-----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, Nx9bv/Oa2om0IJvIJ6Po/ZaN2/eYd94OnUAEiTBRFiRn7e0o2zmBzSpMXjb46R9Z VPj5i/WarBwadshy08FmPQ== 0000912057-00-055238.txt : 20010101 0000912057-00-055238.hdr.sgml : 20010101 ACCESSION NUMBER: 0000912057-00-055238 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20001229 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/A SEC ACT: SEC FILE NUMBER: 001-10346 FILM NUMBER: 799465 BUSINESS ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: ONTARIO STATE: CA ZIP: 91730 BUSINESS PHONE: 9092972699 MAIL ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: ONTARIO STATE: CA ZIP: 91730 FORMER COMPANY: FORMER CONFORMED NAME: CXR CORP DATE OF NAME CHANGE: 19920703 10-Q/A 1 a2034168z10-qa.txt 10Q/A ================================================================================ 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. ================================================================================ 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
2 ITEM 1. FINANCIAL STATEMENTS. MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, DECEMBER 31, 2000 1999 --------------- --------------- 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 =============== ===============
See accompanying notes to consolidated condensed financial statements. F-1 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 ---------------------- --------------------- (in thousands, except per share amounts) 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) ====================== =====================
See accompanying notes to consolidated condensed financial statements. F-2 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 1999 --------------- -------------- (in thousands) 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 =============== ==============
See accompanying notes to consolidated condensed financial statements. F-3 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 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:
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, 2000 1999 ------------------ ------------------ 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) ================== ==================
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.
MARCH 31, 2000 DECEMBER 31, 1999 ------------------ ------------------ 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 ================== ==================
(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 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 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.
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2000 MARCH 31, 1999 --------------- --------------- 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) =============== ================
MARCH 31, MARCH 31, 2000 1999 ---------------- ---------------- 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 =============== ===============
F-7 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.
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2000 MARCH 31, 1999 ------------------ ------------------ 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) ================== ==================
MARCH 31, MARCH 31, 2000 1999 ------------------ ------------------ 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 ================== ==================
(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 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- 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- 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.
MARCH 31, MARCH 31, VARIANCE 2000 1999 INCREASE/(DECREASE) ----------- ----------- -------------------------- (DOLLARS IN THOUSANDS) 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)% =========== =========== ============
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- 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.
MARCH 31, MARCH 31, 2000 1999 --------- --------- (dollars in thousands) 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% ======== ========
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. -6- OPERATING EXPENSES Operating expenses for the three months ended March 31, 2000 and 1999 were comprised of the following:
MARCH 31, MARCH 31, 2000 1999 --------- --------- 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 ========== ==========
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 -7- 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- 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- 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- 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- 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 -12- 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. -13- 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. -14- 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 -15- 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 -16- 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. -17- 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. -18- 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. -19- 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. -20- 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) -21- -----END PRIVACY-ENHANCED MESSAGE-----