<PAGE>
================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-10346
MICROTEL INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 77-0226211
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(Address of Principal Executive Offices)
(909) 297-2699
(Issuer's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address And Former Fiscal Year,
if Changed Since Last Report)
Indicated by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of December 19, 2000, there were 20,569,759 shares of the issuer's
common stock, $.0033 par value, outstanding.
================================================================================
<PAGE>
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Consolidated Condensed Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999........................................................................ F-1
Consolidated Condensed Statements of Operations and Comprehensive Income for the
three months ended March 31, 2000 and l999 (unaudited)....................................... F-2
Consolidated Condensed Statements of Cash Flows for the three months ended
March 31, 2000 and l999 (unaudited).......................................................... F-3
Notes to Consolidated Condensed Financial Statements (unaudited)................................... F-4
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................. 3
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.................................................................................... 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................. 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................................... 19
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 20
ITEM 5. OTHER INFORMATION.................................................................................. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 20
SIGNATURES.................................................................................................. 21
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS.
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 635 $ 481
Short-term investments 1,181 --
Accounts receivable - net 5,544 6,519
Inventories 4,129 4,181
Other current assets 632 578
--------------- ---------------
Total current assets 12,121 11,759
Property, plant and equipment-net 1,312 1,393
Goodwill-net 1,459 1,507
Investment in unconsolidated affiliate -- 1,240
Other assets 649 722
--------------- ---------------
$ 15,541 $ 16,621
=============== ===============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,046 $ 2,107
Current portion of long-term debt 1,245 1,422
Accounts payable 4,124 4,771
Accrued expenses 2,595 2,985
--------------- ---------------
Total current liabilities 10,010 11,285
Long-term debt, less current portion 121 165
Other liabilities 722 782
--------------- ---------------
Total liabilities 10,853 12,232
Convertible redeemable preferred stock, $10,000
unit value. Authorized 250 shares; issued and
outstanding 59.5 shares and 59.5 shares
(aggregate liquidation preference of $595 and
$595, respectively) 611 588
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized
10,000,000 shares; 0 shares issued and
outstanding -- --
Common stock, $.0033 par value. Authorized
25,000,000 shares; issued and outstanding
18,494,000 and 16,436,000 shares 61 60
Additional paid-in capital 23,817 23,726
Accumulated deficit (19,871) (19,759)
Accumulated comprehensive income (loss) 70 (226)
--------------- ---------------
Total stockholders' equity 4,077 3,801
--------------- ---------------
$ 15,541 $ 16,621
=============== ===============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-1
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
---------------------- ---------------------
(in thousands, except per share amounts)
<S> <C> <C>
Net sales $ 6,486 $ 7,510
Cost of sales 4,113 4,904
---------------------- ---------------------
Gross profit 2,373 2,606
Operating expenses:
Selling, general and administrative 2,212 3,716
Engineering and product development 243 558
---------------------- ---------------------
Loss from operations (82) (1,668)
Other income (expense)
Interest expense (96) (119)
Gain on sale of subsidiary -- 331
Equity in earnings of unconsolidated -- 536
affiliates
Other 95 (47)
---------------------- ---------------------
Loss before income taxes (83) (967)
Income taxes 6 8
---------------------- ---------------------
Net loss $ (89) $ (975)
---------------------- ---------------------
Other comprehensive income (loss):
Change in net unrealized gain on marketable
securities 461 --
Foreign currency translation adjustment (165) (263)
---------------------- ---------------------
Total comprehensive income (loss) $ 207 $ (1,238)
====================== =====================
Basic and diluted loss per share $ (0.01) $ (0.07)
====================== =====================
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-2
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
--------------- --------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (89) $ (975)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 32 136
Amortization of intangibles 66 91
Gain on sale of subsidiary -- (331)
Gain on sale of fixed assets (43) --
Equity in earnings of unconsolidated entities -- (536)
Stock and warrants issued as compensation -- 781
Other noncash items 84 360
Changes in operating assets and liabilities:
Accounts receivable 975 687
Inventories 52 (77)
Other assets 56 (95)
Accounts payable and accrued expenses (1,097) (192)
--------------- --------------
Cash provided by (used in) operating activities 36 (151)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (6) (8)
Cash received for sale of DTS stock 520
--
Proceeds from sale of fixed assets 43 --
Cash collected on note receivable -- 9
--------------- --------------
Cash from investing activities 557 1
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable and long term debt (282) 202
Proceeds from exercise of employee stock options 8 --
Proceeds from sale of common stock -- 1
--------------- --------------
Cash provided by (used in) financing activities (274) 203
--------------- --------------
Effect Of Exchange Rate Changes On Cash (165) (263)
--------------- --------------
Net Increase (Decrease) In Cash 154 (
210)
Cash At Beginning Of Period 481 572
--------------- --------------
Cash At End Of Period $ 635 $ 362
=============== ==============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
F-3
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. is an international telecommunications
electronics company comprised of three wholly owned subsidiaries - CXR Telcom
Corporation in Fremont, California, CXR, S. A. in Paris, France and XIT
Corporation in Rancho Cucamonga, California. CXR Telcom Corporation and CXR, S.
A. design, manufacture and market electronic telecommunications test
instruments, wireless and wireline voice, data and video transmission and
network access equipment. XIT Corporation designs, manufactures and markets
information technology products, including input and display components,
subsystem assemblies and power supplies. The Company operates out of facilities
in the U. S., France, England and Japan.
The Company is organized into three segments - Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits. Through the sale
of various subsidiaries in 1998 and 1999, the Company has divested a majority of
its circuits operations.
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 March 31, 2000 and December 31, 1999 and the results of
operations and cash flows for the related interim periods ended March 31, 2000
and 1999. However, these results are not necessarily indicative of results for
any other interim period or for the year. It is suggested that the accompanying
consolidated condensed financial statements be read in conjunction with the
Company's Consolidated Financial Statements included in its 1999 Annual Report
on Form 10-K.
F-4
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(2) LOSS PER SHARE
The following table illustrates the computation of basic and
diluted loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
------------------ ------------------
<S> <C> <C>
NUMERATOR:
Net loss $ (89,000) $ (975,000)
Less: accretion of the excess of the redemption
value over the carrying value of redeemable
preferred stock (23,000) (56,000)
------------------ ------------------
Loss attributable to common stockholders
(112,000) (1,031,000)
DENOMINATOR:
Weighted average number of common shares outstanding
during the period
18,174,000 14,766,000
------------------ ------------------
Basic and diluted loss per share $ (.006) $ (.070)
================== ==================
</TABLE>
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was antidilutive due to losses
incurred by the Company.
(3) INVENTORIES
Inventories consist of the following.
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
------------------ ------------------
<S> <C> <C>
Raw materials $ 1,644,000 $ 1,728,000
Work-in-process 962,000 1,199,000
Finished goods 1,523,000 1,254,000
------------------ ------------------
$ 4,129,000 $ 4,181,000
================== ==================
</TABLE>
(4) LITIGATION
The Company and its subsidiaries from time to time become involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a
F-5
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
material adverse affect on the Company's consolidated financial position,
results of operations or cash flows.
(5) DISPOSITION OF A BUSINESS
On January 7, 2000, the Company sold all of its interest in the common
stock in Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc. ("Wi-LAN"),
a company based in Alberta, Canada in exchange for $520,000 and 28,340 shares of
Wi-LAN common stock. Wi-LAN is a publicly traded company on the Toronto Stock
Exchange. The Wi-LAN common stock had a market value of $720,000 on the date of
the transaction. The Company is restricted from selling the Wi-LAN stock until
July 7, 2000 due to Toronto Stock Exchange rules that restrict sales of stock
obtained in an acquisition-related transaction. As of March 31, 2000 the value
of the Company's Wi-Lan shares had increased in value by $461,000 to $1,181,000.
The increase in value has been reflected in the carrying value of the investment
and the other comprehensive income or loss line of the equity section in the
balance sheet. The Wi-LAN investment is shown in the current asset section of
the balance sheet as short-term investments.
(6) WARRANT EXCHANGE OFFER
During the first quarter of 2000, the Company offered to holders of
warrants with an exercise price of one dollar or more and ranging as high as
$3.79 the opportunity to exchange their warrants with new warrants for one half
the number of shares at one half the exercise price of the original warrants.
Neither the expiration dates, nor any other terms of the warrants, were changed
as a result of this offer. The offer was available to all warrant holders with
exercise prices of one dollar or more including Carmine T. Oliva, the Company's
President and Chairman of the Board, and the two other directors. The primary
reason for the offer was to reduce the quantity of shares allocated to warrants
so that the Company would have sufficient authorized stock for its needs until
an increase in the authorized stock could be voted on by the stockholders as
part of the year 2000 Annual Meeting of Stockholders.
The offers and acceptances were finalized by April 10, 2000. Shares
represented by warrants were reduced by 1,384,602 shares and this reduction
would serve to reduce the dilution of future earnings per share since fewer
shares could be outstanding. An $87,000 expense was recorded in the first
quarter of 2000 for the difference in fair value of the new warrants as compared
to previous warrants at the date of acceptance. The estimated fair values of the
old and new warrants was calculated using a Black-Scholes pricing model with the
following assumptions: no dividend yield; expected volatility of 93%; a
risk-free interest rate of 6%; and expected lives ranging from 0.1 to 5 years.
(7) REPORTABLE SEGMENTS
The Company has three reportable segments: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits. The
Instrumentation and Test Equipment segment operates principally in the U.S. and
European markets and designs, manufactures and distributes telecommunications
test instruments and voice and data transmission and networking equipment. The
Components and Subsystems Assemblies segment operates in the U.S., European and
Asian markets and designs, manufactures and markets information technology
products, including input and display components, subsystem assemblies, and
power supplies. The Company has disposed of the majority of its Circuits segment
business operations and has only one such operation that is material.
F-6
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(7) REPORTABLE SEGMENTS (CONTINUED)
The Company evaluates performance based upon profit or loss from
operations before income taxes exclusive of nonrecurring gains and losses. The
Company accounts for intersegment sales at prices negotiated between the
individual segments.
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers, design,
manufacturing and marketing strategies.
There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's consolidated financial statements included in its 1999 Annual Report
on Form 10-K.
Selected financial data for each of the Company's operating segments is
shown below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
--------------- ---------------
<S> <C> <C>
Sales to external customers:
Instruments $ 3,553,000 $ 3,708,000
Components 2,264,000 2,918,000
Circuits 669,000 884,000
--------------- ---------------
$ 6,486,000 $ 7,510,000
=============== ===============
Intersegment sales:
Instruments $ -- $ --
Components 73,000 60,000
Circuits -- 181,000
--------------- ---------------
$ 73,000 $ 241,000
=============== ===============
Segment pretax profits
Instruments $ (95,000) $ (781,000)
Components 467,000 512,000
Circuits (111,000) (387,000)
---------------- ----------------
$ 261,000 $ (656,000)
=============== ================
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Segment assets
Instruments $ 7,113,000 $ 9,439,000
Components 5,127,000 7,133,000
Circuits 1,457,000 2,421,000
--------------- ---------------
$ 13,697,000 $ 18,993,000
=============== ===============
</TABLE>
F-7
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(7) REPORTABLE SEGMENTS (CONTINUED)
The following is a reconciliation of the reportable segment loss and
assets to the Company's consolidated totals.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Total income (loss) for reportable segments $ 261,000 $ (656,000)
Unallocated amounts:
Gain on sale of assets of subsidiary -- 331,000
Equity in earnings of unconsolidated
affiliates
-- 540,000
Unallocated general corporate expenses
(344,000) (1,182,000)
------------------ ------------------
Consolidated loss before income taxes $ (83,000) $ (967,000)
================== ==================
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
------------------ ------------------
<S> <C> <C>
ASSETS
Total assets for reportable segments $ 13,697,000 $ 18,993,000
Other assets 1,844,000 2,584,000
------------------ ------------------
Total consolidated assets $ 15,541,000 $ 21,577,000
================== ==================
</TABLE>
(8) SUBSEQUENT EVENT
On April 17, 2000, the Company finalized its acquisition of Belix
Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash, assumption of debt of Belix of
$575,000 and an earn-out for the former stockholders based on future sales.
Belix is located in England, U. K. and is in the business of manufacturing power
supplies for various applications. It will be integrated into the Company's
existing power supply producer, XCEL Power Systems, Ltd. A charge for severance
and other consolidation costs will likely be incurred in the second quarter.
Belix' tangible assets consist primarily of accounts receivable, inventories and
fixed assets.
F-8
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-Q contains certain forward-looking
statements which generally include the plans and objectives of management for
future operations, including plans and objectives relating to our future
economic performance. The forward-looking statements and associated risks may
include, relate to or be qualified by other important factors, including,
without limitation:
--- the projected growth in the telecommunications and electronic
components;
--- our business strategy for expanding our presence in these markets;
--- anticipated trends in our financial condition and results of
operations; and
--- our ability to distinguish ourselves from our current and future
competitors.
We do not undertake to update, revise or correct any forward-looking statements.
The information contained in this report is not a complete description
of our business or the risks associated with an investment in our common stock.
Before deciding to buy or maintain a position in our common stock, you should
carefully review and consider the various disclosures we made in this report,
and in our other materials filed with the Securities and Exchange Commission,
including our Annual Report on Form 10-K for the fiscal year ended December 31,
1999, as amended, that discuss our business in greater detail and that also
disclose various risks, uncertainties and other factors that may affect our
business, results of operations or financial condition.
Any of the factors described alone or in the "Risk Factors" section
could cause our financial results, including our net income (loss) or growth in
net income (loss) to differ materially from prior results.
OVERVIEW
We are a Delaware corporation that was formed July 14, 1989 under the
name CXR Corp. to hold the shares of two of our three present direct
wholly-owned operating subsidiaries, CXR Telcom Corporation, a Delaware
corporation and CXR, S.A., a company organized under the laws of France. These
two subsidiaries manufacture, assemble and distribute transmission and network
access products and telecommunications test instruments. We amended our
certificate of incorporation to change our name to CXR Corporation in October
1989 and then to MicroTel International, Inc. in March 1995.
On March 26, 1997 we acquired our third present direct wholly-owned
operating subsidiary, XIT Corporation. XIT Corporation was a private,
closely-held New Jersey corporation that was formed in 1983 and had been
operating in the United States, England and Japan as a designer, manufacturer
and marketer of information display and input products and printed circuit
boards for the international telecommunications, medical, industrial, military
and aerospace markets.
Our acquisition of XIT Corporation occurred in the form of a merger of
a newly formed and wholly-owned subsidiary of our company with and into XIT
Corporation. The merger involved an exchange by the former shareholders of XIT
Corporation of all of the outstanding shares of XIT Corporation for newly issued
shares of MicroTel International, Inc. representing a majority ownership
interest in MicroTel International, Inc. Because the merger resulted in a change
in control of MicroTel International, Inc., the merger was accounted for as a
reverse acquisition, and historical financial information of XIT Corporation is
used as the historical financial information of MicroTel International, Inc.
-3-
<PAGE>
We previously organized our operations in three business segments:
--- Instrumentation and Test Equipment;
--- Components and Subsystem Assemblies; and
--- Circuits.
In an effort to focus our attention and working capital on our
telecommunications test instruments and our transmission and network access
products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc.
in April 1998 and sold substantially all of the assets of HyComp, Inc., a
manufacturer of hybrid circuits, in April 1999.
In October 2000, we decided to discontinue our circuit segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of XIT Corporation. We intend to
retain our Monrovia, California circuit board manufacturing facility as a
captive supplier of circuit boards to XIT Corporation's Digitran Division.
Consequently, through our three direct wholly-owned operating
subsidiaries, XIT Corporation, CXR Telcom Corporation and CXR, S.A., and through
the divisions and subsidiaries of our subsidiaries, we presently design,
manufacture, assemble, and market products and services in the following two
business segments:
Telecommunications
- Telecommunications Test Instruments (analog and digital test
instruments used in the installation, maintenance, management and
optimization of public and private communication networks)
- Transmission and Network Access Products (range of products for
accessing the public and private networks for the transmission of
data, voice and video)
Electronic Components (digital switches and electronic power supplies)
Our sales are primarily in North America, Europe and Asia. Although a
majority of our sales for the periods covered in this report were to customers
in the telecommunications industry, we also have significant sales to
industrial, medical, aerospace and military customers. Revenues are recorded
when products are shipped if shipped FOB shipping point or when received by the
customer if shipped FOB destination.
Although our operations as of the date of this report are organized
into two business segments, the financial statements and the discussions
relating to the financial statements contained in this report reflect our
previous organization into three segments because the discontinuation of our
circuits segment did not occur until October 2000.
-4-
<PAGE>
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales for the first quarter of 2000 decreased by
approximately $1,024,000 or 13.6% compared with the same period in the prior
year. This decrease in sales was primarily comprised of:
-- The sale of the Company's HyComp, Inc. ("HyComp") subsidiary.
-- A reduction in the sales of the Company's U. K. based component
business.
The table below sets forth the composition of consolidated net sales by
business segment, separately identifying the operations of HyComp for the three
months ended March 31, 2000 and 1999.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, VARIANCE
2000 1999 INCREASE/(DECREASE)
----------- ----------- --------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SEGMENT
-------
Instruments $ 3,553 $ 3,708 $ (155) (4.2)%
Components 2,264 2,918 (654) (22.4)%
Circuits 669 428 241 56.3%
HyComp (sold 3/31/99) -- 456 (456) (100.0)%
----------- ----------- ------------
Total Sales $ 6,486 $ 7,510 $ (1,024) (13.6)%
=========== =========== ============
</TABLE>
Instrument sales were down slightly by 4.2% in the first quarter of
2000 compared to the first quarter of 1999. Management believes this decrease
was partially due to reduced orders of test equipment by U. S. telecom customers
in late 1999 due to Y2K concerns which was a one time non recurring event.
Orders for test equipment have since improved beyond expectation. The reduction
in test equipment sales was offset by improved sales of transmission products.
The increase in U. S. transmission sales was the result of major product
qualification efforts in the latter half of 1999 which had been underway for
almost a year with Pacific Bell and GTE. Sales of transmission and modem
equipment from the Company's facility in France in the current quarter were
slightly below the first quarter of 1999 due to lower than usual sales in
January. This was expected as the sales for this facility in December 1999 were
unusually high which had the affect of shifting sales that would otherwise have
normally been shipped in January into December.
Component sales declined 22.4% to $2,264,000 in the first quarter of
2000 from $2,918,000 in the first quarter of 1999. The U. S. component operation
incurred a 9% sales decrease in the current quarter compared to the first
quarter of 1999 due to a decrease in switch sales. The majority of the sales
decline in this segment is due to a short term delay in the release of
production for certain contracts at the Company's U. K. facility for power
supplies. This resulted in a 28.5% sales decrease in the first quarter of 2000
from the first quarter of 1999 for the U. K. facility.
Excluding the effect of HyComp, Inc., which was sold March 31, 1999,
sales for the Circuit sector increased 56.3% to $669,000 in the current quarter
from $428,000 in the first quarter of 1999. The increase in sales was the result
of a successful effort to replace the Circuit segment's sales to other
facilities of the Company with sales to unrelated third parties at higher
prices. Unit sales were up 4% in the first quarter of 2000 from the comparable
prior year period.
-5-
<PAGE>
GROSS PROFIT
The composition of consolidated gross profit by business segment and
the percentages of related net sales are as follows for the three months ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C>
SEGMENT
--------
Instruments and Test Equip. $ 1,351 38.0% $ 1,452 39.2%
Components 947 41.8% 1,083 37.1%
Circuits 75 11.2% (68) (15.8)%
HyComp (sold 3/31/99) -- -- 139 30.5%
-------- --------
Total Gross Profit $ 2,373 36.6% $ 2,606 34.7%
======== ========
</TABLE>
Gross profit for the Instrumentation and Test Equipment
segment declined slightly in the current quarter compared to the prior year
period. The U. S. facility reduced its manufacturing costs considerably and with
a slightly reduced sales level was able to increase its gross margin to 39% of
sales in the first quarter of 2000 as compared to 32.8% of sales in the first
quarter of 1999 due to reducing headcount, subletting part of its facility and
reorganizing. This improvement in margin was more than offset with a reduction
in margin at the French facility to 37% of sales in the current period from
42.9% of sales in the prior year period. The French facility's margin was
reduced because of the lower exchange rate of the Euro and French Franc to the
U. S. dollar, causing their importation of manufacturing components and resale
items from the U. S. to be more costly in their local currency and thereby
reducing the margins.
Overall, the components segment was able to increase its gross
profit margin to 41.8% of sales in the current quarter from 37.1% of sales in
the first quarter of last year even though sales declined for this segment by
22.4% for the same comparison periods. Although the gross margin increased as a
percentage of sales, the gross margin declined to $947,000 in the first quarter
of 2000 from $1,083,000 in the first quarter of 1999. The U. S. facility has
produced a substantial increase in its margin performance for the current period
by increasing its gross margin percentage of sales to 57.3% in the current
quarter from 43% in the comparable prior year quarter. This improvement was
accomplished by support personnel reductions and moving from the Ontario,
California facility to the smaller and more efficient Rancho Cucamonga,
California facility. The improvement of the gross margin in the U. S. facility
was offset by the reduction in gross margin in the U. K. facility in actual and
percentage terms because of the reduction in volume causing less absorption of
overhead due to the temporary delay in the placement of production releases for
previously awarded contracts.
Excluding the effect of HyComp, Inc., which was sold March 31,
1999, the gross margin for the circuits segment improved to $75,000, or 11.2% of
sales in the first quarter of 2000 from a negative $68,000, or a negative 15.8%
of sales in the first quarter of 1999. This improvement was accomplished by
reducing personnel and making higher unit priced sales as well as a slight
increase in unit volume.
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<PAGE>
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2000 and 1999
were comprised of the following:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Commissions $ 205 $ 250
Other selling 745 937
--------- ---------
Total selling expense 950 1,187
General & administrative expense 1,262 2,529
---------- ----------
Total selling, general & administrative $ 2,212 $ 3,716
========== ==========
Engineering & product development $ 243 $ 558
========== ==========
</TABLE>
Total selling expense as a percentage of net sales decrease to 14.6%
from 15.8% for the three months ended March 31, 2000 and 1999, respectively,
primarily due to cost reductions at CXR Telcom in Fremont, California.
Commissions as a percentage of net sales remained relatively stable at 3.2 % in
the first quarter of 2000 and 3.3% in the first quarter of 1999.
General and Administrative Expenses ("G&A") declined to $1,262,000 or
19.5% of net sales in the current quarter from $2,529,000 or 33.7% of net sales
in the first quarter of 1999. After adjusting for $715,000 of non-recurring
charges in the first quarter of 1999, G&A expenses have been reduced by $552,000
or 30.4% in the current quarter from the prior year quarter. The Company reduced
G&A expenses dramatically by transferring the administrative functions of CXR
Telcom to the corporate office in May 1999 and did so with a reduced corporate
staff. Additional savings in G&A were achieved through closely monitoring and
reducing such expenses at the divisional level and the corporate level.
Engineering and product development costs were incurred by the
Instrumentation and Test Equipment segment in the first quarters of 2000 and
1999. In the first quarter of 1999, $32,000 of such expenses were recorded in
the Circuits segment by HyComp, Inc. which was sold March 31, 1999. Engineering
and product development costs were $243,000 or 3.7% of net sales in the current
quarter which is a $315,000 reduction from the $558,000 or 7.4% of net sales
recorded for the first quarter of 1999. The reduction is primarily due to the
elimination of the CXR Telcom engineering effort in Fremont, California and the
consolidation of such engineering efforts in the St. Charles, Illinois facility.
This reorganization has reduced costs and improved the efficiency of the product
development process. The engineering and product development costs will focus on
the Instrumentation and Test Equipment segment and will focus on bringing new
products to the market in order to improve the Company's competitive position in
this segment.
OTHER INCOME AND EXPENSE
In January 2000, the Company sold all of its interest in Digital
Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc. of Alberta, Canada in
exchange for $520,000 and 28,340 shares of Wi-LAN, Inc. common stock, which is
traded on the Toronto, Ontario Stock Exchange. The market value of the acquired
common stock of Wi-LAN, Inc. was approximately $720,000 on the date of the
transaction. The Company's decision to sell the DTS stock was due to (1) the
investment in DTS not providing expected benefits and (2) the Company's need to
increase liquidity and working capital.
In the first quarter of 1999, the Company recorded $536,000 of equity
in earnings for DTS and $331,000 gain on the sale of HyComp. No expenses or
income related to either DTS or HyComp were
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<PAGE>
incurred in the first quarter of 2000 and none are expected to be incurred in
the future. Interest expense was reduced to $96,000 in the current period from
$119,000 in the prior year due to lower average loan balances. Income taxes are
not material due to U. S. loss carryforwards.
SUBSEQUENT EVENT
On April 17, 2000, the Company finalized its acquisition of Belix
Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash, assumption of debt of Belix of
$575,000 and an earn-out for the former stockholders based on future sales.
Belix is located in England, U. K. and is in the business of manufacturing power
supplies for various applications. It will be integrated into the Company's
existing power supply producer, XCEL Power Systems, Ltd. Belix' tangible assets
consist primarily of accounts receivable, inventories and fixed assets. A charge
for severance and other consolidation costs will likely be recorded in the
second quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $36,000 was generated from operations during the first quarter
of 2000 as compared to a cash usage from operations of $151,000 in the first
quarter of 1999. The primary source of cash from operations was the collection
of receivables which reduced the balance of receivables to $5,544,000 as of
March 31, 2000 as compared to $6,519,000 as of December 31, 1999. The primary
usage of cash from operations was the reduction in accounts payable by $647,000
in the first quarter of 2000. The Company generated net cash of $154,000 for the
first quarter of 2000 compared to a net cash usage of $210,000 in the first
quarter of prior year. The Company received $520,000 cash from the sale of its
DTS stock which was primarily used to pay down debt. Cash used to reduce debt
was $282,000 in the first quarter of 2000.
On January 7, 2000, the Company sold all of its interest in the common
stock of Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc., a public
company based in Alberta, Canada. As consideration, the Company received
$520,000 in cash and 28,340 shares of Wi-LAN common stock valued at
approximately $720,000 at the time of the transaction. The Company used the cash
to pay down debt. In conjunction with the transaction, the Company's lender,
Congress Financial Corporation ("Congress"), agreed to waive certain defaults of
the loan agreement relating to a $350,000 overdraft the Company was required to
pay down by September 22, 1999 and eliminated the requirement of a $350,000
target reserve. The target reserve was a funding requirement to pay down the
principal of the term loan by $350,000 in addition to the regular monthly
principal payments secured by the Wi-LAN stock.
Due to rules of the Toronto Stock Exchange, where Wi-LAN, Inc. stock
trades, the Company is prohibited from selling its interest in the Wi-LAN, Inc.
stock for six months after acquisition because the stock was acquired in a
transaction related to the sale or purchase of a company. However, the Company's
lender did increase the Company's borrowing availability by $400,000 on February
29, 2000 by providing an authorized overdraft.
The financing facility provided by Congress expires on June 23, 2000.
Congress has informed management that it will not renew the loans and such loans
will be due and payable on that day. The Company is actively pursuing
replacement financing and has already received one proposal from a prospective
lender and expects other additional proposals. If the Company is unable to
secure alternative financing by the date of the expiration of the Congress
financing facility, the Company may not be able to continue its domestic
operations.
-8-
<PAGE>
The Company continues to suffer from a shortage of cash. However, with
the recent efforts in cost cutting, reorganizing in the Instrument and Test
Equipment segment, the improvement in recent orders and improved operating
performance and cash flows, management believes the Company's cash situation,
though serious, has improved substantially since the fourth quarter of 1999.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company
(see Note 4 to the Consolidated Condensed Financial Statements included
elsewhere herein).
YEAR 2000
To date, the Company experienced no material effects related to
computer operations and the arrival of the year 2000 as of the date of this
report. Management does not expect any disruptions due to the year 2000 as
management believes all its current systems are year 2000 compliant.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either the Company or its
various operating subsidiaries.
EURO CONVERSION
The Company has operating subsidiaries located in France and the U.K.
with combined net sales from these operations approximating 48% of total Company
net sales for the first quarter of 2000. Net sales from the French subsidiary
participating in the Euro conversion were 34% of the Company's net sales for the
first quarter of 2000. The Company continues to review the impact of the Euro
conversion on its operations.
In 1998, the Company's European operations took steps to ensure their
capability of entering into Euro transactions as of January 1, 1999. No material
changes to information technology and other systems were necessary to
accommodate these transactions as such systems previously had the capability to
utilize multiple currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on the Company's European operations, at this time, the Company does
not foresee any material impediments in its ability to compete for orders from
customers requesting pricing using the new exchange rate. Since the Company has
no significant direct sales between its U.S. operations and Europe, exchange
rate risk is regarded as nominal.
-9-
<PAGE>
RISK FACTORS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE
FUTURE AND WHICH MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.
Our consolidated financial statements have been prepared assuming we
will continue as a going concern. We incurred significant net operating losses
in each of the years ended December 31, 1999, 1998 and 1997. We realized a net
loss of approximately $4.6 million for the twelve months ended December 31,
1999, as compared to incurring a net loss of approximately $1.2 million for the
twelve months ended December 31, 1998 and a net loss of approximately $9.7 for
the twelve months ended December 31, 1997. Additionally, we were in default of
our previously outstanding domestic credit facility agreement because we were
not in compliance with an adjusted net worth covenant contained in that
agreement. These factors raised substantial doubt about our ability to continue
as a going concern and led our independent certified public accountants to
modify their unqualified opinion to include an explanatory paragraph related to
our ability to continue as a going concern. Our consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
For the nine-month period ended September 30, 2000, we reported net
income of approximately $0.4 million. Our accumulated deficit and accumulated
comprehensive loss through September 30, 2000 were approximately $19.4 million
and $0.7 million, respectively, and as of that date we had a total stockholders'
equity of approximately $5.3 million. We expect to realize net income during the
quarter and year ended December 31, 2000. However, there is no assurance that we
actually will realize net income for these periods or maintain profitable
operations in the future. If we are unable to do so, there may be a material
adverse effect on our cash flows, which could cause us to violate covenants
under our credit facility and could impede our ability to raise capital, if
needed, through debt or equity financing.
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT
FOREIGN CURRENCY WHICH MUST BE CONVERTED INTO UNITED STATES DOLLARS FOR
INCLUSION IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT, EXCHANGE RATE
FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF OPERATIONS.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
-10-
<PAGE>
THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE. WE EXPECT THEM TO BECOME
MORE COMPETITIVE IN THE FUTURE, WHICH COULD RESULT IN SIGNIFICANT PRICE
COMPETITION, REDUCED REVENUES, LOWER PROFIT MARGINS OR LOSS OF MARKET SHARE.
The telecommunications and electronic components markets are highly
competitive. These markets may experience pricing and margin pressure that could
adversely affect our business, financial condition and operating results. A
number of development stage companies and major domestic and international
companies offer products and services within the same markets that we target.
Some of our competitors and potential competitors have larger technical staffs,
more established and larger marketing and sales organizations and significantly
greater financial resources than us. Our competitors may develop products and
services that are superior to ours or that achieve greater market acceptance.
Our future success will depend significantly upon our ability to increase our
share of our target markets and to sell additional products, product
enhancements and services to our customers. Competition may decrease:
-- our market share;
-- the prices we receive for our products and services;
-- our revenues; and/or
-- our profit margins.
Any of these decreases could adversely affect our business, financial condition
and operating results. As a result, we may not be able to compete successfully.
IN ORDER TO COMPETE SUCCESSFULLY, WE MUST KEEP PACE WITH THE RAPID CHANGES
INVOLVING THE ELECTRONIC COMPONENTS AND TELECOMMUNICATIONS INDUSTRIES.
The electronic components and telecommunications industries are
characterized by rapid technological advances, changes in customer requirements,
evolving industry standards and frequent new product and services introductions
and enhancements. New products and services based on new technologies or new
industry standards may quickly render existing products and services obsolete.
Our future success will depend upon our ability to enhance our current products
and services and to develop and introduce new products and services that keep
pace with technological developments, respond to the growth in the markets in
which we compete, encompass evolving customer requirements and achieve market
acceptance. Any failure on our part to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in developing or introducing new products and services, could result in a loss
of competitiveness, revenues, profit margins or market share. There is no
assurance that any new products, services or enhancements which we develop will
achieve market acceptance.
WE RELY ON A RELATIVELY LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF ANY
SIGNIFICANT CUSTOMER COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND
FINANCIAL CONDITION.
We derive a significant portion of our revenues from a relatively
limited number of customers. For the nine months ended September 30, 2000, our
ten largest customers accounted for approximately 36% of our revenues. We
anticipate that our ten largest customers will continue to account for a large
portion of our revenues for the foreseeable future. The loss of any one or more
of these major customers would likely have a material adverse effect on our
business, prospects, financial condition, results of operations and cash flows.
-11-
<PAGE>
OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY AFFECT OUR BUSINESS IF
DEMAND IS REDUCED.
During the nine months ended September 30, 2000, the sale of
telecommunications equipment and related services accounted for approximately
55% of our total sales. In many cases we have long-term contracts with our
telecommunications customers but do not receive long-term purchase orders or
commitments under such contracts. Rather, we receive purchase orders for only
such quantities of telecommunications equipment as are required from time to
time by our customers.
During the nine months ended September 30, 2000, the sale of electronic
components accounted for approximately 45% of our total sales. In some cases we
have long-term contracts with our electronic components customers. However, in
most cases we receive purchase orders for only such quantities of electronic
components as are required from time to time by our customers.
Accordingly, we are highly dependent on the successful sales of our
telecommunications products and electronic components. A significant reduction
in sales of these products resulting from changes in industry, including the
entry of new competitors into the market, from the introduction of new or
improved technology or an unanticipated shift in the needs of our customers, or
for other reasons, would have a material adverse effect on our business,
prospects, financial condition, results of operations and cash flows.
OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR PRODUCTS
FROM OUTSIDE SUPPLIERS.
The major components of our products include circuit boards,
microprocessors, chipsets and memory components. Most of these components are
available from multiple sources. However, certain components used in our
products are currently obtained from single or limited sources. Certain modem
chipsets used in our data communications products have been in short supply and
are frequently on allocation by semiconductor manufacturers. Similar to others
in the electronics industry, we recently have, from time to time, experienced
difficulty in obtaining certain components. We do not have guaranteed supply
arrangements with any of our suppliers, and there can be no assurance that these
suppliers will continue to meet our requirements. Shortages of components could
not only limit our production capacity but also could result in higher costs due
to the higher costs of components in short supply or the need to utilize higher
cost substitute components. An extended interruption in the supply of any of
these components or a reduction in their quality or reliability would have a
material adverse effect on our financial condition and results of operations.
While we believe that with respect to our single source components we could
obtain similar components from other sources, we could be required to alter
product designs to use alternative components. There can be no assurance that
severe shortages of components will not occur in the future that could increase
the cost or delay the shipment of our products and have a material adverse
effect on our financial condition and results of operations. Significant
increases in the prices of these components could also have a material adverse
effect on our results of operations because we may not be able to adjust product
pricing to reflect the increases in component costs.
OUR COMMITMENT OF SIGNIFICANT RESOURCES AND EXPANSION OF OUR ACTIVITIES ABROAD
COULD PROVE TO BE UNPROFITABLE DUE TO RISKS INHERENT IN INTERNATIONAL BUSINESS
ACTIVITIES.
Sales of our products and services to customers located outside the
United States accounted for approximately 52% of our net sales for the nine
months ended September 30, 2000. We expect to commit significant resources in
the foreseeable future to expand our operations abroad. Accordingly, we are
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<PAGE>
subject to a number of risks associated with international business activities
that could adversely affect our operations abroad and slow our growth. These
risks generally include, among others:
-- foreign currency fluctuations; and
-- differing technological advances, preferences or requirements;
-- difficulties in managing and staffing our foreign operations;
-- increased collection risks;
-- tariffs and other trade restrictions; and
-- general economic conditions.
Any of these risks could adversely affect our business, financial condition and
operating results.
THERE ARE RISKS THAT OUR PRODUCTS MAY BE RETURNED BY OUR CUSTOMERS.
We are exposed to the risk of product returns from our customers as a
result of returns due to defective products or product components. Generally,
our electronic components carry a one-year limited parts and labor warranty and
our telecommunications products carry a two-year limited parts and labor
warranty. Typically our telecommunications products may be returned within 30
days of purchase if a new order is received, and the new order will be credited
with 80% of the selling price of the returned item. Products returned under
warranty typically are tested and repaired or replaced at our option.
Historically, product returns have not had a material impact on our operations
or financial condition. While we believe that product returns should not be
material in future periods, it is expected that a relatively modest number of
returns will continue. However, there can be no assurance that significant
levels of product returns will not occur in the future, which may have a
material adverse effect on our operations.
IF WE ARE UNABLE TO SUCCESSFULLY CONSUMMATE ADDITIONAL ACQUISITIONS, OUR
LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.
Our business strategy has included growth through acquisitions. We
consider acquisitions that improve our competitive capabilities in our
businesses or provide additional market penetration or business opportunities in
areas that are consistent with our business plan. Identifying and pursuing
strategic acquisition opportunities and integrating acquired products and
businesses requires a significant amount of management time and skill.
Acquisition transactions are accompanied by a number of risks, including, among
other things:
-- the difficulty of assimilating the operations, technology and
personnel of the acquired companies;
-- the potential disruption of our ongoing business;
-- expenses associated with the transactions;
-- additional expenses associated with amortization of acquired
intangible assets;
-- the difficulty of maintaining uniform standards, controls,
procedures and policies;
-- the impairment of relationships with employees and customers as a
result of any integration of new management personnel; and
-- the potential unknown liabilities associated with acquired
businesses.
If we proceed with future acquisitions, our failure to adequately
address these issues could have a material adverse effect on our business,
results of operations and financial condition.
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<PAGE>
WE RELY HEAVILY ON OUR KEY EMPLOYEES, AND THE LOSS OF THEIR SERVICES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Carmine T. Oliva, and our Executive Vice President,
Graham Jefferies. The loss of Mr. Oliva, Mr. Jefferies or one or more other key
members of management could have a material adverse effect on us. Although we
have entered into employment agreements with several key employees, we have not
entered into any employment agreement with any executive officer of our company
other than with Mr. Oliva and Mr. Jefferies. We maintain key-man life insurance
on Mr. Oliva and Mr. Jefferies. However, we cannot assure you that we will be
able to maintain this insurance in effect or that the coverage will be
sufficient to compensate us for the loss of the services of Mr. Oliva or Mr.
Jefferies.
THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF
OUR COMMON STOCK TO FLUCTUATE.
Our quarterly operating results have varied in the past and may
continue to fluctuate significantly in the future due to a number of factors,
many of which are beyond our control. If our operating results do not meet the
expectations of investors, our stock price may decline. Fluctuations in our
operating results may result from a number of factors, including the following:
-- the number of purchasers of our electronics hardware products and
the volume of products purchased by those purchasers;
-- the demand for our electronics hardware products worldwide;
-- the prices that we are able to charge for our products and services;
-- costs related to possible acquisitions of new technologies and
businesses;
-- changes affecting the telecommunications industry, including
consolidations and restructuring of United States and foreign
telephone companies;
-- changes affecting the electronics industry, including the
contraction of military, commercial, governmental and aerospace
spending;
-- the amount and timing of capital expenditures and other costs
relating to the expansion of our business; and
-- general economic conditions.
We believe that period-to-period comparisons of our operating results
will not necessarily be meaningful in predicting future performance.
OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS.
Our strategy envisions a period of rapid growth that may put a strain
on our administrative and operational resources. While we believe that we have
established a significant infrastructure to support growth, our ability to
effectively manage growth will require us to continue to expand the capabilities
of our operational and management systems and to attract, train, manage and
retain qualified engineers, technicians, salespersons and other management
personnel. There can be no assurance that we will be able to do so. If we are
unable to successfully manage our growth, our business, prospects, financial
condition, results of operations and cash flows could be adversely affected.
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<PAGE>
BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS,
MISAPPROPRIATION OF THESE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS
RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION.
Our future success will be highly dependent on proprietary technology,
particularly in our telecommunications business. However, we do not hold any
patents and we currently rely on a combination of contractual rights,
copyrights, trademarks and trade secrets to protect our proprietary rights. Our
management believes that because of the rapid pace of technological change in
the industries in which we operate, the legal intellectual property protection
for our products is a less significant factor in our success than the knowledge,
abilities and experience of our employees, the frequency of our product
enhancements, the effectiveness of our marketing activities and the timeliness
and quality of our support services. Consequently, we rely to a great extent on
trade secret protection for much of our technology. However, there can be no
assurance that our means of protecting our proprietary rights will be adequate
or that our competitors or customers will not independently develop comparable
or superior technologies or obtain unauthorized access to our proprietary
technology.
We may receive infringement claims from third parties relating to our
products and technologies. In such event, we intend to investigate the validity
of any such claims and, if we believe the claims have merit, we intend to
respond through licensing or other appropriate actions. Certain of these claims
may relate to technology included in components purchased by us from third party
vendors for incorporation into our products. In such event, we would forward
these claims to the appropriate vendor. If we or our component manufacturers
were unable to license or otherwise provide any such necessary technology on a
cost-effective basis, we could be prohibited from marketing products containing
that technology, incur substantial costs in redesigning products incorporating
that technology, or incur substantial costs defending any legal action taken
against us, all of which could have a material adverse effect on our business,
prospects, financial condition, results of operations and cash flows.
IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE COULD FACE SIGNIFICANT
LIABILITIES.
We are subject to a variety of environmental regulations relating to
the use, storage, discharge and disposal of hazardous chemicals used in our
circuit board manufacturing processes. Any failure to comply with present and
future regulations could subject us to future liabilities or the suspension of
production. These regulations could also restrict our ability to expand our
facilities or could require us to acquire costly equipment or to incur other
significant expenses to comply with environmental regulations. We may also from
time to time be subject to lawsuits with respect to environmental matters. The
extent of our liability under any such suit is not determinable and may have a
material adverse affect on us.
IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING GOVERNMENT AND INDUSTRY STANDARDS
AND REGULATIONS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS.
We design our products to comply with a significant number of industry
standards and regulations, some of which are evolving as new technologies are
deployed. In the United States, our telecommunications products must comply with
various regulations defined by the United States Federal Communications
Commission, or FCC, and Underwriters Laboratories as well as industry standards
established by Telcordia Technologies, Inc., formerly Bellcore, and the American
National Standards Institute. Internationally, our telecommunications products
must comply with standards established by the European Committee for
Electrotechnical Standardization, the European Committee for Standardization,
the European Telecommunications Standards Institute, telecommunications
authorities in various countries as well as with recommendations of the
International Telecommunications Union. The failure
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<PAGE>
of our products to comply, or delays in compliance, with the various existing
and evolving standards could negatively impact our ability to sell our products.
THE LIMITATION ON OUR USE OF NET OPERATING LOSS CARRYFORWARDS MAY NEGATIVELY
IMPACT OUR RESULTS OF OPERATIONS AND CASH FLOWS.
We have substantial net operating loss, or NOL, carryforwards for
federal and state tax purposes. Because of our ownership changes resulting from
a merger in 1997, the use of these NOL carryforwards to offset future taxable
income will be limited. To the extent we are unable to fully use these NOL
carryforwards to offset future taxable income, we will be subject to income
taxes on such future taxable income, which will negatively impact our results of
operations and cash flows.
OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS PURCHASING SHARES OFFERED BY THIS PROSPECTUS.
The market prices of securities of technology-based companies,
including electronics hardware companies, currently are highly volatile. The
market price of our common stock has fluctuated significantly in the past. The
market price of our common stock may continue to exhibit significant
fluctuations in response to the following factors, many of which are beyond our
control:
-- variations in our quarterly operating results;
-- changes in market valuations of similar companies and stock market
price and volume fluctuations generally;
-- economic conditions specific to the electronics hardware industry;
-- announcements by us or our competitors of new or enhanced products,
technologies or services or significant contracts, acquisitions,
strategic relationships, joint ventures or capital commitments;
-- regulatory developments;
-- additions or departures of key personnel; and
-- future sales of our common stock or other securities.
The price at which you purchase shares of common stock offered by this
prospectus may not be indicative of the price of our stock that will prevail in
the trading market. You may be unable to sell your shares of common stock at or
above your purchase price, which may result in substantial losses to you.
Moreover, in the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY
IN OUR STOCK MAY BE REDUCED.
Broker-dealer practices in connection with transactions in "penny
stocks" are regulated by penny stock rules adopted by the Securities and
Exchange Commission. Penny stocks, like shares of our common stock, generally
are equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in
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the transaction, and, if the broker-dealer is the sole market maker, the
broker-dealer must disclose this fact and the broker-dealer's presumed control
over the market, and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, broker-dealers who sell
these securities to persons other than established customers and "accredited
investors" must make a special written determination that the penny stock is a
suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. Consequently, these requirements may have the
effect of reducing the level of trading activity, if any, in the secondary
market for a security subject to the penny stock rules, and investors in our
common stock may find it difficult to sell their shares.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT BE
AVAILABLE.
Our future capital requirements will depend upon many factors,
including the magnitude of our sales and marketing efforts, the development of
new products and services, possible future strategic acquisitions, the progress
of our research and development efforts and the status of competitive products
and services. We believe that current and future available capital resources
will be adequate to fund our operations for the foreseeable future. However, to
the extent we are in need of any additional financing, there can be no assurance
that any such additional financing will be available to us on acceptable terms,
or at all. If additional funds are raised by issuing equity securities, further
dilution to the existing stockholders may result. If adequate funds are not
available, we may be required to delay, scale back or eliminate our marketing
efforts or to obtain funds through arrangements with partners or others that may
require us to relinquish rights to certain of our technologies or potential
products, services or other assets. Accordingly, the inability to obtain such
financing could adversely affect our business, financial condition and results
of operations.
SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE COULD ADVERSELY AFFECT OUR
STOCK PRICE.
Sales of a substantial number of shares of our common stock in the
public market, or the perception that sales could occur, could adversely affect
the market price for our common stock. We have filed a resale registration
statement with the Securities and Exchange Commission relating to shares of
common stock outstanding or underlying warrants held by various individuals and
entities. When declared effective, that registration statement will result in
additional shares of our common stock being available on the public market. In
addition, our current stockholders beneficially own a large number of shares of
common stock that are outstanding or are issuable upon exercise of options or
warrants or upon conversion of preferred stock, which shares of common stock
they may be able to sell in the public market. These sales also might make it
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.
BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND
IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK.
Until May 12, 1999, our common stock was quoted on the Nasdaq SmallCap
Market. We were unable to maintain the minimum bid price of $1.00 per share and
our stock was delisted from that market. Since May 13, 1999, our common stock
has been traded under the symbol "MCTL" on the OTC Bulletin Board. Because our
stock trades on the OTC Bulletin Board rather than on a national securities
exchange, you may find it difficult to either dispose of, or to obtain
quotations as to the price of, our common stock.
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OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY POSSIBLY
PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR SHARES.
Our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights of those shares, without any further vote
or action by our stockholders. Of these shares, 250 have been designated as
Series A Preferred, 200 of which were issued and 25 of which are currently
outstanding. In addition, 150,000 shares have been designated as Series B
Preferred Stock, 150,000 of which have been issued and are currently
outstanding. The rights of the holders of our common stock are subject to the
rights of the holders of our currently outstanding preferred stock and will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that we may issue in the future. The issuance of preferred
stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting
stock, thereby delaying, deferring or preventing a change in control of our
company. Furthermore, such preferred stock may have other rights, including
economic rights senior to the common stock, and, as a result, the issuance
thereof could adversely affect the market value of our common stock.
THE ANTI-TAKEOVER EFFECTS OF DELAWARE LAW COULD ADVERSELY AFFECT THE PERFORMANCE
OF OUR STOCK.
Section 203 of the General Corporation Law of Delaware prohibits us
from engaging in certain business combinations with interested stockholders, as
defined by statute. These provisions may have the effect of delaying or
preventing a change in control of our company without action by our
stockholders, even if a change in control would be beneficial to our
stockholders, and therefore could adversely affect the price of our common
stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES
Between February and April 2000, the Registrant made an offer to all
holders of warrants to purchase shares of common stock at exercise prices of
$1.00 or more pursuant to which these holders could elect to surrender their
outstanding warrants with exercise prices of $1.00 or more in exchange for the
issuance to them of warrants to purchase a number of shares equal to one-half of
the number of shares underlying the surrendered warrants at an exercise price of
one-half of the exercise price of the surrendered warrants. A total of 2,769,201
warrants with exercise prices ranging from $1.21 to $3.79 were surrendered in
exchange for 1,384,602 warrants with exercise prices ranging from $0.605 to
$1.895. The majority of warrants exchanged were held by persons or entities who
were not employees or directors of the Registrant or its subsidiaries.
In March 2000, the Registrant issued 306,148 shares of common stock in
connection with a cashless exercise of warrants to purchase 500,000 shares of
common stock at an exercise price of $.69 per share.
In March 2000, the Registrant issued an aggregate of 35,000 shares of
common stock to three employees upon exercise of warrants at an exercise price
of $0.20 per share.
In March 2000, the Registrant issued 306,148 shares of common stock to
one entity in connection with the cashless exercise of a warrant to purchase up
to 500,000 shares of common stock, which warrant had been issued in connection
with settlement of litigation.
The issuances of our securities in the above-referenced transactions
were effected in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933, as amended, on the basis that such
transactions did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would provide.
DIVIDENDS
To date we have not paid dividends on our common stock. Our line of
credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificates of designations related to our
Series A Preferred Stock and Series B Preferred Stock provide that shares of
those series of preferred stock are not entitled to receive cash dividends. We
currently intend to retain future earnings to fund the development and growth of
our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by the our board of directors.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As of March 31, 2000, we were in default of the tangible net worth
covenant of our domestic credit facility. The balance due under this facility
was $2,810,643 as of March 31, 2000. In August 2000, we replaced our domestic
credit facility with a new domestic credit facility with Wells Fargo Business
Credit, Inc. which expires in August 2003.
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
27.1 Financial Data Schedule*
-----------
* Filed as an exhibit to the initial filing of this Form 10-Q on May 15, 2000.
(b) REPORTS ON FORM 8-K
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MICROTEL INTERNATIONAL, INC.
Dated: December 29, 2000 By: /s/ CARMINE T. OLIVA
------------------------------------
Carmine T. Oliva, Chairman of the Board,
Chief Executive Officer (principal executive
officer) and President
By: /s/ RANDOLPH D. FOOTE
------------------------------------
Randolph D. Foote, Chief Financial Officer
(principal financial and accounting officer)
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