<PAGE> 1
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, 1997 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.
------------------------------------------------------
(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:
Name of each exchange
Title of each class on which registered
----------------------------- ---------------------
Common Stock $.0033 par value None
- --------------------------------------------------------------------------------
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 November 13, 1997, there were 11,896,228 shares of common stock
outstanding.
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MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1997 and December 31, 1996 (Unaudited) 3
Consolidated Condensed Statements of Operations
Three and Nine Months Ended September 30, l997 and l996 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, l997 and l996 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
</TABLE>
2
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MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DEC. 31,
1997 1996
------------- --------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 861 $ 886
Accounts receivable 7,355 4,734
Inventories 7,844 6,297
Other current assets 1,322 714
-------- --------
TOTAL CURRENT ASSETS 17,382 12,631
Plant and equipment-net 4,996 5,006
Software development costs-net 698
Goodwill-net (Note 7) 827 1,836
Other assets 1,557 1,091
-------- --------
$ 25,460 $ 20,564
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to related parties $ 325 $ 352
Notes payable to institutional lenders 3,493 3,140
Current portion of long term debt 1,037 1,073
Accounts payable and accrued expenses 9,366 6,526
Deferred compensation 880
-------- --------
Total current liabilities 15,101 11,091
Long term debt 3,013 3,549
Deferred compensation liability 641
Minority interest 76 68
-------- --------
Total long-term liabilities 3,730 3,617
Redeemable preferred stock 701 794
Stockholders' equity:
Common stock 38 9,018
Additional paid-in capital 18,883
Accumulated deficit (12,993) (4,109)
Foreign currency translation adjustments 153
-------- --------
Total stockholders' equity 5,928 5,062
-------- --------
$ 25,460 $ 20,564
======== ========
</TABLE>
See notes to consolidated condensed financial statements.
3
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MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 11,536 $ 8,479 $ 31,272 $ 24,453
Cost of sales 8,570 6,390 23,542 17,984
-------- -------- -------- --------
GROSS PROFIT 2,966 2,089 7,730 6,469
Operating expenses:
Selling, general and administrative 3,247 1,689 8,802 4,892
Engineering and product development 569 76 1,361 233
Writedown of goodwill (Note 7) 5,693 -- 5,693 --
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (6,543) 324 (8,126) 1,344
Other income (expense)
Interest expense (199) (166) (659) (409)
Other (27) (123) (20) (43)
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (6,769) 35 (8,805) 892
Income taxes (benefit) 4 (10) 6 22
-------- -------- -------- --------
NET INCOME (LOSS) $ (6,773) $ 45 $ (8,811) $ 870
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE $ (0.59) $ 0.01 $ (0.92) $ 0.15
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES USED
CALCULATING NET INCOME (LOSS) PER SHARE 11,520 5,886 9,581 5,850
======== ======== ======== ========
</TABLE>
See notes to consolidated condensed financial statements.
4
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MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
----------- ---------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,118) $ 931
Adjustment to reconcile net income (loss) to cash
provided by (used in) operating activities:
Depreciation and amortization 516 455
Amortization of intangibles 450 144
Other noncash items (87) 1
Changes in operating assets and liabilities:
Accounts receivable (811) (40)
Inventories 1,432 (540)
Other assets (353) 185
Accounts payable and accrued expenses (1,437) (491)
------- -------
Cash provided by (used in) operating activities (3,408) 645
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (45) (694)
Cash paid for purchase of Etch-Tek -- (428)
Cash paid for purchase of Abbott -- (734)
Cash acquired in reverse acquisition 264
------- -------
Cash provided by (used in) investment activities 219 (1,856)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments to) related parties (527) (70)
Net borrowings (repayments) of other short-term debt 210 1,211
Net borrowings (repayments) of long-term debt (637) 667
Redemption of preferred stock (140) (140)
Private placement of common stock 4,258
------- -------
Cash provided by financing activities 3,164 1,668
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (64)
------- -------
NET INCREASE IN CASH (25) 393
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 886 392
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 861 $ 785
======= =======
</TABLE>
See notes to consolidated condensed financial statements.
5
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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, 5, 7 AND 8
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. design, manufacture and market electronic telecommunication
test instruments and data communications equipment. XIT designs,
manufactures, and markets information technology products, including
displays and input components, subsystem assemblies, hybrid
microelectronic and other 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.
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, 1997 and December 31, 1996 and the results
of operations and cash flows for the related interim periods ended
September 30, 1997 and 1996. 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 for the three years ended September 30, 1996, 1995
and 1994 included in its Registration Statement on Form S-1/A (No.
333-29925) which was declared effective on October 8, 1997.
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 subsidiaries, and
beginning March 26, 1997, include the Company and its other
subsidiaries, CXR Telcom Corporation and CXR S.A. (the
6
<PAGE> 7
Former Company). XIT has a 50% interest in a real estate partnership
which was formed in December 1996 and is accounted for using the equity
method. Equity in the income (loss) of the partnership of approximately
$7,800 and $(400) for the three and nine months ended September 30,
1997, respectively, is included in other income (expense) in the
accompanying consolidated condensed statements of operations.
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.
Certain 1996 amounts and certain first quarter 1997 amounts included in
the results for the nine months ended September 30, 1997 have been
reclassified to conform to the current quarter presentation with no
impact on the net income (loss) for those periods.
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.
STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
In accord with the reverse acquisition accounting treatment, the capital
accounts of XIT have been restated 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 calculations 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 and nine months
ended September 30, 1997 and 1996, respectively. The accretion of the
excess of the redemption value over the carrying value of redeemable
preferred stock has been deducted from (added to) net income (loss) in
arriving at net income (loss) applicable to common stockholders used in
the calculations of net income (loss) per share. Accretion of $15,000
and $20,000 have been deducted from (added to) net income (loss) for
the three months ended September 30, 1997 and 1996, respectively, and
$48,000 and $61,000 have been deducted from net income (loss) for the
nine months ended September 30, 1997 and 1996, respectively.
7
<PAGE> 8
(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 6,115,000 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 at the acquisition date and an additional $94,000 was recorded
in the second quarter of 1997 upon the resolution of a pre-acquisition
contingency. The goodwill was being amortized on a straight-line basis
over 15 years. During the quarter, the Company wrote down the carrying
value of the goodwill and reduced the life assigned to such goodwill to
ten years (see Note 7). The preliminary purchase price allocation is
subject to change as 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 two months and 25 days ended March 25,
1997 with those of XIT's for its year ended September 30, 1996 and the
nine months ended September 30, 1997, 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)
----------------------------------------
9 Months Ended Year Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net Sales $ 34,352 $ 47,552
============== ========
Net loss $ (10,903) $ (3,835)
============== ========
Net loss per common share $ (1.05) $ (0.42)
============== ========
</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 September 30, 1997 and December
31, 1996:
<TABLE>
<CAPTION>
(in thousands)
----------------------------------------
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Raw materials $ 4,281 $ 2,718
Work-in-process $ 2,943 $ 2,642
Finished goods $ 2,653 $ 1,289
Reserves $(2,033) $ (352)
------- -------
$ 7,844 $ 6,297
======= =======
</TABLE>
(4) BANKING ARRANGEMENTS
Both XIT and a subsidiary have bank lines of credit which expired
originally on January 15, 1997, and which were to expire under extension
arrangements on August 30, 1997. Additionally, both XIT and the
subsidiary were in violation of certain financial covenants under the
related loan agreements. Although the bank had not waived these
defaults, it had agreed to forbear from taking any action with respect
to same until the extended expiration date. On August 11, 1997 these
lines were renewed with more favorable advance rates against related
collateralized assets and with less restrictive financial covenants.
With the exception of a covenant prohibiting certain intercompany
transfers, which XIT has violated but the bank has waived, the Company
is in compliance with each of these covenants. Outstanding borrowings
under these lines of credit were $2,167,000 and $2,027,000 at September
30, 1997 and December 31, 1996, respectively.
(5) 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
9
<PAGE> 10
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 was 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 by the Company of a number of
conditions subsequent which did not occur and therefore was not binding
on either party. Subsequent thereto, several alternative 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 and Mr.
Jacobson's motion for leave to amend his complaint have been granted and
on August 25, 1997, Mr. Jacobson filed an amended complaint. On
September 24, 1997, the Company filed a demurrer to Mr. Jacobson's
second amended complaint and a hearing on such demurrer is scheduled for
November 18, 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 the amount already recorded by the Company for the deferred
compensation arrangement, which approximates $1,000,000 at September 30,
1997. The recorded amount approximates the value of the tentative
settlement reached on March 26, 1997.
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
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 Mr. 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 and sought
to compel him to serve a complaint upon the defendants. On June 30,
1997, the complaint was served, and the Company has subsequently
answered, denying the material allegations of the complaint. In
August 1997, the Company served discovery requests on Mr. Scheinfeld.
Mr. Scheinfeld was obligated to respond to these discovery requests by
September 12, 1997. As of the date hereof, Mr. Scheinfeld has not
responded and the Company plans to seek to dismiss as a result.
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 financial position, results of
operations or cash flows.
(6) 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
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<PAGE> 11
share of restricted common stock. The pricing of the units was 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 earned 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
was 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, the gross proceeds of which were $5,000,000. Net proceeds to the
Company approximated $4,258,000, after $600,000 for commissions and
Yorkton's expenses noted above and $142,000 for other expenses incurred.
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.
(7) WRITE-DOWN OF GOODWILL
The Company assesses the recoverability of its goodwill whenever
adverse events or changes in circumstances or business climate
indicates that expected future cash flows (undiscounted and without
interest charges) for individual business units may not be sufficient
to support recorded goodwill. During the third quarter ended September
30, 1997 the Company, due to decline in profit margins and continuing
operating losses, wrote-off the carrying value of goodwill originating
with the acquisition in 1986 of the Digitran division of Becton
Dickenson and the acquisition of HyComp, Inc. in 1993. The Company
also wrote down the carrying value of goodwill originating from the
reverse acquisition with XIT (see Note 2) to its net realizable value,
required under Statement of Financial Accounting Standard No. 121.
These write downs totaled $5,693,000 and were charged to income.
(8) SUBSEQUENT EVENTS
On October 14, 1997, the Company announced it had entered into an
agreement in principle to sell its Xcel Arnold Circuits, Inc. subsidiary
("XACI"), a manufacturer of multi-layer bare printed circuit boards, to
a private corporation. The agreement is subject to certain conditions
including receipt of financing by the purchaser and the execution of a
definitive agreement. If the purchaser is able to obtain satisfactory
financing to consumate the transaction, the Company expects to close
the sale in mid-December. While XACI represents a significant portion of
the revenues of the Company's Circuits Sector, it also represents a
significant majority of the Company's operating loss in 1997.
On October 17, 1997, the Company's CXR Telcom subsidiary acquired all
the outstanding common stock of Critical Communications, Incorporated,
of St. Charles, Illinois ("Critical") in exchange for shares of the
Company's common stock. Critical designs, manufactures and distributes
telephone test instruments. The acquisition will be accounted for as a
purchase and is effective for accounting purposes as of October 1, 1997.
(9) NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). This
pronouncement provides a different method of calculating earnings per
share than is currently used in accordance with APB Opinion 15,
"Earnings Per Share." FAS 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 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. This
pronouncement is effective for fiscal years and interim periods ending
after December 15, 1997, early adoption is not permitted. The
Company does not believe that the adoption of this pronouncement will
have a material impact on the net loss per share presented in the
accompanying statements of operations.
Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB
is effective for financial statements ending after December 15, 1997.
The new standard reinstates various securities disclosure requirements
11
<PAGE> 12
previously in effect under Accounting Principles Board Opinion No. 15,
which has been superseded by SFAS No. 128. The Company does not expect
adoption of SFAS No. 129 to have a material effect on its financial
position, results of operations or cash flows.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130") issued by the FASB is effective
for financial statements with fiscal years beginning after December 15,
1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The
Company has not determined the effect on its financial position or
results of operations from the adoption or this statement.
Statement of Financial Accounting Standards No. 131 "Disclosures about
Segments of and Enterprise and Related Information" ("SFAS No. 131")
issued by the FASB is effective for financial statements beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information
about their products and services, the geographic areas in which they
operate and their major customers. The Company does not expect adoption
of SFAS 131 to have a material effect on its results of operations.
12
<PAGE> 13
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: RESULTS OF OPERATIONS,
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") resulting
from the reverse acquisition by XIT of MicroTel International, Inc. (the
"Company") and its subsidiaries in a merger on March 26, 1997. The pre-merger
Company and "accounting acquiree" is described as CXR in the discussion below.
The Company's Components and Subsystem Assemblies, and Instrumentation and Test
Equipment Sectors are referred to as "the Components Sector" and "the Test
Equipment Sector", respectively, in the discussion below for brevity.
RESULTS OF OPERATIONS
EFFECTS OF ACQUISITIONS ON THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
The consolidated results of operations for the three and nine months ended
September 30, 1997 include results of operations of CXR since its acquisition
on March 26, 1997. The tables below at the beginning of the respective
discussions of the three and nine months ended September 30, 1997 separate the
results of CXR from the consolidated totals ("the comparative results") for the
three and nine months ended September 30, 1997 in order to provide a more
meaningful basis for a comparative discussion of such results with those of the
prior-year periods.
Additionally, the Company acquired Etch-Tek, Inc. ("Etch-Tek"), a manufacturer
of printed circuit boards on May 1, 1996 and Abbott Electronics Ltd. ("Abbott"),
a British manufacturer of power supplies on September 1, 1996. The effects of
the inclusion of these results of operations for the nine months ended September
30, 1996 in the comparative prior periods is discussed in explanation of the
fluctuations in the comparative results from the related prior period.
13
<PAGE> 14
THIRD QUARTER RESULTS
<TABLE>
<CAPTION>
Three Months Ended September 30
-------------------------------------------------------
1997 1996
----------------------------------------- --------
Consolidated CXR Comparative
------------ -------- -----------
<S> <C> <C> <C> <C>
Net sales $ 11,536 $ 4,525 $ 7,011 $ 8,479
Cost of sales 8,570 2,712 5,858 6,390
-------- -------- -------- --------
Gross profit 2,966 1,813 1,153 2,089
Selling expense 1,312 735 577 602
General & administrative 1,935 627 1,308 1,087
Writedown of goodwill 5,693 4,000 1,693 --
Engineering & product development 569 501 68 76
Interest income (expense) (199) (119) (80) (166)
Other income (expense) (27) 58 (85) (123)
Income taxes 4 -- 4 (10)
-------- -------- -------- --------
Net income (loss) $ (6,773) $ (4,111) $(2,662) $ 45
======== ======== ======== ========
</TABLE>
The following discussion relates to the comparison of the results of operations
for the three months ended September 30, 1997, excluding the results of CXR to
the results for the same period of the prior year.
Net sales for the third quarter of 1997 declined by approximately $1,470,000 or
17.3% from those in the same period of the prior year. This decline was
comprised of lower net sales for the Company's Circuits Sector of approximately
$1,740,000 and an increase in the net sales for the Components Sectors of
$270,000. The decrease in the Circuits Sector resulted primarily from lower
demand from the major customer of the group, Motorola, due to order cutbacks by
the customer precipitated by previous shipment performance problems (see further
discussion of these problems following under the Nine Months Comparison and
Outlook sections). The net increase in the Components Sector was due to the
inclusion of Abbott's operating results for the entire quarter in 1997 versus
one month in the 1996 quarter subsequent to its acquisition on September 1,
1996, an increase of approximately $930,000, partially offset by a one-time
order for the Company's U.K operations which did not repeat in the third
quarter of 1997 as well as general decline in demand for sector products due to
the aging of related customer programs.
Gross profit, as a percentage of sales, declined from 24.6% in the third quarter
of 1996 to 16.4 % for the third quarter of 1997. This decline was due primarily
to the lower sales volume noted above and the consequential decline in
absorption of the Company's fixed manufacturing costs.
Operating expenses (selling, general and administrative, and engineering and
product development) increased by $1,881,000 in total from $1,765,000 in the
third quarter of 1996 to $3,646,000 in the third quarter of 1997. The primary
component of this change was a write down of goodwill of $1,693,000 originating
with the acquisition in 1986 of the Company's Digitran division and the
acquisition in 1993 of HyComp, Inc. (see Note 7 to the consolidated condensed
financial statements). This write down resulted from the Company's reassessment
of the anticipated impact of current industry and economic factors on
the Company's operations. Net realizable value was based on estimated
undiscounted future cash flows from the related assets acquired. Selling
expenses as a percentage of sales increased slightly from 7.1% in 1996 to 8.2%
in 1997, although they include a significant commissions component and are
therefore largely variable. Selling expenses in the Circuits Sector as a
percentage of sales increased as the result of a change in sales mix toward
those products with higher commissions. The increase was due to: (i) a higher
mix of house account to manufacturer's representative sales in 1996, (ii) an
increase in sales, as
14
<PAGE> 15
a percent of the total sales, for the Circuits Sectors which have higher than
average sales commissions; and, (iii) the effects on the percentage in 1997 of
spreading fixed departmental costs over the lower sales volume. General and
administrative expenses increased by $221,000 or 20.3% in 1997 over 1996 as the
positive effects of the streamlining of the administrative structure in the
Circuits Sector in the last half of 1996, resulting in savings of approximately
$163,000 for the quarter as compared to the same period in 1996, were more than
outweighed by higher corporate administrative costs. The latter corporate cost
increases relate principally to incremental legal fees associated with public
reporting, integration matters resulting from the merger of XIT and the Company
and recent acquisition activity. Engineering and product development expenses
decreased by $8,000 from 1996 to 1997 due principally to an increase in the
amount of such costs billable to specific contracts.
Interest expense decreased by $86,000 in the third quarter of 1997 versus the
third quarter of 1996 reflecting lower average borrowings during the 1997
period. Other income (expense) is principally comprised of foreign currency
exchange gains and losses incurred during the respective periods.
Income taxes are nominal in the respective periods as the Company is in a loss
carryforward position for Federal income tax purposes.
The table following summarizes the incremental results of CXR for the three
months ended September 30, 1997.
<TABLE>
<CAPTION>
($000's)
CXR
---------
<S> <C>
Net sales $ 4,525
========
Gross profit $ 1,813
========
Operating expenses 1,863
Writedown of goodwill 4,000
Other expenses (61)
--------
Net income (loss) $ (4,111)
========
</TABLE>
During 1996 and continuing through the third quarter of 1997, domestic sales for
CXR were generally negatively impacted by delays in purchasing by its principal
customers, as a result of the consolidation and/or restructuring of these
companies in the wake of the passage of the Telecommunications Bill of 1996.
One noteable exception was the receipt in April of an order totaling $2,340,000
from AT&T for customized test instruments. European sales of CXR, S.A. were
negatively impacted by a decline in sales to France Telecom during its
pre-privatization reorganization and a generally weak French economy in which
unemployment currently remains at peak levels. Additionally, sales for both
operating subsidiaries have been negatively impacted by the rapid obsolescence
of the analog-based components of their product lines, particularly older
transmission products and further, both sales and margins have been impacted by
extreme price competition for transmission products in general.
CXR Telcom's revenues increased $110,000 or 6% between the respective 1996 and
1997 third quarter periods and its gross profit improved in the third quarter of
1997 increasing approximately $170,000 or 24%. CXR Telcom's margins were
favorably impacted by partial shipments of a high-margin product on an order
received from AT&T in April 1997 and also to the positive effects of personnel
cutbacks made in the first quarter of 1997.
Absent the improved margin which resulted from the partial shipment of the AT&T
order in the amount of approximately $650,000, CXR Telcom's operating results
would have continued to decline from those of the prior year. Based on its
evaluation of this result, of changes in economic and market factors and in
consideration of the aging of CXR's transmission product line, the Company
wrote down the carrying value of the goodwill originating from the reverse
acquisition with XIT to its realizable value and reduced its life from fifteen
years to ten (see Note 7 to the consolidated condensed financial statements).
To overcome the negative factors impacting CXR's European operation, CXR S.A.
has implemented several changes to its business strategy. It has introduced a
new line of ISDN Terminal Adapters to its
15
<PAGE> 16
transmission product line, diversified its test equipment offerings, begun a new
business unit which provides networking solutions to the business user utilizing
O.E.M. products, and refocused its marketing to expand its markets outside of
France, including the establishment of a subsidiary in England, as well as
further diversify both its its product and customer base in order to lessen
dependency on individual customers or suppliers. These efforts have contributed
to offsetting the decline in sales from existing product lines.
FIRST NINE MONTHS RESULTS
<TABLE>
<CAPTION>
(in thousands)
Nine Months Ended September 30
--------------------------------------------------------
1997 1996
----------------------------------------- ---------
Consolidated CXR Comparative
------------ -------- ------------
<S> <C> <C> <C> <C>
Net sales $ 31,356 $ 9,683 $ 21,673 $ 24,452
Cost of sales 23,626 5,647 17,979 17,931
-------- -------- -------- --------
Gross profit 7,730 4,036 3,694 6,521
Selling expense 3,486 1,663 1,823 1,809
General & administrative 5,316 1,206 4,110 3,135
Write down of goodwill 5,693 4,000 1,693 --
Engineering & product
development 1,361 1,168 193 233
Interest (659) (148) (511) (410)
Other income (expense) (20) 45 (65) (42)
Income taxes 6 (6) 12 22
-------- -------- -------- --------
Net income (loss) $ (8,811) $ (4,098) $ (4,713) $ 870
======== ======== ======== ========
</TABLE>
The following discussion relates to the comparison of the results of operations
for the nine months ended September 30, 1997, excluding the results of CXR, to
the results for the same period of the prior year.
Net sales for the nine months ended September 30, 1997 declined by approximately
$2,780,000 or 11.4% from those in the same period of the prior year. This
decline was comprised of lower net sales for the Company's Circuits of
$3,400,000 and a net increase in the net sales for the Components Sectors of
$620,000. The decrease for the first nine months of 1997 in the Circuits Sector
was comprised of an increase in Sector sales of $1,235,000 due to the inclusion
of Etch Tek's operations for the entire nine months in 1997 versus five months
in the same period in 1996 subsequent to its acquisition on May 1, 1996, and a
decline in sales for the remainder of the Sector of $4,635,000. This latter
decline was due principally to lower demand from the major customer of the
group, Motorola. Lower demand in the first quarter of 1997 was based on reduced
customer requirements and the effects on the Sector were compounded by an
inability to ship the lower level of orders received as a result of material
sourcing problems caused by cash flow constraints during the same quarter.
Although it is believed that customer requirements increased in the second
quarter of 1997, the Sector continued to experience lower demand due to order
cutbacks by Motorola resulting from the previous shipment performance problems.
The increase in net sales in the Components Sector was the net result of an
increase in Sector sales of $3,082,000 due to the inclusion of Abbott's
operations for the entire nine months in 1997 versus one month in the same
period in 1996 subsequent to its acquisition on September 1, 1996 which was
partially offset by: (i) the loss in July 1996 of a major account for display
monitors, (ii) a significant digital switch program in place in the first half
of 1996 which did not repeat in 1997 and (iii) a general decline in sector
product sales due to the aging of related customer programs.
16
<PAGE> 17
Gross profit, as a percentage of sales, declined from 26.7% in the first nine
months of 1996 to 17.0 % for the first nine months of 1997. This decline was due
primarily to the lower sales volume noted above and the consequential decline in
absorption of the Company's fixed manufacturing costs, and secondarily to higher
than average margins on the 1996 digital switch program that did not repeat in
1997.
Operating expenses (selling, general and administrative, and engineering and
product development) increased by approximately $2,642,000 in total from
$5,177,000 in the first nine months of 1996 to $7,819,000 in the same period of
1997. The primary component of this change was a write down of goodwill of
$1,693,000 (see Note 7 to the consolidated condensed financial statements). This
write down resulted from the Company's reassessment of the anticipated impact
of current industry and economic factors on the Company's operations. Net
realizable value was based on estimated undiscounted future cash flows from the
related assets acquired. Selling expenses as a percentage of sales increased
slightly from 7.4% in 1996 to 8.4% in 1997, although they include significant
commissions and are therefore largely variable. The increase was due
to a higher mix of house account to manufacturer's representative sales,
principally in the second quarter of 1996 versus the second quarter of 1997, and
to the effects on the 1997 percentage of spreading fixed departmental costs over
the lower sales volume for the first nine months of the year. General and
administrative expenses increased by $975,000 or 31.1% in 1997 over the same
period in 1996 as the positive effects of the streamlining of the administrative
structure in the Circuits Sector in the second half of 1996, which approximated
$374,000 for the first nine months of 1997, were more than outweighed by the
inclusion of Abbott for nine months in 1997 versus only one month in 1996 and
increased corporate administrative costs. The latter corporate cost increases
relate principally to incremental legal fees associated with public reporting
and integration matters following and resulting from the merger of XIT and the
Company, and secondarily to higher personnel costs and the implementation of a
new computer system in 1997. Engineering and product development expenses
declined by $40,000 from 1996 to 1997 due principally to an increase in the
amount of such costs billable to specific contracts.
Interest expense increased by $101,000 in the first nine months of 1997 versus
the first nine months of 1996 principally reflecting higher average borrowings
during the first nine months of the respective periods. Other income (expense)
is principally comprised of foreign currency exchange gains and losses incurred
during the respective periods.
Income taxes are nominal in the respective periods as the Company is in a loss
carryforward position for Federal income tax purposes.
The table following summarizes the incremental results of CXR for the nine
months ended September 30, 1997.
<TABLE>
<CAPTION>
CXR
---------
<S> <C>
Net sales $ 9,683
========
Gross profit $ 4,036
========
Operating expenses 4,037
Write down of goodwill 4,000
Other expenses (97)
--------
Net income (loss) $ (4,098)
========
</TABLE>
CXR's results of operations above consist of the six months and five days ended
September 30, 1997 subsequent to the merger on March 26, 1997. In addition
to CXR's results of operations for the third quarter of 1997 discussed
previously, CXR results above include net earnings of $105,000 on net
17
<PAGE> 18
sales of $500,000 for the five day period ended March 31, 1997, including
amortization of goodwill originating in the merger of $5,000. For the entire
three months ended March 31, 1997, however, CXR incurred a net loss of
$(1,904,000) on net sales of $3,496,000. Included in these quarterly results
prior to March 26, 1997, CXR incurred certain significant charges as follows:
(i) $462,000 of compensation expense related to certain officers and directors
whose corporate capacities would terminate or change at the date of the merger
with XIT and (ii) $287,000 of asset write-downs and severance costs related to
the reassessment of the impact on asset realizable values and certain cutbacks
in personnel, respectively, necessitated by the continuing sluggishness of its
business volume. These charges directly impacted the net loss of CXR for the
quarter as there are no tax effects because CXR is in a net operating loss
carryforward position. Even considering these charges, CXR's results for the
first quarter of 1997 exhibited a significant deterioration from the first
quarter of 1996, in which it incurred a net loss of $715,000 on net sales of
$4,134,000. This deterioration resulted from the continuing and worsening impact
on CXR of the industry and economic factors discussed previously.
Compared to the first quarter of 1997, CXR's results improved significantly in
the second and third quarters as the result of substantially increased net
sales, a favorable impact on margins resulting from the initial shipment of a
high margin product on an order received from AT&T in April 1997, and the
positive effects of personnel cutbacks made in the first quarter. Of the total
AT&T order of $2,340,000, CXT Telcom shipped approximately $241,000 and
$650,000 in the second and third quarters, respectively. Despite the temporary
improvement resulting from the partial shipments of the AT&T order in the
second and third quarters, CXR's operating results have continued to decline
from the prior year. As a result of this decline, the aging of its
transmission product line and other economic and market factors, the Company
wrote down the carrying value of the goodwill originating from the reverse
acquisition with XIT to its net realizable value (see Note 7 to the
consolidated condensed financial statements). Excluding the write down of
goodwill, for the full nine month period ended September 30, 1997 CXR incurred
a net loss of $2,039,000 on net sales of $12,679,000 versus a net loss of
$941,000 on net sales of $12,039,000 in the first nine months of 1996.
Although not necessarily indicative of the results that would have occurred or
of results which may occur in the future, Note 2 to the consolidated condensed
financial statements presents summary pro forma results as if the merger had
taken place at the beginning of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $3,377,000 was used in operations in the first nine months of 1997
versus cash of $645,000 being provided by operations in the first nine months of
1996. 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.
In the first nine months of 1996, the Company had refinanced its bank borrowings
on more favorable terms and had obtained a $750,000 bank term loan secured by
the assets of Etch-Tek, acquired on May 1, 1996. The net proceeds of these
borrowings were used principally for the cash consideration paid for the
Etch-Tek and Abbott acquisitions and to pay down older accounts payable.
Conversely, in the
18
<PAGE> 19
first nine months of 1996, the Company used the trade credit availability from
paying down the accounts payable to fund the increase in accounts receivable and
inventories accompanying the growth during the period.
In the first quarter of 1997, the Company reduced its inventory levels and
elongated its payables cycle due to lack of available borrowings. In the second
quarter of 1997, the Company further reduced its inventories to respond to the
decline in business volume and used a portion of the proceeds of the Yorkton
private placement (discussed below) to pay down the aging payables. The increase
in accounts receivable, which resulted principally from CXR's increased business
volume in the second quarter, was also financed by the proceeds of the private
placement. During the third quarter, the Company experienced improved
collections of accounts receivable and continued to reduce inventories slightly
while concurrently experiencing an increase in payables, principally resulting
from the acquisition of materials to fill the remaining AT&T order scheduled to
be shipped during the fourth quarter of 1997.
As discussed in Note 4 to the consolidated condensed financial statements, the
bank lines of credit for both XIT Corporation and one of its subsidiaries were
to expire under current extension arrangements on August 30, 1997. The lines of
credit were renewed on August 11, 1997 with more favorable advance rates against
related collateralized assets and with less restrictive financial covenants,
with which XIT Corporation and its subsidiary are in compliance. Based on the
collateral base as of the renewal date, the new terms provided approximately
$473,000 in additional available borrowings.
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 $4,258,000. 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 is contracted
or (ii) the currently 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 in the next twelve months.
Management is actively seeking 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 5 to the consolidated condensed financial statements). Management believes
that the outcome of these pending proceedings will not have a material adverse
effect on the financial position, results of operations or cash flows of the
Company.
OUTLOOK
In the Circuits Sector, the Company's delivery performance has improved and
sales demand for product from Motorola has increased in the subsequent period,
although still not to historical levels. Further, sales efforts for the Sector
have been intensified, with initial success, to both increase sales volume and
19
<PAGE> 20
to dilute the Sector's concentration in and consequential dependence on
Motorola. The Company has also implemented yield improvement measures,
reductions in overtime and outsourcing, and improved cost controls in the
Sector's operations. Further, the Sector obtained higher pricing, effective in
September 1997, for certain digital products sold to Motorola as expiring
contracts are renewed and will continue to seek price increases as current
contracts are renewed. There can be no assurance, however, that the Sector will
retain business that comes up for renewal. The combination of the above factors
and the positive effects of anticipated increased volume on absorption of fixed
manufacturing costs is expected to improve gross profit margins in the future.
Despite the expectation of improved operating performance, the Company believes
that its high-volume printed-circuit operation will not ultimately achieve
operating margins comparable to its other circuit operations nor its other
business sector operations and that from a long-term, strategic perspective,
the Company's assets will achieve a higher return if invested in other
activities. Accordingly, the Company has entered into an agreement in principle
to sell its Xcel Arnold Circuits, Inc. subsidiary ("XACI"), to a private
corporation. The agreement is subject to certain conditions including receipt
of financing by the purchaser and the execution of a definitive agreement. The
Company presently expects to close the sale in late November or early December.
The operating loss for XACI represents approximately 65% of the operating loss
for the Company for the first nine months of 1997.
In the Components Sector, the Company is in the process of qualifying itself and
its products with several new prospective customers for display monitors. If
obtained, revenues from such customers should replace the loss in revenue which
resulted from the loss of the major display monitor account in 1996.
Additionally, the Company is actively seeking new programs with existing
customers and new accounts to replace the decline in revenues related to the
aging of its current customers' programs. In August 1997, the Sector
implemented a partial layoff of both administrative and factory personnel,
pending an increase in business volume. Estimated quarterly savings in
personnel costs related to these layoffs is $165,000.
In the Test Equipment Sector, the negative impact of the reorganizations of the
Sector's domestic customers continues. While final implementation guidance on
the deregulation provided for in the Telecommunications Bill of 1996 was
released in late August 1996 by the federal government, allowing the local and
long distance telephone companies to begin entering each others' markets, the
industry continues to reposition itself and enter into business combinations
which have resulted in delays in the purchase of capital equipment. As a
consequence of this phenomenon and the technological obsolescence of the CXR
transmission and test instrument product lines, the Company wrote down the
carrying cost of goodwill originating in the reverse acquisition by XIT
of the Company in March 1997. While the industry repositioning is expected to
ultimately result in market expansion as the changed entities emerge and the
long distance and local carriers vie for business opportunities in each others
markets, it is unclear that will become the situation in the near term or at
all.
Additionally, in October 1997, CXR Telcom acquired Critical Communications,
Incorporated ("Critical") of St. Charles, Illinois. Founded in 1991, Critical
is a provider of sophisticated, state-of-the-art, portable telephone test
instruments used by both long-distance carriers and local telephone service
providers as well as by corporate and government telecommunications end users.
The Company plans to merge the manufacturing operations of Critical into those
of CXR Telcom and to distribute its products through both existing CXR and
Critical sales channels. This acquisition expands the present CXR product
offering to include additional software-driven, user-friendly and
cost-competitive products which are expected to broaden CXR's penetration of
the Installation and Maintenance ("I&M") segment of the telecommunications
marketplace - i.e. that segment in which corporate services installations and
maintenance are provided by the various telephone companies. While CXR's
existing I&M products are used extensively in the Central Office testing
environment (which necessitates the use of a multi-function, all-in-one test
instrument), Critical's products are primarily
20
<PAGE> 21
designed to service the test instrument needs at outside plant service
installations, where lightweight, portable products requiring fewer functional
testing features are required. It is particularly in this market segment, where
CXR presently competes with only one, outdated product, that the Critical
product line is expected to have significant impact. The Company will also begin
to distribute the Critical product line through its French subsidiary, CXR,
S.A., in lieu of products presently acquired from third-party manufacturers and
then resold into the French telecommunications market. The Company plans to
distribute the Critical product line not only in France but throughout Europe,
as well as to the developing telecommunications markets of Latin America and
Asia, for which it presently has no available product offering.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1997, the FASB issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128"). This pronouncement provides a
different method of calculating earnings per share than is currently used in
accordance with APB Opinion 15, "Earnings Per Share." FAS 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 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. This pronouncement is effective for fiscal years
and interim periods ending after December 15, 1997, early adoption is not
permitted. The Company does not believe that the adoption of this pronouncement
will have a material impact on the net loss per share presented in the
accompanying statements of operations.
Statement of Financial Accounting Standards No. 129 "Disclosure of Information
about Capital Structure" ("SFAS No. 129") issued by the FASB is effective for
financial statements ending after December 15, 1997. The new standard
reinstates various securities disclosure requirements previously in effect
under Accounting Principles Board Opinion No. 15, which has been superseded by
SFAS No. 128. The Company does not expect adoption of SFAS No. 129 to have a
material effect on its financial position of results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130") issued by the FASB is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined the effect
on its financial position or results of operations from the adoption or this
statement.
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of and Enterprise and Related Information" ("SFAS No. 131") issued by the FASB
is effective for financial statements beginning after December 15, 1997. The
new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements
of the enterprise and in condensed financial statements of interim periods
issued to shareholders. It also requires that public business enterprises
report certain information about their products and services, the geographic
areas in which they operate and their major customers. The Company does not
expect adoption of SFAS 131 to have a material effect on its results of
operations.
21
<PAGE> 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material developments. See Note 5 - Litigation of the accompanying
unaudited consolidated condensed financial statements and Legal
Proceedings section of Item 11 of the Registrant's Registration
Statement on Form S-1/A (No. 333-29925) which was declared effective
on October 8, 1997 for a description of previously reported
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-none.
b) Reports on Form 8-K - none
22
<PAGE> 23
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.
November 14, 1997 /s/ James P. Butler
--------------------------------------------
James P. Butler, CFO
(Principal Accounting and Financial Officer)
23
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<NAME> MICROTEL INTERNATIONAL, INC.
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