<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended June 30, 2000 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.)
9485 Haven Avenue, Ste. 100, Rancho Cucamonga, CA 91730
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (909) 297-2699
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
-------------------------------- on which registered
---------------------
Common Stock $.0033 par value 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 August 8, 2000, there were 20,509,549 shares of common stock outstanding.
<PAGE>
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
June 30, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 30, 2000 and l999 4
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 2000 and l999 5
Notes to Consolidated Condensed Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
</TABLE>
-2-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 2000 1999
-------- ------------
<S> <C> <C>
Cash and cash equivalents $ 391 $ 481
Short-term investments 799 --
Accounts receivable, net 6,256 6,519
Inventories 4,941 4,181
Other current assets 1,274 578
-------- --------
Total current assets 13,661 11,759
Property, plant and equipment-net 1,378 1,393
Goodwill, net 3,123 1,507
Investment in unconsolidated affiliates -- 1,240
Other assets 492 722
-------- --------
$ 18,654 $ 16,621
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 3,125 $ 2,107
Current portion of long-term debt 1,509 1,422
Accounts payable 5,263 4,771
Accrued expenses 2,867 2,985
-------- --------
Total current liabilities 12,764 11,285
Long-term debt, less current portion 766 165
Other liabilities 652 782
-------- --------
Total liabilities 14,182 12,232
Convertible redeemable preferred stock 253 588
Stockholders' equity:
Common stock 68 60
Additional paid-in capital 24,302 23,726
Accumulated deficit (19,785) (19,759)
Accumulated comprehensive loss (366) (226)
-------- --------
Total stockholders' equity 4,219 3,801
-------- --------
$ 18,654 $ 16,621
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-3-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 7,512 $ 6,801 $ 13,998 $ 14,311
Cost of sales 4,698 4,411 8,811 9,314
-------- -------- -------- --------
Gross profit 2,814 2,390 5,187 4,997
Operating expenses:
Selling, general and administrative 2,459 2,890 4,671 6,607
Engineering and product development 253 477 496 1,035
-------- -------- -------- --------
Income (loss) from operations 102 (977) 20 (2,645)
Other income (expense)
Interest expense (99) (83) (195) (202)
Gain on sale of subsidiary -- -- -- 331
Equity in earnings of unconsolidated affiliates -- 191 -- 727
Other 110 (40) 205 (87)
-------- -------- -------- --------
Income (loss) before income taxes 113 (909) 30 (1,876)
Income tax expense 4 5 10 13
-------- -------- -------- --------
Net income (loss) 109 (914) 20 (1,889)
Other comprehensive gain (loss)
Changes in unrealized gain on marketable securities (382) -- 78 --
Foreign currency translation adjustment (51) (161) (217) (424)
-------- -------- -------- --------
Total comprehensive loss $ (324) $ (1,075) $ (119) $ (2,313)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.005 $ (0.054) $ (0.001) $ (0.123)
======== ======== ======== ========
Diluted earnings (loss) per share $ 0.004 $ (0.054) $ (0.001) $ (0.123)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-4-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
------- -------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 20 $(1,889)
Adjustments to reconcile net income (loss) to cash provided by (used
in) operating activities:
Depreciation and amortization 206 240
Amortization of intangibles 169 173
Gain on the sale of fixed assets (43) --
Gain on sale of subsidiary -- (331)
Equity in earnings of unconsolidated entities -- (727)
Stock and warrants issued as compensation 130 1,219
Other noncash items 221 463
Changes in operating assets and liabilities:
Accounts receivable 987 1,576
Inventories (19) 626
Other assets (185) 59
Accounts payable and accrued expenses (2,245) (1,081)
------- -------
Cash provided by (used in) operating activities (759) 328
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (9) (52)
Proceeds from sale of fixed assets 43 --
Proceeds from the sale of DTS stock 520 --
Proceeds from sale of subsidiary -- 750
Investment in Belix Ltd. companies (592) --
Cash received from note receivable -- 9
------- -------
Cash provided by (used in) investing activities (38) 707
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (repayments) of notes payable and long term debt 852 (1,063)
Proceeds from exercise of warrants and employee stock options 73 --
Proceeds from sale of common stock -- 2
------- -------
Cash provided by (used in) financing activities 925 (1,061)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (218) (424)
------- -------
-5-
<PAGE>
NET DECREASE IN CASH AND CASH EQUIVALENTS (90) (450)
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 481 572
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 391 $ 122
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-6-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
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 NOTE 4 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
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 United States, 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.
-7-
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 June 30, 2000 and the results
of operations and cash flows for the related interim periods ended June
30, 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.
(2) EARNINGS (LOSS) PER SHARE
The following table illustrates the computation of basic and
diluted loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NUMERATOR:
Net income (loss) $ 109 $ (914) $ 20 $ (1,889)
Less: accretion of the excess of the
redemption value over the carrying
value of redeemable preferred stock 23 (11) 46 45
-------- -------- -------- --------
Income (loss) attributable to common
stockholders 86 (903) (26) (1,934)
DENOMINATOR:
Weighted average number of common
shares outstanding during the period 18,712 16,594 18,443 15,685
Incremental shares from assumed
conversions of warrants, options and
preferred stock 2,076 -- -- --
-------- -------- -------- --------
Adjusted weighted average shares 20,788 16,594 18,443 15,685
Basic loss per share $ .005 $ (.054) $ (.001) $ (.123)
======== ======== ======== ========
Diluted loss per share $ .004 $ (.054) $ (.001) $ (.123)
======== ======== ======== ========
</TABLE>
-8-
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The computation of diluted loss per share for the six month
period ended June 30, 2000 and the six and three month period ended
June 30, 1999 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 or such instruments had exercise prices greater than the
average market price of the common shares during the periods presented.
(3) INVENTORIES
Inventories consist of the following.
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $ 1,684,000 $ 1,728,000
Work-in-process 1,558,000 1,199,000
Finished goods 1,699,000 1,254,000
------------------ --------------
$ 4,941,000 $ 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
material adverse affect on the Company's consolidated financial
position, results of operations or cash flows.
(5) ACQUISITION AND DISPOSITION OF BUSINESSES
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 Exchange. The Wi-LAN common
stock had a market value of $720,000 on the date of the transaction.
The Company was restricted from selling the Wi-LAN stock until July 7,
2000 due to Toronto exchange rules that restrict sales of stock
obtained in an acquisition related transaction. As of June 30, 2000 the
value of the Company's Wi-Lan shares had increased in value by $79,000
to $799,000. The increase in
-9-
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(5) ACQUISITION AND DISPOSITION OF BUSINESSES (CONTINUED)
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. Accordingly, the Wi-LAN investment is shown in the
current asset section of the balance sheet as short-term investments.
On July 7, 2000, the Company sold all its shares of Wi-LAN common stock
for net proceeds of $917,000. The sale resulted in a gain of
approximately $197,000 which will be included in the Company's results
of operations in the third quarter of 2000.
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 and an
earn-out for the former stockholders based on sales. The Company has
recorded an estimated earn-out accrual of approximately $440,000. In
adition, the Company has recorded an additional accrual of
approximately $360,000 for certain severance and relocation costs
related to Belix. The company has included accruals in the calculation
of the cost of the acquisition. 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' assets consist mostly
of accounts receivable, inventories and fixed assets. All dollar
amounts indicated in this paragraph are derived from the conversion of
British pounds into U. S. dollars at the conversion rate in effect at
the time of the acquisition.
(6) CONVERSION OF PREFERRED STOCK
During the three months ended June 30, 2000, certain holders
of convertible redeemable preferred stock converted 34.5 shares of
preferred stock into 1,743,285 shares of common stock. The same holders
also exercised warrants to purchase 172,500 shares of common stock for
$0.25 per share.
-10-
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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.
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.
-11-
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) REPORTABLE SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999
---- ----
<S> <C> <C>
SALES TO EXTERNAL
CUSTOMERS:
Instruments $ 7,193,000 $ 7,357,000
Components 5,408,000 5,540,000
Circuits 1,397,000 1,414,000
------------ ------------
$ 13,998,000 $ 14,311,000
============ ============
INTERSEGMENT SALES:
Instruments $ -- $ --
Components -- 130,000
Circuits 153,000 321,000
------------ ------------
$ 153,000 $ 451,000
============ ============
SEGMENT PRETAX INCOME
(LOSS)
Instruments $ 46,000 $ (971,000)
Components 1,076,000 722,000
Circuits (266,000) (892,000)
------------ ------------
$ 856,000 $ (1,141,000)
============ ============
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
SEGMENT ASSETS
Instruments $ 7,139,000 $ 7,960,000
Components 8,757,000 5,213,000
Circuits 1,319,000 1,379,000
----------- -----------
$17,215,000 $14,552,000
=========== ===========
</TABLE>
-12-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS (CONTINUED)
The following is a reconciliation of the reportable segment
loss and assets to the Company's consolidated totals.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
PRETAX INCOME (LOSS)
Total income (loss) for reportable segments $ 856,000 $(1,141,000)
Unallocated amounts:
Gain on sale of assets of subsidiary -- 331,000
Equity in earnings of unconsolidated
affiliates -- 727,000
Write-down of note receivable -- (466,000)
Warranty reserve reversal 110,000 --
Unallocated general corporate
expenses (936,000) (1,327,000)
----------- -----------
Consolidated loss before income taxes $ 30,000 $(1,876,000)
=========== ===========
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Total assets for reportable segments $17,215,000 $14,552,000
Other assets 1,439,000 2,069,000
----------- -----------
Total consolidated assets $18,654,000 $16,621,000
=========== ===========
</TABLE>
-13-
<PAGE>
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. PROSPECTIVE READERS OR
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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 1999
NET SALES
Consolidated net sales for the second quarter of 2000 increased by
$711,000 or 10.5% compared with the same period in 1999. The table below shows
the composition of consolidated net sales by business segment.
<TABLE>
<CAPTION>
Three Months Three Months Variance-
Ended Ended Increase Percent
Segment June 30, 2000 June 30, 1999 (Decrease) Change
------- ------------- ------------- ---------- ------
<S> <C> <C> <C> <C>
Test Equipment $3,641 $3,649 $ (8) (0.2)%
Components 3,143 2,622 521 19.9%
Circuits 728 530 198 37.4%
------ ------ ------ ----
Total $7,512 $6,801 $ 711 10.5%
====== ====== ====== ====
</TABLE>
The relative percent of net sales by segment between the respective
periods experienced the following changes:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
Segment June 30, 2000 June 30, 1999
------- ------------- -------------
<S> <C> <C>
Test Equipment 48.5% 53.7%
Components 41.8% 38.5%
Circuits 9.7% 7.8%
----- -----
Total 100.0% 100.0%
===== =====
</TABLE>
-14-
<PAGE>
The Instrument and Test Equipment segment sales remained approximately
the same in the second quarter of 2000 compared to the second quarter of 1999.
CXR Telcom experienced a $665,000 increase in sales of its test equipment in the
second quarter of 2000 as compared to the prior year period as a result of
favorable acceptance of the Company's new compact series 704 test equipment.
This increase was offset by lower than expected sales of transmission equipment
from CXR S. A. such as ISDN products and modems. The U. S. transmission product
line was transferred from CXR Telcom in Fremont, California to CXR S. A. in
France effective April 1, 2000.
The Component segment sales increased $521,000 or 19.9% in the second
quarter of 2000 over such sales in the prior year period. The Rancho Cucamonga,
California based XIT Corporation ("XIT") increased its sales by $119,000 in the
second quarter of 2000 as compared to the second quarter of 1999 primarily due
to the acceleration of orders of one of XIT's largest customers for the final
year of a five year contract. The Company's Japanese subsidiary XCEL Japan, Ltd.
increased its sales by $140,000 in the current quarter as compared to the prior
year period primarily as result of improved economic conditions in Asian
markets. The remaining increase in sales of $262,000 for the second quarter of
2000 as compared to the second quarter of 1999 for the Component segment was
primarily due to the net addition to sales that the acquisition of Belix Ltd.
contributed to the Company's U. K. subsidiary, XCEL Power Systems, Ltd. ("XPS").
Belix contributed $658,000 of revenue in the second quarter of 2000.
The Circuit segment increased sales by $198,000 or 37.4% in the second
quarter of 2000 from the second quarter of 1999. The increase in sales was the
result of the Company's effort to increase this segment's sales to unrelated
third parties in conjunction with a planned reduction of intercompany sales.
However, management believes it may be in the Company's long term interest to
exit the Circuit segment.
GROSS PROFIT
Consolidated gross profit as a percent of net sales increased to 37.5%
in the second quarter of 2000 from 35.1% in the second quarter of 1999. The
composition of consolidated gross profit by business sector and the percentages
of related net sales are shown in the following table for the periods indicated:
<TABLE>
<CAPTION>
Three Months Percent of Three Months Percent of
Ended Related Ended Related
Segment June 30, 2000 Net Sales June 30, 1999 Net Sales
------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Test Equipment $1,490 40.9% $1,446 39.6%
Components 1,284 40.9% 933 35.6%
Circuits 40 5.5% 11 2.0%
------ ------
Total $2,814 37.5% $2,390 35.1%
====== ======
</TABLE>
Gross profit for the Instrumentation and Test Equipment segment as a
percent of net sales improved to 40.9% in the second quarter of 2000 from 39.6%
in the second quarter of 1999. The gross profit improvement primarily resulted
from a greater percentage of higher margin test equipment sold in the current
quarter than in the prior year quarter in comparison to total sales of test
equipment and transmission equipment. The increase in relatively high margin
test equipment sales more than offset the lower margins related to the
transmission and modem sales. The gross profit at CXR Telcom improved to 50% in
the second quarter of 2000 as compared to 45% in the second quarter of 1999. For
the same
-15-
<PAGE>
comparison period, CXR S. A.'s gross profit fell to 35.4% from 37.4%. This
reduction in margin was primarily the result of lower quantities of transmission
and modem production sold and to higher material costs due to the lower
valuation of the French Franc in relation to U. S. dollars.
The Component segment improved its gross profit as a percentage
of sales substantially to 40.9% in the second quarter of 2000 from 35.6% in the
second quarter of 1999. XIT greatly improved its gross profit margin as a
percent of sales to 66.5% in the current quarter from 41.8% in the prior year
quarter. This highly improved performance primarily resulted from additional
manufacturing efficiencies, less overhead due to the relocation last November
into less costly facilities, the discontinuation of the less profitable
subsystem assemblies business and higher production volumes. Partially
offsetting such improvements was a reduction in gross profit as a percent of
sales at XPS to 15.4% in the second quarter of 2000 from 27.2% in the second
quarter of 1999. Incomplete engineering and delays in the receipt of components
negatively impacted Belix and delays in production releases for existing
contracts unfavorably impacted XPS. Belix contributed $658,000 of revenue in the
second quarter of 2000.
The Circuits segment improved its gross profit as a percent of net sales
in the second quarter of 2000 to 5.5% from 2% in the second quarter of 1999. The
improvement mainly was due to the to higher prices from more outside business
and improved efficiencies due to higher volumes.
OPERATING EXPENSES
Operating expense for the three months ended June 30, 2000 and 1999 were
comprised of the following.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Commissions $ 209 $ 189
Other selling expense 796 850
------ ------
Total selling expense 1,005 1,039
General & administrative 1,454 1,851
------ ------
Total selling, general & administrative $2,459 $2,890
====== ======
Engineering & product development $ 253 $ 477
====== ======
</TABLE>
Total selling expense as a percentage of net sales decrease to 13.3%
from 15.3% for the three months ended June 30, 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 2.8 %
for both the current quarter and the prior year second quarter.
General and administrative expenses ("G&A") declined to $1,454,000 or
19.4% of net sales in the current quarter from $1,851,000 or 27.2% of net sales
in the second quarter of 1999. The G&A for the prior year period included an
expense of $466,000 to establish a reserve for a note receivable. Without this
charge the prior year period G&A would have been $1,385,000 and would have
represented 20.4% of sales.
-16-
<PAGE>
Engineering and product development costs were incurred by the
Instrumentation and Test Equipment segment in the second quarters of 2000 and
1999. Such costs were $253,000 or 3.4% of net sales in the second quarter of
2000 compared to $477,000 or 7% of net sales in the second quarter of 1999. The
majority of the reduction in engineering and product expenses in the current
quarter as compared to the prior year period is due to the closing down of the
engineering function at the CXR Telcom facilities in Fremont, California and
concentrating the engineering efforts in the St. Charles, Illinois engineering
facility. Management believes a substantial engineering and product development
effort is necessary to maintain the Company's competitive position.
OTHER INCOME AND EXPENSE
Interest expense increased slightly in the second quarter of 2000 from
the second quarter of 1999. Other income of $110,000 included a reversal of a
warranty reserve related to the prior year sale of HyComp, Inc., a former
subsidiary of the Company. The reserve was partially reversed due to the
settlement of a warranty issue and therefore the Company recorded other income
of $116,000.
SIX MONTHS ENDED JUNE 30, 2000 VERSUS JUNE 30, 1999
NET SALES
Consolidated net sales for the first six months of 2000 decreased by
approximately $313,000 or 2.2% compared with the same period in 1999. The table
below shows the composition of consolidated net sales by business sector.
<TABLE>
<CAPTION>
Six Months Six Months Variance-
Ended Ended Increase/ Percent
Segment June 30, 2000 June 30, 1999 (Decrease) Change
------- ------------- ------------- ---------- ------
<S> <C> <C> <C> <C>
Test Equipment $ 7,193 $ 7,357 $ (164) (2.2)%
Components 5,408 5,540 (132) (2.4)%
Circuits 1,397 1,414 (17) (1.2)%
------- ------- -------
Total $13,998 $14,311 $ (313) (2.2)%
======= ======= =======
</TABLE>
The relative percent of net sales by segment between the respective
periods experienced the following changes:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
Segment June 30, 2000 June 30, 1999
------- ------------- -------------
<S> <C> <C>
Test Equipment 51.4% 51.4%
Components 38.6% 38.7%
Circuits 10.0% 9.9%
----- -----
Total 100.0% 100.0%
===== =====
</TABLE>
The Instrument and Test Equipment segment sales declined by 2.2% in the
first half of 2000 compared to the first half of 1999. However, CXR Telcom
experienced a $1,366,000 increase in sales of test equipment in the first half
of 2000 as compared to the prior year period in which $630,000 of test equipment
was sold. The increase was primarily due to favorable acceptance of the
Company's new compact series 704 test equipment. This represents a 217% increase
in test equipment sales in the first half of 2000 from the first half of 1999.
This increase was offset by lower than expected sales of
-17-
<PAGE>
transmission equipment from CXR S. A. such as ISDN products and modems. The U.
S. transmission product line was transferred from CXR Telcom in Fremont,
California to CXR S. A. in France effective April 1, 2000.
The Component segment sales decreased slightly by 2.4% in the six-month
period ended June 30, 2000 from the prior year six-month period. XPS in the U.
K. incurred a sales decline of 9.8% in the first half of 2000 as compared to the
first half of 1999 primarily due to delays in the release of production for
certain contracts. However, the Company's Japanese subsidiary, XCEL Japan, Ltd.,
increased its sales by $132,000, or 41.8% in the current six-month period as
compared to the prior year period due to strong sales in the Asian market for
components. Belix contributed $658,000 of revenue during the first half of 2000.
The Circuit segment sales remained relatively flat in the six-month
period ended June 30, 2000 as compared to the six-month period ending June
30, 1999. The first six-month period of 1999 included $456,000 sales of
HyComp, Inc. a former subsidiary that was sold on March 31, 1999. Excluding
the HyComp Inc. sales from the first half of 1999, the circuit segment sales
increased to $1,397,000 in the first six-month period of 2000 from $958,000
in the first six-month period of 1999 which represents a $439,000 increase in
sales or a 45.8% increase. The dramatic improvement in sales volume has been
attained by concentrated effort to replace intercompany sales with more
profitable third party sales. Notwithstanding the remarkable progress that
has been achieved in this segment, management believes it may be in the
long-term interest of the Company to leave this segment.
GROSS PROFIT
Consolidated gross profit as a percent of net sales increased to 37.1%
in the first half of 2000 from 34.9% in the first half of 1999. The composition
of consolidated gross profit by business sector and the percentages of related
net sales are shown in the following table for the periods indicated:
<TABLE>
<CAPTION>
Six Months Percent of Six Months Percent of
Ended Related Ended Related
Segment June 30, 2000 Net Sales June 30, 1999 Net Sales
------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Test Equipment $2,842 39.5% $2,900 39.4%
Components 2,230 41.2% 2,016 36.4%
Circuits 115 8.2% 81 5.7%
------ ------
Total $5,187 37.1% $4,997 34.9%
====== ======
</TABLE>
Gross profit for the Instrumentation and Test Equipment segment as a
percent of net sales was relatively unchanged in the six-month period of 2000 as
compared to the six-month period of 1999. The gross profit at CXR Telcom
improved to 45% in the first half of 2000 as compared to 38.1% in the first half
of 1999. For the same comparison period, CXR S. A.'s gross profit fell to 36.2%
from 40%. This reduction in margin was primarily the result of higher material
costs due to the lower valuation of the French Franc in relation to U. S.
dollars.
The Component segment improved its gross profit as a percentage of
sales to 41.2% in the six-month period ending on June 30, 2000 from 36.4% in the
six-month period ending on June 30, 1999. XIT greatly improved its gross profit
margin as a percent of sales to 62.2% in the first half from 42.4% in
-18-
<PAGE>
the comparable prior year period. This improved performance primarily resulted
from additional manufacturing efficiencies, less overhead due to the relocation
last November into less costly facilities, the discontinuation of the less
profitable subsystem assemblies business and higher production volumes.
Partially offsetting such improvements was a reduction in gross profit as a
percent of sales at XPS to 15.4% in the first half of 2000 from 28.7% in the
first six months of 1999. The reduction primarily resulted from the additional
costs associated with integrating the Belix operations into the XPS operations.
Also, both Belix and XPS experienced lower than expected sales. Incomplete
engineering and delays in the receipt of components negatively impacted Belix
and delays in production releases for existing contracts unfavorably impacted
XPS. Belix contributed $658,000 of revenue in the first half of 2000.
The Circuits segment improved its gross profit as a percent of net sales in the
first half of 2000 to 8.2% from 5.7% in the first half of 1999. The improvement
mainly was due to a 45.8% increase in sales of the Company's remaining Circuit
segment facilities which was due to higher prices from more outside business and
improved efficiencies due to higher volumes.
OPERATING EXPENSES
Operating expense for the six months ended June 30, 2000 and 1999 were
comprised of the following.
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Commissions $ 414 $ 439
Other selling expense 1,541 1,788
------ ------
Total selling expense 1,955 2,227
General & Administrative 2,716 4,380
------ ------
Total S,G & A $4,671 $6,607
====== ======
Engineering & product development $ 496 $1,035
====== ======
</TABLE>
Total selling expense as a percentage of net sales decrease to 13.9%
from 15.6% for the six months ended June 30, 2000 and 1999, respectively,
primarily due to cost reductions at CXR Telcom in Fremont, California.
Commissions, as a percentage of net sales, remained stable at 3% for both the
current six-month period and the prior year six-month period.
General and Administrative Expenses ("G&A") declined dramatically to
$2,716,000 or 19.4% of net sales in the first half of 2000 from $4,380,000 or
30.6% of net sales in the first half of 1999. The G&A for the prior year period
of 1999 included an expense of $466,000 to establish a reserve for a note
receivable, a charge of $522,000 associated with the company's program to retain
its listing on Nasdaq and a $193,000 charge related to a 1997 acquisition.
Without these charges the prior year period G&A would have been $3,199,000 and
would have represented 22.4% of sales. The reduction of G&A expenses to 19.4% of
sales represents the results of much of the company's cost cutting efforts of
1999 and early 2000. Management is continuing to reevaluate all costs and
intends to continue reducing administrative expenses in relation to the
Company's business levels.
-19-
<PAGE>
Engineering and product development costs were incurred by the
Instrumentation and Test Equipment segment in the first half of 2000 and 1999
except for $32,000 of such costs incurred by the Circuits segment in the first
quarter of 1999. Engineering and product and development costs were $496,000 or
3.5% of net sales in the first half of 2000 compared to $1,035,000 or 7.2% of
net sales in the first half of 1999. The majority of reduction in engineering
and product expenses in the current quarter as compared to the prior year period
is due to the closing down of the engineering function at the CXR Telcom
facilities in Fremont, California and concentrating the engineering efforts in
the St. Charles, Illinois engineering facility. Management believes a
substantial engineering and product development effort is necessary to maintain
the Company's competitive position.
OTHER INCOME AND EXPENSE
Interest expense decreased slightly in the second half of 2000 from the
second half of 1999. Other income of $110,000 included a reversal of a warranty
reserve related to the prior year sale of HyComp, Inc., a former subsidiary of
the Company. The reserve was partially reversed due to the settlement of a
warranty issue and therefore the Company recorded other income of $116,000. The
other income category for the period ended June 30, 1999 included $331,000 gain
on the sale of HyComp, Inc., a former subsidiary and $727,000 of recorded
earnings based on the equity method as result of earnings of the Company's
former ownership of 37% of the common stock of Digital Transmission Systems,
Inc.
-20-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash of $759,000 was used by operations in the first six months of 2000
compared to cash of $328,000 provided by operations in the first six months of
1999. The decrease in cash used in operations resulted primarily from
substantial payments of accrued expenses and accounts payable. Accounts
receivables collection provided much of the cash to partially offset the cash
used in the reduction in accrued expenses and payables. Cash flows from
investing activities included cash received from the sale of the Company's 37%
interest in Digital Transmission Systems, Inc. ("DTS") offset with the
investment in Belix. Financing activities provided $925,000 of cash flow
primarily from additional debt related to the acquisition of Belix.
On January 7, 2000, the Company sold all of its interest in the common
stock of ("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 was 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. On July 7, 2000, the Company sold
all its shares of Wi-LAN common stock for net proceeds of $917,000. The sale
resulted in a gain of approximately $197,000 which will be included in the
Company's results of operations in the third quarter of 2000. The proceeds were
used to pay down debt owed Congress eliminating the overadvance and paying down
the term loan balance to $55,000.
The financing facility provided by Congress expired on June 23, 2000.
Congress has twice amended its loan agreement with the Company to extend its
credit facility through August 14, 2000. The Company expects to have completed
the process of obtaining new financing with the business credit operations of a
well-known national lending institution and anticipates paying off its Congress
debt by August 14. However, there can be no assurance that the new financing
will be obtained.
The Company's cash situation continues to improve in the domestic
operations. In light of the recent efforts in cost cutting, reorganizing in the
Instrument and Test Equipment segment and the improvement in recent orders,
management believes the Company's cash situation has improved substantially
since the fourth quarter of 1999. The Company expects to further improve its
cash position on the effective date of the new financing discussed above.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company (see
Note 4 to the Consolidated Condensed Financial Statements included elsewhere
herein).
-21-
<PAGE>
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 49% of total Company
net sales for the first half of 2000. Net sales from the French subsidiary
participating in the Euro conversion were 32% of the Company's net sales for the
first half 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.
OUTLOOK FOR THE COMPANY
The Company's overall strategy is to expand its Instrumentation and Test
Equipment segment through the acquisition and/or development of new products,
product lines and/or separate operating companies. Concurrently, the Company
continues to evaluate existing lower-margin or loss operations elsewhere
throughout the Company, with a view toward divestment so as to redirect capital
to the higher margin Instrumentation and Test Equipment segment. In addition,
the Company will continue to seek to maximize short to intermediate term
profitability on existing maturing product lines in all segments through price
increases and lower operating costs. The Company has completed its transfer of
production of its U. S. transmission and modem product lines from its CXR Telcom
Fremont facility to its French subsidiary, CXR, S. A. This transfer will improve
the manufacturing efficiency and sales effort of these product lines as they
will now be centralized in one location.
CXR Telcom has released a new universal ADSL/xDSL facility test set
incorporating IEEE 23 tone test technique that should result in a significant
increase in the sales of its 704A universal test set. Also, CXR, S. A. has
introduced in Europe its new high speed mSDSL multirate modem. This new Fastline
2000 modem varies its transmission rate to provide maximum performance over
single pair copper wires. In the Component segment, XIT's Digitran Division has
achieved recertification by the
-22-
<PAGE>
U. S. government's Defense Supply center to manufacture the Digitran patented
family of Binary Coded Digital switches for the government's Qualified Parts
List. In April 2000, CXR Telcom received a contract from the Federal Aviation
Agency for the Halcyon 704A-400 combination test unit that is expected to
provide $8,000,000 in revenue over a three year period.
The Company's XCEL Power Systems, Ltd. ("XPS") in the U. K. acquired
Belix, Ltd. ("Belix") on April 17, 2000. Belix manufactures power supplies as
does XPS. The combined entity is expected to double its sales compared to its
sales before the acquisition. Belix is expected to be profitable in its first
year as part of the Company's U. K. operations.
The Company's XIT subsidiary has achieved its highest open order
position in several years. In fact, three out of six-months of new orders
exceeded one million dollars and this trend is continuing. The open order trend
coupled with lower costs from cost reductions achieved in 1999 have resulted in
this unit achieving a net income contribution for six-months of $1,129,000 and
this trend is expected to continue through the first half of 2001.
Following the initial round of mergers of Regional Bell Operating
Companies in 1997 and 1998, certain other mergers which occurred in 1999, most
notably SBC's acquisition of Ameritic among other acquisitions, have resulted in
the Company's CXR Telcom subsidiary having its products, which were previously
approved by SBC, now becoming approved also by Ameritec and others. This has
resulted in substantially improved order entry and a growing open order position
for CXR Telcom. These new approvals coupled with previous approvals for CXR
Telcom's new 704A universal tests sets have resulted in higher unit sales in the
first quarter of 2000 than all of 1999. We see this trend continuing and further
enhanced by newly introduced custom ruggedized enclosures for the new product
range. Domestic sales of transmission products have expanded with the
introduction of Remote Access Server products for Internet applications as well
as for other transmission products for billing and voice mail applications which
are currently being sold to SBC Communications, GTE and others.
The Company expects its profit and cash flow to continue to improve in
subsequent quarters of 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material new developments. See Note 4 - Litigation in the
accompanying unaudited consolidated condensed financial statements.
Item 2. Changes in Securities and Use of Proceeds
None.
-23-
<PAGE>
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:
Exhibit Description
Number -----------
-------
10.52 Agreement between XCEL Power Systems Limited and the
stockholders of Belix Company Limited dated April 17, 2000
27 Unaudited Financial Data Schedule for the six months ended
June 30, 2000.
(b) Reports on Form 8-K.
Reports on Form 8-K were filed as follows:
(1) Dated May 4, 2000 under Item 5 - Other, was filed on May 5,
2000.
(2) Dated June 28, 2000 under Item 5 - Other, was filed on June 28,
2000.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
l934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MicroTel International, Inc.
August 14, 2000 /s/ Carmine T. Oliva
------------------------------------
Carmine T. Oliva
Chief Executive Officer
(Principal Executive Officer)
/s/ Randolph D. Foote
------------------------------------
Randolph D. Foote
Chief Financial Officer
(Principal Accounting and Financial
Officer)
-25-
