galveston County, Texas
alleging damages arising from DDC's investment of more than $2,000,000
for the purchase of 1,072,000 shares of the Company's common stock. On
February 11, 1997, Mr. Jacobson, through his attorney, demanded that the
Company indemnify him, hold him harmless and pay for the cost of defense,
including reasonable attorney's fees and costs in connection with the
litigation instituted against him by DDC. This suit was subsequently
dismissed by DDC.
On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to
the Company that he believed that the litigation instituted against him
by DDC provided a basis for him to rescind the 1993 Agreement and assert
his rights to full payment under the 1977 Agreement. A motion for leave
to amend the claim against the Company to include this assertion has been
filed with the court.
Notwithstanding the above, the Company management and Mr. Jacobson have
conducted settlement discussions since June 1996, and the Company
believes that an enforceable settlement was reached on January 22, 1997.
Mr. Jacobson apparently disclaims this agreement based on the actions
noted above. On February 28, 1997 the Company filed a motion for leave
to file a cross-claim asserting that the January 22, 1997 agreement
supersedes all previous agreements with Mr. Jacobson.
A court supervised settlement conference with Mr. Jacobson was held on
March 26, 1997. Although a tentative settlement was reached, the
settlement was subject to fulfillment of a number of conditions
subsequent which did not occur and therefore was not binding on either
party. Subsequent thereto, several settlement offers have been proposed
by plaintiff's counsel, none of which are acceptable to the Company.
Currently, the Company's motion for leave to cross-claim has been
granted and a trial setting conference has been scheduled for
September 3, 1997.
The Company does not believe that the value of a settlement of the above
matter or alternatively a trial judgement will be materially in excess of
amounts already recorded by the Company for the deferred compensation
arrangement.
In October 1996, David Scheinfeld brought an action in the Supreme Court
of the State of New York, County of New York, to recover monetary damages
in the amount of $300,000 allegedly sustained by the failure of
10
<PAGE> 11
the Company, its stock transfer agent and its counsel to timely deliver
and register 30,000 shares of Common Stock for which payment had been
made. The Company was informed by David Scheinfeld that in order to
settle his claims, the Company would have to issue him unrestricted
shares of common stock. Since the Company cannot issue unrestricted
shares (absent registration), the Company answered Mr. Scheinfeld's
motion, seeking to compel him to serve a complaint upon the defendants.
On June 30, 1997, the complaint was served.
Although the ultimate outcome of the matters noted above cannot be
predicted with certainty, pending actual resolution, in the opinion of
management, the disposition of these matters will not have a material
adverse affect on the consolidated results of operations or financial
position.
(7) PRIVATE PLACEMENT
On February 20, 1997, the Company accepted a commitment from Yorkton
Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best
efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000
through a private placement of investment units consisting of one share
of restricted common stock and one quarter of a warrant to purchase one
share of restricted common stock. The pricing of the units is based on a
20% discount from the ten day average closing bid price of the Company's
common stock preceding the date of contracting with the institutional
investors (the "Average Reported Price"), with a minimum price per unit
of $2.50 and maximum price of $3.50. The investors warrants have an
exercise price of 130% of the Average Reported Price. Additionally,
Yorkton and one other intermediary earn an aggregate commission of 10% of
the gross proceeds and warrants to acquire 10% of the shares purchased in
the offering at an exercise price of the lesser of the Average Reported
Price or $3.50 per share, and Yorkton further is reimbursed for
accountable expenses of the offering up to 2% of the gross proceeds.
On April 14, 1997, a first closing occurred on 2,000,000 investment
units, for gross proceeds of $5,000,000. Net proceeds to the Company
were $4,400,000. The offering, which was structured to accommodate
multiple closings, would terminate on the earlier of i) the date the
maximum offering of $10,000,000 was contracted or ii) the extended
termination date of May 31, 1997. The offering expired on May 31, 1997
with no additional closings.
11
<PAGE> 12
MICROTEL INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD", "BELIEVE" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL
TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS
STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING
STATEMENTS ARE INCLUDED IN THE FOLLOWING SECTIONS BELOW:
LIQUIDITY AND CAPITAL RESOURCES AND OUTLOOK. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS
MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF VARIOUS FACTORS.
As discussed in Note 1 to the consolidated condensed financial statements, the
financial statements presented are those of XIT Corporation (XIT) because of
the reverse acquisition by XIT of MicroTel International, Inc.(the Company) and
its subsidiaries in a merger on March 26, 1997. The Company's Components and
Subsystems Assembly Sector is referred to as "the Components Sector" in the
discussion below for brevity.
RESULTS OF OPERATIONS
EFFECTS OF ACQUISITIONS ON THE THREE MONTHS ENDED DECEMBER 31, 1996
The consolidated results of operations for the three months ended December 31,
1996 include the results of operations of two companies acquired since December
31, 1996. They include the full quarterly results of both Etch-Tek, Inc., a
manufacturer of printed circuit boards acquired on May 1, 1996, and Abbott
Electronics Ltd., a British manufacturer of power supplies acquired on
September 1, 1996. The table below separates the results of the acquired
entities from the consolidated totals for the three months ended December 31,
1996 in order to provide a more meaningful basis for a comparative discussion
of these results versus the three months ended December 31, 1995.
12
<PAGE> 13
<TABLE>
<CAPTION>
( in thousands )
Three Months Ended December 31
--------------------------------------------------------------------------------------
1996 1995
-------------------------------------------------------------- ------------
Consolidated Acquisitions Comparative
<S> <C> <C> <C> <C>
Net sales $ 7,887 $ 2,200 $ 5,687 $ 6,796
Cost of sales 6,524 1,668 4,856 5,073
------------ ------------ ------------- ------------
Gross profit 1,363 532 831 1,723
Selling expense (693) (105) (588) (554)
General & administrative (1,281) (425) (856) (817)
Engineering & product development (69) (69) (76)
Interest (183) (72) (111) (98)
Other income (expense) (12) 1 (13) (27)
Income taxes (14) (14)
------------ ------------ ------------- ------------
Net income (loss) $ (889) $ (69) $ (820) $ 151
============ ============ ============= ============
</TABLE>
As can be seen from the table, the consolidated results of operations for the
three months ended were significantly impacted by the results of the acquired
companies. Net sales, gross profit, and operating expenses (selling, general
and administrative, and engineering and product development) of these companies
represented 27.9%, 39%, and 25.9%, respectively, of the consolidated totals.
The table following summarizes by company the incremental results related to
the acquired companies for the three months ended December 31, 1996:
<TABLE>
<CAPTION>
(in thousands)
Etch-Tek Abbott Total
------------ ------------- -------------
<S> <C> <C> <C>
Net sales $ 1,013 $ 1,187 $ 2,200
============ ============= =============
Gross profit $ 124 $ 408 $ 532
Operating expenses (182) (348) (530)
Other income(expense) 1 1
Interest expense (16) (56) (72)
------------ ------------- -------------
Net income (loss) $ (73) $ 4 $ (69)
============ ============= =============
</TABLE>
COMPARATIVE RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1997 VS
THREE MONTHS ENDED DECEMBER 31, 1995
The following discussion relates to the comparison of the results of operations
for the three months ended December 31, 1996, excluding the results of the
acquired companies, to the results for the same period of the prior year (see
the first table above under Effects of Acquisitions on the Three Months Ended
December 31, 1996).
Net sales for the three months ended December 31, 1996 declined by $1,109,000
or 16.3% from those in the same period of the prior year. The decline was
principally in the Components Sector, whose sales were down by $1,183,000 or
37%. Approximately $640,000 of the decline in the Sector's sales was due to the
loss of a major account for display monitors, and the remaining decline
resulted principally from the timing of orders from a significant subsystem
assembly customer.
13
<PAGE> 14
Gross profit, as a percentage of sales, declined from 25.7% in the three months
ended December 31, 1995 to 14.6% for the three months ended December 31, 1996.
This decline was the combined result of (a) the lower sales volume for the
Components Sector noted above and the consequential decline in absorption of
fixed manufacturing costs and (b) manufacturing inefficiencies incurred by the
Circuits Sector because of a product mix change to higher technical content
circuit boards.
Operating expenses (selling, general and administrative, and engineering and
product development) increased by $61,000 in total from $1,447,000 in the three
months ended December 31, 1995 to $1,513,000 in the three months ended December
31, 1996. Selling expense, as a percentage of sales, was 10.8% in 1996 versus
9.4% in 1995. Selling expense consists principally of commissions for Circuits
Sector sales and fixed departmental costs for Components Sector sales. The
increase in percentage in 1996 is consequently due to the decline in sales for
the Components Sector noted above. General and administrative and engineering
and product development expenses were relatively comparable between the
periods. The apparent flat level of general and administrative expenses,
however, was the combined result of the positive effects in 1996 of the
streamlining of the administrative structure in the Circuits Sector being
offset by the inclusion in 1995 of a reversal of an accrual of $176,000 related
to the favorable disposition of certain long-disputed administrative costs.
Interest expense increased by only $13,000, as a result of significantly higher
average borrowings in 1996 being mitigated by lower interest rates due to the
refinancing of the Company's bank facilities in January 1996. Other income
(expense) is principally comprised of foreign currency exchange gains and
losses incurred during the respective periods, and in 1996, includes equity in
the loss of a real estate partnership of $13,000.
Income taxes are nominal in the respective periods as the Company is in a loss
carryforward position for Federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $660,000 was used in operations in the three months ended December 31,
1996 versus cash of $197,000 being provided by operations in the same period of
1995. The increase in cash use was caused by the decline in results of
operations, coupled with changes in working capital management during the
respective periods. During the three months ended December 31, 1995, the
Company had reduced inventory levels and elongated its payables cycle due to
cash flow constraints. During the three months ended December 31, 1996 and
again due to cash flow difficulties, the Company also reduced its inventory
levels and its payables generally aged, but it borrowed $225,000 from a related
party to bring certain vendors more current to insure availability of material
supply for pending orders. Subsequent to December 31, 1996 in the first quarter
of fiscal 1997, the Company experienced no significant improvement in cash flow
from operations and due to lack of available borrowings, further reduced its
inventory levels and further elongated its payables cycle.
The Company's investment in and loan to a real estate partnership in 1996 (see
Note 5 to the consolidated condensed financial statements) was financed by a
$100,000 loan from its partner as to the investment and a bank loan of $750,000
as to the loan to the partnership.
All of the Company's banking facilities are asset-based borrowing arrangements,
with substantially all availability borrowed at any given time. Further, as
discussed in Note 4 to the accompanying consolidated condensed
14
<PAGE> 15
financial statements, the bank lines of credit for both the Company and one of
its subsidiaries expire under current extension arrangements on August 30,
1997. Based on discussions with the bank, management believes that the lines
will be renewed with more favorable advance rates and less restrictive
financial covenants. However, there can be no assurances that this will occur.
On February 20, 1997, the Company accepted a commitment from Yorkton Securities
Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise
a minimum of $5,000,000 and a maximum of $10,000,000 through a private
placement of investment units consisting of one share of restricted common
stock and one quarter of a warrant to purchase one share of restricted common
stock. On April 14, 1997, a first closing occurred on 2,000,000 investment
units, for gross proceeds of $5,000,000. Net proceeds to the Company were
$4,400,000. The Units were issued to European institutional investors pursuant
to the exemption afforded by Regulation S under the Securities Act of 1933, as
amended. The offering, which was structured to accommodate multiple closings,
would terminate on the earlier of i) the date the maximum offering of
$10,000,000 was contracted or ii) the extended termination date of May 31,
1997. The offering expired on May 31, 1997 with no additional closings.
The proceeds of the closing of the Yorkton private placement have alleviated
the immediate cash flow problems of the Company. However, management believes
that future cash flows from operations will need to be supplemented to support
its working capital and business development needs for the next twelve months.
Management will actively seek additional funds through an additional private
placement of debt or equity securities. There can be no assurance, however,
that alternative financing will be available, or if available, that it will be
on terms favorable to the Company.
There are two significant legal proceedings pending against the Company (see
Note 6 to the consolidated condensed financial statements). Management believes
that the outcome of these pending litigations will not have a material adverse
effect on the results of operations or financial position of the Company.
OUTLOOK
Consolidated condensed financial statements for the three months ended March
31, 1997 and a related discussion thereof are included in the Company's
Registration Statement on Form S-1 (No. 33-29925) filed on June 24, 1997, and
should be referred to for a discussion of additional factors which may affect
the Company's future results of operations and financial position.
Specifically, reference should be made to the Consolidated Condensed Financial
Statements for the Three Months Ended March 31, 1997 and 1996 included in Item
16. Exhibits and Financial Statement Schedules of the Registration Statement
and to the "Results of Operations-Three Months Ended March 31, 1997 Versus
Three Months Ended March 31, 1996" and "Outlook" sections of the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 11. Information with Respect to the Registrant of the
Registration Statement.
15
<PAGE> 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 - Litigation of the accompanying unaudited consolidated
condensed financial statements and "Legal Proceedings" in Item 11.
Information with Respect to the Registrant of the Registrant's
Registration Statement on Form S-1 (No. 33-29925) filed on June 24,
1997 for a description of legal proceedings.
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
a) Exhibits:
27- Financial Data Schedule for the Three Months Ended
December 31, 1996
(b) No reports on Form 8-K were filed.
16
<PAGE> 17
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.
July 7, 1997 // Barry E. Reifler //
------------------------
Barry E. Reifler, CFO
(Principal Accounting and
Financial Officer)
17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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