-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C9lbTs1+tVm5yBVdNYzlexmLKptTZvW1QJbk3myuGiQxmH4lH5DAHoiJTfc60iKx iUm2xH9ZoPxmbnAPndiwdw== 0000893220-97-001066.txt : 19970521 0000893220-97-001066.hdr.sgml : 19970521 ACCESSION NUMBER: 0000893220-97-001066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970520 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROTEL INTERNATIONAL INC CENTRAL INDEX KEY: 0000854852 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 770226211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10346 FILM NUMBER: 97612168 BUSINESS ADDRESS: STREET 1: 2040 FORTUNE DR STREET 2: STE 102 CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084358520 MAIL ADDRESS: STREET 1: 2040 FORTUNE DRIVE STREET 2: STE 102 CITY: SAN JOSE STATE: CA ZIP: 95131 FORMER COMPANY: FORMER CONFORMED NAME: CXR CORP DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q MICROTEL INTERNATIONAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarter ended March 31, 1997 or ( ) Transition report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 For the transition period N/A Commission file Number 1-10346 MICROTEL INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 77-0226211 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4290 E. Brickell Street, Ontario California 91761 (Address of principal executive offices) (Zip Code) Registrant's telephone number (909) 391-4321 Securities registered pursuant to Section 12(b) of the Act:
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 March 31, 1997 there were 9,311,179 shares of Common Stock outstanding. 2 MICROTEL INTERNATIONAL, INC. INDEX TO FORM 10-Q
PAGE ---- Part I - FINANCIAL INFORMATION Item l. Financial Statements Consolidated Condensed Balance Sheets March 31, 1997 and December 31, 1996 3 Consolidated Condensed Statements of Operations Three Months Ended March 31, l997 and l996 4 Consolidated Condensed Statements of Cash Flows Three Months Ended March 31, l997 and l996 5 Notes to Consolidated Condensed Financial Statements 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-15 Part II - OTHER INFORMATION Item 1. Legal Proceedings 16 Item 2. Changes in Securities 16 Item 3. Defaults upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
-2- 3 PART 1-FINANCIAL INFORMATION MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
MARCH 31, DEC. 31, 1997 1996 ---- ---- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 998 $ 886 Accounts receivable 6,705 4,738 Inventories 8,836 6,297 Other current assets 1,044 724 -------- -------- Total current assets 17,583 12,645 Plant and equipment-net 5,292 5,006 Software development costs-net 829 Goodwill-net 7,637 2,776 Other assets 1,567 1,092 -------- -------- $ 32,908 $ 21,519 ======== ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to related parties $ 1,512 $ 352 Notes payable to institutional lenders 2,913 3,140 Current portion of long term debt 1,072 1,058 Accounts payable and accrued expenses 10,693 6,255 Deferred compensation 982 -------- -------- Total current liabilities 17,172 10,805 Long term debt 3,335 3,565 Deferred compensation liability 676 Minority interest 61 59 -------- -------- Total long-term liabilities 4,072 3,624 Redeemable preferred stock 811 794 Stockholders' equity: Common stock 31 20 Additional paid-in capital and other 14,578 9,412 Accumulated deficit (3,756) (3,136) -------- -------- Total stockholders' equity 10,853 6,296 -------- -------- $ 32,908 $ 21,519 ======== ========
See notes to consolidated condensed financial statements. -3- 4 MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996 (in thousands except per share amounts) Net sales $ 7,707 $ 7,336 Cost of sales 6,234 5,372 ------- ------- GROSS PROFIT 1,473 1,964 Operating expenses: Selling, general and administrative 1,775 1,467 Engineering and product development 98 106 ------- ------- INCOME (LOSS) FROM OPERATIONS (400) 391 Other income (expense) Interest expense (198) (128) Other (1) 22 ------- ------- INCOME (LOSS) BEFORE INCOME TAXES (599) 285 Income taxes 4 3 ------- ------- NET INCOME (LOSS) $ (603) $ 282 ======= ======= NET INCOME (LOSS) PER COMMON SHARE $ (0.10) $ 0.05 ======= ======= WEIGHTED AVERAGE NUMBER OF SHARES USED IN CALCULATING NET INCOME (LOSS) PER SHARE 6,244 5,814 ======= =======
See notes to consolidated condensed financial statements. -4- 5 MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 1996 ---- ---- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(603) $ 282 Reconciliation to cash provided by (used in) operations: Depreciation and amortization 162 138 Amortization of intangible assets 48 38 Minority interest 2 12 Changes in operating assets and liabilities: Accounts receivable (157) 72 Inventories 440 (99) Other assets (43) 412 Accounts payable and accrued expenses 93 (739) ----- ----- Cash provided by (used in) operations (58) 116 ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Net disposals (purchases) of property, plant and equipment 13 (179) Cash acquired in reverse acquisition 264 ----- ----- Cash provided by (used) in investment activities 277 (179) ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) related parties 660 27 Net borrowings (repayments) of other short-term debt (370) (271) Net borrowings (repayments) of long-term debt (281) 679 ----- ----- Cash provided by financing activities 9 435 ----- ----- EFFECT OF EXCHANGE RATE CHANGES ON CASH (116) (48) ----- ----- NET INCREASE (DECREASE) IN CASH 112 324 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 886 392 ----- ----- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 998 $ 716 ===== =====
See notes to consolidated condensed financial statements. -5- 6 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS When used in these notes to consolidated condensed financial statements, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend", "should", "believe" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating costs and financial position. Specifically, forward-looking statements are included in Notes 2,4, and 5 hereof. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially than those included within the forward-looking statements as a result of various factors. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the Company) is a holding company for its three wholly-owned subsidiaries-CXR Telcom Corporation, CXR S.A., and, effective March 26, 1997, XIT Corporation (XIT). CXR Telcom Corporation and CXR S.A. design, manufacture and market electronic telecommunication test equipment and data communications equipment. XIT designs, manufactures, and markets information technology products, including displays and input components, subsystem assemblies, printed circuits, and hybrid microelectronic circuits. The Company conducts its operations out of various facilities in the U.S., France, England, and Japan and organizes itself in three product line sectors-Circuits, Components and Subsystem Assemblies, and Instrumentation and Test Equipment. 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 financial position as of March 31, 1997 and December 31, 1996 and results of operations and cash flows for the three months ended March 31, 1997 and 1996. It is suggested that these interim consolidated financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, l996. As discussed more fully in Note 2, the Company merged with XIT on March 26, 1997. The merger was accounted for as a purchase of the Company by XIT in a "reverse acquisition" because the existing shareholders of the Company prior to the merger did not have voting control of the combined entity after the merger. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company, the Company, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year -6- 7 financial statements presented by the combined entity after the business combination. Consequently,the consolidated condensed financial statements include the accounts of XIT and its subsidiaries, and beginning March 26, 1997, include the Company and its other subsidiaries, CXR Telcom Corporation and CXR S.A. (the Former Company). Intercompany balances and transactions are eliminated in consolidation and the currencies of the countries in which foreign subsidiaries are located are considered their functional currencies. Cumulative translation adjustments result from converting from these functional currencies to U.S. dollars. FISCAL YEAR END CHANGE In connection with the reverse acquisition accounting treatment described above, XIT changed its fiscal year end from September 30 to December 31 to adopt the fiscal year end of the Former Company. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE In accord with the reverse acquisition accounting treatment, the capital accounts of XIT have been restated to give effect to the merger exchange ratio (1.451478 common shares of the Company for each common share of XIT) and to convert XIT's no par value common stock to $.0033 par value common stock of the Company. Net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Common stock equivalents were antidilutive and therefore not part of the shares used in calculating net income (loss) per share for the three months ended March 31, 1997 and 1996, respectively. On March 3, 1997 the Financial Accounting Standards Board issued FAS No. 128 "Earnings per Share" (FAS 128), which will become effective for the Company for its year end December 31, 1997, requiring restatement of quarterly and prior year financial information, if applicable. This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APB No. 15 "Earnings per Share". FAS No. 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share of APB No. 15. The potential effects of FAS 128 on the consolidated condensed financial statements presented herein has yet to be determined. (2)MERGER WITH XIT On March 26, 1997, XIT of Ontario, California merged with a wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former shareholders of XIT were issued approximately 6,115,000 shares of common stock of the Company, or approximately 66% of the issued and outstanding common stock. In addition, holders of XIT stock options and warrants collectively have the right to acquire an additional 2,153,240 shares of common stock. Collectively, then the former XIT shareholders own, or have the right to acquire,approximately 65% of the Common Stock of the Company on a fully-diluted basis as of the date of the transaction. -7- 8 As noted above, the merger is accounted for as a purchase of the Former Company by XIT. Accordingly, the purchase price consists of the value of the common stock outstanding of the Former Company at the date of the merger of $5,011,000 plus estimated direct costs of the acquisition of $636,000 and the acquired assets and liabilities of the Former Company have been recorded at their estimated fair values at the date of the merger. The excess of $4,904,000 of the purchase price over the preliminary valuation of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 15 years. The preliminary purchase price allocation is subject to change when additional information concerning asset and liability valuations is obtained. The following represents the unaudited pro forma results of operations as if the merger had occurred at the beginning of the periods indicated and combines the Former Company's results of operations for the year ended December 31, 1996 and the three months ended March 31, 1997 with those of XIT's for its year ended September 30, 1996 and the three months ended March 31, 1997, respectively, with adjustments to reflect amortization of the estimated excess price over the fair value of the net assets acquired. (in thousands, except per share amounts)
Quarter Year Ended Ended March 31, December 31, 1997 1996 ---- ---- Net sales $10,703 $47,551 ======= ======= Net loss $(2,694) $(3,782) ======= ======= Net loss per common share $ (.29) $ (.42) ======= =======
The pro forma results of operations above do not purport to be indicative of the results that would have occurred had the merger taken place at the beginning of the periods presented or of results which may occur in the future. (3)INVENTORIES Inventories consist of the following at March 31, 1997 and December 31, 1996:
(in thousands, except per share amounts) March 31, December 31, 1997 1996 ---- ---- Raw materials $4,118 $2,718 Work-in-process 3,146 2,642 Finished goods 3,578 1,289 Reserves (2,006) (352) ======= ======= $8,836 $6,297 ======= =======
(4)BANKING ARRANGEMENTS Both XIT and a subsidiary have bank lines of credit which expired originally on January 15, 1997, and which currently expire under extension arrangements on June 30, 1997. Additionally, both XIT and the subsidiary are in violation of certain covenants under the related loan agreements. Although the bank has not waived these defaults, it has agreed to forbear from taking any action with respect to same until the extended expiration -8- 9 date. Based on discussion with the bank, management believes that these lines will be renewed with more favorable advance rates against related collateralized assets and with less restrictive financial covenants. However, there can be no assurance that this will occur. Outstanding borrowings under these lines of credit were $2,124,000 and $2,027,000 at March 31, 1997 and December 31, 1996, respectively. (5)LITIGATION In September, 1994 Raymond Jacobson, a former officer and director of the Company and a participant in the Company's deferred compensation plan, brought an action against the Company in the California Superior Court, Santa Clara County, alleging that the Company has breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August 1994. The 1993 Agreement superseded a previous deferred compensation agreement dated April 1, 1977 (the "1977 Agreement") which had provided for twice the level of payments. Mr. Jacobson was claiming damages of approximately $1,200,000, which he purported to be the present value of all payments to be made under the 1993 Agreement. In June 1995 the Company paid Mr. Jacobson all amounts past due under the contract plus interest and reinstated the bi-weekly payments, which have continued to date. On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against Mr. Jacobson in the District Court for Galveston County, Texas alleging damages arising from DDC's investment of more than $2,000,000 for the purchase of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr. Jacobson, through his attorney, demanded that the Company indemnify him, hold him harmless and pay for the cost of defense, including reasonable attorney's fees and costs in connection with the litigation instituted against him by DDC. This suit was subsequently dismissed by DDC. On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the Company that he believed that the litigation instituted against him by DDC provided a basis for him to rescind the 1993 Agreement and assert his rights to full payment under the 1977 Agreement Notwithstanding the above, the Company management and Mr. Jacobson have conducted settlement discussions since June 1996, and the Company believes that an enforceable settlement was reached on January 22, 1997. Mr. Jacobson apparently disclaims this agreement based on the actions noted above. On February 28, 1997 the Company filed a motion for continuance to file a counterclaim asserting that the January 22, 1997 agreement supersedes all previous agreements with Mr. Jacobson. A court supervised settlement conference with Mr. Jacobson was held on March 26, 1997. Although a tentative settlement was reached, the settlement was subject to fulfillment of a number of conditions subsequent which did not occur and therefore was not binding on either party. Subsequent thereto, several settlement offers have been proposed by plaintiff's counsel, none of which are acceptable to the Company. A trial in the matter has been scheduled for August 25, 1997. The Company does not believe that the value of a settlement of the above matter or alternatively a trial judgement will be materially in excess of amounts already recorded by the Company for the deferred compensation arrangement. -9- 10 In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of the Company, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by David Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company cannot issue unrestricted shares (absent registration), the Company has answered Mr. Scheinfeld's motion and is seeking to compel him to serve a complaint upon the defendants. Although the ultimate outcome of the matters noted above cannot be predicted with certainty, pending actual resolution, in the opinion of management, the disposition of these matters will not have a material adverse affect on the consolidated results of operations or financial position. (6) PRIVATE PLACEMENT On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. The pricing of the units is based on a 20% discount from the ten day average closing bid price of the Company's common stock preceding the date of contracting with the institutional investors (the "Average Reported Price"), with a minimum price per unit of $2.50 and maximum price of $3.50. The investors warrants have an exercise price of 130% of the Average Reported Price. Additionally, Yorkton and one other intermediary earn an aggregate commission of 10% of the gross proceeds and warrants to acquire 10% of the shares purchased in the offering at an exercise price of the lesser of the Average Reported Price or $3.50 per share, and Yorkton further is reimbursed for accountable expenses of the offering up to 2% of the gross proceeds. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company were $4,400,000. The offering, which is structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 is contracted or ii) the currently extended termination date of May 31, 1997. -10- 11 MICROTEL INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS When used in this Management's Discussion and Analysis of Financial Condition and Results of Operations, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend", "should", "believe" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating costs and financial position. Specifically, forward-looking statements are included in the following sections below: Results of Operations-Effects of Acquisitions on the Three Months Ended March 31, 1997, Liquidity and Capital Resources, and Outlook. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially than those included within the forward-looking statements as a result of various factors. As discussed in Note 1 to the consolidated condensed financial statements, the financial statements presented are those of XIT Corporation (XIT) because of the reverse acquisition by XIT of MicroTel International, Inc.(the Company) and its subsidiaries in a merger on March 26, 1997. The pre-merger Company and "accounting acquiree" is described as CXR in the discussion below. RESULTS OF OPERATIONS EFFECTS OF ACQUISITIONS ON THE THREE MONTHS ENDED MARCH 31, 1997 The consolidated results of operations for the three months ended March 31, 1997 include the full or partial results of operations of three companies acquired since March 31, 1996. They include the full quarterly results of both Etch-Tek, Inc., a manufacturer of printed circuit boards acquired on May 1, 1996, and Abbott Electronics Ltd., a British manufacturer of power supplies acquired on September 1, 1996. They also include the results of operations of CXR for the five days ended March 31, 1997. The table below separates the results of the acquired entities from the consolidated totals for the three months ended March 31, 1997 in order to provide a more meaningful basis for a comparative discussion of these results versus the three months ended March 31, 1996. -11- 12
(in thousands) Three Months Ended March 31 ------------------------------------------------------------------ 1997 1996 ------------------------------------------------- ------ Consolidated Acquisitions Comparative ------------ ------------ ----------- Net sales $7,707 $2,540 $5,167 $7,336 Cost of sales 6,234 1,856 4,378 5,372 ------------ ------------ ----------- ------ Gross profit 1,473 684 789 1,964 Selling expense (613) (161) (452) (659) General & administrative (1,162) (418) (744) (808) Engineering & product development (98) (31) (67) (106) Interest (198) (71) (127) (128) Other income (expense) (1) (1) 22 Income taxes (4) (4) (3) ------------ ------------ ----------- ------ Net income (loss) $ (603) $ 3 $ (606) $ 282 ============ ============ =========== ======
As can be seen from the table, the consolidated results of operations for the three months ended were significantly impacted by the results of the acquired companies. Net sales, gross profit, and operating expenses (selling, general and administrative, and engineering and product development) of these companies represented 32.9%, 46.4%, and 32.6%, respectively, of the consolidated totals. The table following summarizes by company the incremental results related to the acquired companies for the three months ended March 31, 1997:
(in thousands) Etch-Tek Abbot CXR Total ----- ------ ----- ------ Net sales Gross profit $ 947 $1,093 $ 500 $2,540 ===== ====== ===== ====== $ 44 $ 428 $ 212 684 ===== ====== ===== ====== Operating expenses (177) (326) (107) (610) Interest expense (16) (55) (71) ----- ------ ----- ------ Net income (loss) $(149) $ 47 $ 105 $ 3 ===== ====== ===== ======
The level of business volume for CXR for the five days ended March 31, 1997 is not indicative of its pro rata sales per period, as its revenues have historically been higher towards the end of each quarter due to the buying patterns of its principal customers. For the entire three months ended March 31, 1997, CXR incurred a net loss of $(1,904,000) on net sales of $3,496,000. Included in these quarterly results prior to March 26, 1997, CXR incurred certain significant charges as follows: i) $462,000 of compensation expense related to certain officers and directors whose corporate capacities would terminate or change at the date of the merger with XIT and ii) $287,000 of asset write-downs and severance costs related to the reassessment of the impact on asset realizable values and certain cutbacks in personnel, respectively, necessitated by the continuing sluggishness of its business volume. These charges directly impacted the net loss of CXR for the quarter, as there are no tax effects because CXR is in a net operating loss carryforward position. Additionally, the consolidated results of operations for the three months ended March 31, 1997 included amortization of the goodwill originating in the acquisition of CXR of $5,000 for the five days days subsequent to the merger, whereas annual amortization is estimated to approximate $327,000. -12- 13 Although not necessarily indicative of the results that would have occurred or of results which may occur in the future, Note 2 to the consolidated financial statements presents summary pro forma results as if the merger had taken place at the beginning of the first quarter of 1997. COMPARATIVE RESULTS OF OPERATIONS - 1ST QUARTER 1997 VS 1ST QUARTER 1996 The following discussion relates to the comparison of the results of operations for the three months ended March 31, 1997, excluding the results of the acquired companies, to the results for the same period of the prior year ( see the first table above under Effects of Acquisitions on the Three Months Ended March 31, 1997). Net sales for the first quarter of 1997 declined by $2,169,000 or 29.6% from those in the same period of the prior year. This decline was comprised of lower net sales for the Company's Circuits Sector and Components and Subsystem Assemblies Sector of $1,636,000 and $533,000, respectively. The decrease in the Circuits Sector was due principally to lower demand from the major customer of the group, Motorola, compounded by an inability to ship the lower level of orders received as a result of material sourcing problems caused by cash flow constraints. The decrease in the Components and Subsystem Assemblies Sector was due principally to the loss of a major account for display monitors. Gross profit, as a percentage of sales, declined from 26.8% in the first quarter of 1996 to 15.3% for the first quarter of 1997. This decline was the direct result of the lower sales volume noted above and the consequential decline in absorption of the Company's fixed manufacturing costs, particularly in the capital intensive Circuits Sector. Operating expenses (selling, general and administrative, and engineering and product development) declined by $310,000 in total from $1,573,000 in the first quarter of 1996 to $1,263,000 in the first quarter of 1997. Selling expenses, which include a significant commissions component and are therefore largely variable, were comparable as a percentage of sales at 8.8% in 1997 versus 9% in 1996. General and administrative expenses in 1997 declined by $64,000 or 7.9% from 1996 as a combined result of the streamlining of the administrative structure in the Circuits Sector, offset in part by higher corporate administrative costs. The latter corporate cost increases relate principally to higher personnel costs and the implementation of a new computer system. Engineering and product development expenses declined by $39,000 from 1996 to 1997 due principally to an increase in the amount of such costs billable to specific contracts. Interest expense was approximately the same between the two periods reflecting comparable average borrowings during the periods. Other income (expense) is principally comprised of foreign currency exchange gains and losses incurred during the respective periods. Income taxes are nominal in the respective periods as the Company is in a loss carryforward position for Federal income tax purposes. LIQUIDITY AND CAPITAL RESOURCES Cash of $58,000 was used in operations in the first quarter of 1997 versus cash of $116,000 being provided by operations in the first quarter of 1996. The increase in cash use was caused by the decline in results of operations, coupled with changes in working capital management during the respective periods. In the first quarter of 1996, the Company had refinanced its bank borrowings on more favorable terms and used much of the incremental cash to -13- 14 pay down older accounts payable. In 1997, the Company reduced its inventory levels and elongated its payables cycle due to lack of available borrowings. As discussed in Note 4 to the consolidated condensed financial statements, the bank lines of credit for both XIT Corporation and one of its subsidiaries expire under current extension arrangements on June 30, 1997. Based on discussions with the bank, management believes that the lines will be renewed with more favorable advance rates and less restrictive financial covenants. However, there can be no assurances that this will occur. On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company were $4,400,000. The Units were issued to European institutional investors pursuant to the exemption afforded by Regulation S under the Securities Act of 1933, as amended. The offering, which is structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 is contracted or ii) the currently extended termination date of May 31, 1997. The proceeds of the first closing of the Yorkton private placement have alleviated the immediate cash flow problems of the Company, however management believes that future cash flows from operations will need to be supplemented to support its working capital and business development needs in 1997. If a second closing for a substantial amount of the remainder of the outstanding Yorkton offering does not occur, management will actively seek additional funds through an additional private placement of debt or equity securities. There can be no assurance, however, that alternative financing will be available, or if available, that it will be on terms favorable to the Company. There are two significant legal proceedings pending against the Company (see Note 5 to the consolidated condensed financial statements). Management believes that the outcome of these pending litigations will not have a material adverse effect on the results of operations or financial position of the Company. OUTLOOK In the Circuits Sector, sales demand for product from Motorola has increased in the subsequent period and the Company's delivery performance has improved. Further, sales efforts for the Sector have been intensified, with initial success, to both increase sales volume and to dilute the Sector's concentration in and consequential dependence on Motorola. The Company has also implemented yield improvement measures, reductions in overtime and outsourcing, and improved cost controls in the Sector's operations, and further, expects higher pricing for digital products sold to Motorola as the current contracts are renewed. The combination of the above factors and the positive effects of increased volume on absorption of fixed manufacturing costs should improve gross profit margins in the future. In the Components and Subsystem Assemblies Sector, the Company is in the process of qualifying itself and its products with a new prospective customer. If obtained, revenues from such customer should replace the loss in revenue which resulted from the loss of the major display monitor account in 1996. -14- 15 During 1996 and continuing in the first quarter of 1997, domestic sales of the Instrumentation and Test Equipment Sector (CXR Telcom and CXR S.A.) were negatively impacted by delays in buying by its principal customers, as a result of the consolidation and/or restructuring of these companies in the wake of the passage of the Telecommunications Bill of 1996, and European sales were negatively impacted by a decline in sales to France Telecom during its pre-privatization reorganization and a generally weak French economy. Additionally, sales for both operating subsidiaries have been negatively impacted by the rapid obsolescence of the analog-based components of their product lines, particularly older transmission products; and further, both sales and margins have been impacted by extreme price competition for transmission products in general. In the fourth quarter of 1996 and in the first quarter of 1997 prior to the merger, CXR reduced the carrying value of certain inventory and capitalized software by $1,006,000 and $209,000, respectively. These write-downs resulted from its reassessments of the anticipated continuing near-term impact of the industry and economic factors noted above on asset realizability. Although, the Company believes based on its current assessment that the write-downs are adequate, there can be no assurance that further write-downs of operating assets, as well as write-downs of the goodwill originating in the merger, will not be necessary should actual business conditions deteriorate. Although the negative impact of the reorganizations of the Sector's domestic customers continues, is believed to be a temporary phenomenon. The industry repositioning is expected to result in growth as the changed entities emerge and the long distance carriers vie for the local loop business of the RBOC's and as the RBOC's compete for long distance services. Final implementation guidance on the deregulation provided for in the Telecommunications Bill of 1996 was released in late August 1996 by the federal government allowing the local and long distance telephone companies to begin entering each other's markets. CXR Telcom has been working with its customers to prepare for their future needs in the expansion of their markets. The first major order received in support of such expansion was a $2,340,000 order from AT&T in April 1997 for equipment to support AT&T's expansion into the local markets. To overcome the negative factors impacting the Sector's European operation, CXR S.A. has implemented several changes to its business strategy. It has introduced a new line of ISDN Terminal Adapters to its transmission product line, has begun a new business unit which provides networking solutions to the business user utilizing O.E.M. products, and has refocused its marketing to expand its markets outside of France, including the establishment of a subsidiary in England. Revenue improvements have begun to be realized as a result of these efforts. -15- 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings No material developments. See Note 5 - Litigation of the accompanying unaudited consolidated condensed financial statements and Item 3. Legal Proceedings of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 for a description of previously reported proceedings. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a) Exhibits-none. b) A report on Form 8-K dated January 6, 1997 under Item 2. Acquisition and Disposition of Assets was filed on January 21, 1997 and subse- quently amended on Form 8-KA filed March 17, 1997. -16- 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of l934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MicroTel International, Inc. /s/ Barry E. Reifler May 20, 1997 ---------------------------------------- Barry E. Reifler, CFO (Principal Accounting and Financial Officer) -17- EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 998,000 0 6,491,000 236,000 8,836,000 17,583,000 8,827,000 3,535,000 32,908,000 17,172,000 3,335,000 811,000 0 31,000 10,822,000 32,908,000 7,707,000 7,707,000 6,234,000 6,234,000 0 (6,000) 198,000 (599,000) 4,000 (603,000) 0 0 0 (603,000) (0.10) (0.10)
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