-----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, DaZLc3/YF5aNXFqmGPW+C8HQpsOiVUOBNFN7NIcSp9MbCkA1vVWS/K6LKF4CiKfp ao4mdbiHp1BYsJEzcvKsfQ== 0000912057-00-055240.txt : 20010101 0000912057-00-055240.hdr.sgml : 20010101 ACCESSION NUMBER: 0000912057-00-055240 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 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: 799472 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 a2034171z10-qa.txt FORM 10-Q ================================================================================ 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 JUNE 30, 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 June 30, 2000 (unaudited) and December 31, 1999........................................................................ F-1 Consolidated Condensed Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2000 and l999 (unaudited)................................ F-2 Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 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.................................................................................... 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.................................................................................. 21 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................................... 21 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................... 22 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 22 ITEM 5. OTHER INFORMATION.................................................................................. 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 22 SIGNATURES.................................................................................................. 23
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, Dec. 31, 2000 1999 --------------- --------------- ASSETS Cash and cash equivalents $ 391 $ 481 Short-term investments 799 -- Accounts receivable, net 6,256 6,519 Inventories 4,941 4,181 Other current assets 1,274 578 --------- -------- Total current assets 13,661 11,759 Property, plant and equipment-net 1,378 1,393 Goodwill, net 3,123 1,507 Investment in unconsolidated affiliates -- 1,240 Other assets 492 722 --------- --------- $ 18,654 $ 16,621 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Notes payable $ 3,125 $ 2,107 Current portion of long-term debt 1,509 1,422 Accounts payable 5,263 4,771 Accrued expenses 2,867 2,985 --------- --------- Total current liabilities 12,764 11,285 Long-term debt, less current portion 766 165 Other liabilities 652 782 --------- -------- Total liabilities 14,182 12,232 Convertible redeemable preferred stock, $10,000 unit value. Authorized 250 shares; issued and outstanding 25 shares and 59.5 shares (aggregate liquidation preference of $250 and $595, respectively) 253 588 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 20,509,000 and 16,812,000 shares 68 60 Additional paid-in capital 24,302 23,726 Accumulated deficit (19,785) (19,759) Accumulated comprehensive loss (366) (226) ---------- ---------- Total stockholders' equity 4,219 3,801 --------- --------- $ 18,654 $ 16,621 ========= =========
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 Six months ended June 30, June 30, 2000 1999 2000 1999 --------------- ----------------- ---------------- ---------------- (in thousands, except per share amounts) Net sales $ 7,512 $ 6,801 $ 13,998 $ 14,311 Cost of sales 4,698 4,411 8,811 9,314 ---------- ---------- ---------- ---------- Gross profit 2,814 2,390 5,187 4,997 Operating expenses: Selling, general and administrative 2,459 2,890 4,671 6,607 Engineering and product development 253 477 496 1,035 ---------- ---------- ---------- ---------- Income (loss) from operations 102 (977) 20 (2,645) Other income (expense) Interest expense (99) (83) (195) (202) Gain on sale of subsidiary -- -- -- 331 Equity in earnings of unconsolidated affiliates -- 191 -- 727 Other 110 (40) 205 (87) ---------- ----------- ---------- ----------- Income (loss) before income taxes 113 (909) 30 (1,876) Income tax expense 4 5 10 13 ---------- ---------- ---------- ---------- Net income (loss) 109 (914) 20 (1,889) Other comprehensive gain (loss) Changes in unrealized gain on marketable securities (382) -- 78 -- Foreign currency translation adjustment (51) (161) (217) (424) ----------- ----------- ----------- ----------- Total comprehensive loss $ (324) $ (1,075) $ (119) $ (2,313) ========= ========== ========== ========== Basic earnings (loss) per share $ 0.005 $ (0.054) $ (0.001) $ (0.123) ========== ========== ========== =========== Diluted earnings (loss) per share $ 0.004 $ (0.054) $ (0.001) $ (0.123) ========== ========== ========== ===========
See accompanying notes to consolidated condensed financial statements. F-2 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, 2000 1999 --------------- -------------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 20 $ (1,889) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 206 240 Amortization of intangibles 169 173 Gain on the sale of fixed assets (43) -- Gain on sale of subsidiary -- (331) Equity in earnings of unconsolidated entities -- (727) Stock and warrants issued as compensation 130 1,219 Other noncash items 221 463 Changes in operating assets and liabilities: Accounts receivable 987 1,576 Inventories (19) 626 Other assets (185) 59 Accounts payable and accrued expenses (2,245) (1,081) ---------- --------- Cash provided by (used in) operating activities (759) 328 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (9) (52) Proceeds from sale of fixed assets 43 -- Proceeds from the sale of DTS stock 520 -- Proceeds from sale of subsidiary -- 750 Investment in Belix Ltd. companies (592) -- Cash received from note receivable -- 9 --------- --------- Cash provided by (used in) investing activities (38) 707 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (repayments) of notes payable and long term debt 852 (1,063) Proceeds from exercise of warrants and employee stock options 73 -- Proceeds from sale of common stock -- 2 --------- --------- Cash provided by (used in) financing activities 925 (1,061) --------- --------- Effect Of Exchange Rate Changes On Cash (218) (424) ---------- --------- Net Decrease In Cash And Cash Equivalents (90) (450) ---------- --------- Cash And Cash Equivalents At Beginning Of Period 481 572 --------- --------- Cash And Cash Equivalents At End Of Period $ 391 $ 122 ========= =========
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 MicroTel International, Inc. is an international telecommunications electronics company comprised of three wholly owned subsidiaries - CXR Telcom Corporation in Fremont, California, CXR, S. A. in Paris, France and XIT Corporation in Rancho Cucamonga, California. CXR Telcom Corporation and CXR, S. A. design, manufacture and market electronic telecommunications test instruments, wireless and wireline voice, data and video transmission and network access equipment. XIT Corporation designs, manufactures and markets information technology products, including input and display components, subsystem assemblies and power supplies. The Company operates out of facilities in the United States, France, England and Japan. The Company is organized into three segments - Instrumentation and Test Equipment, Components and Subsystem Assemblies, and Circuits. Through the sale of various subsidiaries in 1998 and 1999, the Company has divested a majority of its circuits operations. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated condensed financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the financial position as of June 30, 2000 and the results of operations and cash flows for the related interim periods ended June 30, 2000 and 1999. However, these results are not necessarily indicative of results for any other interim period or for the year. It is suggested that the accompanying consolidated condensed financial statements be read in conjunction with the Company's Consolidated Financial Statements included in its 1999 Annual Report on Form 10-K. F-4 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (2) EARNINGS (LOSS) PER SHARE The following table illustrates the computation of basic and diluted loss per share (in thousands, except per share amounts):
Three months ended Six months ended June 30, June 30, --------------------------------- --------------------------------- 2000 1999 2000 1999 ---------------- ---------------- ---------------- ---------------- NUMERATOR: Net income (loss) $ 109 $ (914) $ 20 $ (1,889) Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 23 (11) 46 45 ----------- ----------- ----------- ---------- Income (loss) attributable to common stockholders 86 (903) (26) (1,934) DENOMINATOR: Weighted average number of common shares outstanding during the period 18,712 16,594 18,443 15,685 Incremental shares from assumed conversions of warrants, options and preferred stock 2,076 -- -- -- ----------- ----------- ----------- ---------- Adjusted weighted average shares 20,788 16,594 18,443 15,685 Basic loss per share $ .005 $ (.054) $ (.001) $ (.123) =========== =========== =========== ========== Diluted loss per share $ .004 $ (.054) $ (.001) $ (.123) =========== =========== =========== ==========
The computation of diluted loss per share for the six month period ended June 30, 2000 and the six and three month period ended June 30, 1999 excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was antidilutive due to losses incurred by the Company or such instruments had exercise prices greater than the average market price of the common shares during the periods presented. F-5 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (3) INVENTORIES Inventories consist of the following:
June 30, 2000 December 31, 1999 ----------------- ------------------ Raw materials $ 1,684,000 $ 1,728,000 Work-in-process 1,558,000 1,199,000 Finished goods 1,699,000 1,254,000 ------------------ ------------------ $ 4,941,000 $ 4,181,000 ================== ==================
(4) Litigation The Company and its subsidiaries from time to time become involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows. (5) ACQUISITION AND DISPOSITION OF BUSINESSES On January 7, 2000, the Company sold all of its interest in the common stock in Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a publicly traded company on the Toronto Stock Exchange. The Wi-LAN common stock had a market value of $720,000 on the date of the transaction. The Company was restricted from selling the Wi-LAN stock until July 7, 2000 due to Toronto Stock Exchange rules that restrict sales of stock obtained in an acquisition related transaction. As of June 30, 2000 the value of the Company's Wi-Lan shares had increased in value by $79,000 to $799,000. The increase in value has been reflected in the carrying value of the investment and the other comprehensive income or loss line of the equity section in the balance sheet. Accordingly, the Wi-LAN investment is shown in the current asset section of the balance sheet as short-term investments. On July 7, 2000, the Company sold all its shares of Wi-LAN common stock for net proceeds of $917,000. The sale resulted in a gain of approximately $197,000 which will be included in the Company's results of operations in the third quarter of 2000. On April 17, 2000, the Company finalized its acquisition of Belix Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased the capital stock of Belix for $790,000 cash and an earn-out for the former stockholders based on sales. The Company has recorded an estimated earn-out accrual of approximately $800,000. In adition, the Company has recorded an additional accrual of approximately $360,000 for certain severance and relocation costs related to Belix. The company has included accruals in the calculation of the cost of the acquisition. Belix is located in England, U. K. and is in the business of manufacturing power supplies for various applications. It will be integrated into the F-6 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) Company's existing power supply producer, XCEL Power Systems, Ltd. Belix' assets consist mostly of accounts receivable, inventories and fixed assets. All dollar amounts indicated in this paragraph are derived from the conversion of British pounds into U. S. dollars at the conversion rate in effect at the time of the acquisition. (6) CONVERSION OF PREFERRED STOCK During the three months ended June 30, 2000, certain holders of convertible redeemable preferred stock converted 34.5 shares of preferred stock into 1,743,285 shares of common stock. The same holders also exercised warrants to purchase 172,500 shares of common stock for $0.25 per share. (7) Reportable Segments The Company has three reportable segments: Instrumentation and Test Equipment, Components and Subsystem Assemblies, and Circuits. The Instrumentation and Test Equipment segment operates principally in the U.S. and European markets and designs, manufactures and distributes telecommunications test instruments and voice and data transmission and networking equipment. The Components and Subsystems Assemblies segment operates in the U.S., European and Asian markets and designs, manufactures and markets information technology products, including input and display components, subsystem assemblies, and power supplies. The Company has disposed of the majority of its Circuits segment business operations and has only one such operation that is material. The Company evaluates performance based upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. The Company's reportable segments are comprised of operating entities offering the same or similar products to similar customers. Each segment is managed separately because each business has different customers, design, manufacturing and marketing strategies. There were no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the amounts disclosed in the Company's consolidated financial statements included in its 1999 Annual Report on Form 10-K. Selected financial data for each of the Company's operating segments is shown below. F-7 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (7) REPORTABLE SEGMENTS (CONTINUED) Six months ended Six months ended June 30, 2000 June 30, 1999 ------------- ------------- SALES TO EXTERNAL CUSTOMERS: Instruments $ 7,193,000 $ 7,357,000 Components 5,408,000 5,540,000 Circuits 1,397,000 1,414,000 --------------- --------------- $ 13,998,000 $ 14,311,000 =============== =============== INTERSEGMENT SALES: Instruments $ -- $ -- Components -- 130,000 Circuits 153,000 321,000 --------------- --------------- $ 153,000 $ 451,000 =============== =============== SEGMENT PRETAX INCOME (LOSS) Instruments $ 46,000 $ (971,000) Components 1,076,000 722,000 Circuits (266,000) (892,000) ---------------- ---------------- $ 856,000 $ (1,141,000) =============== ================ June 30, December 31, 2000 1999 ------------- ------------ SEGMENT ASSETS Instruments $ 7,139,000 $ 7,960,000 Components 8,757,000 5,213,000 Circuits 1,319,000 1,379,000 --------------- --------------- $ 17,215,000 $ 14,552,000 =============== ===============
F-8 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.
Six months ended Six months ended June 30, 2000 June 30, 1999 ------------- ------------- PRETAX INCOME (LOSS) Total income (loss) loss for reportable segments $ 856,000 $ (1,141,000) Unallocated amounts: Gain on sale of assets of subsidiary -- 331,000 Equity in earnings of unconsolidated affiliates -- 727,000 Write-down of note receivable -- (466,000) Warranty reserve reversal 110,000 -- Unallocated general corporate expenses (936,000) (1,327,000) ------------------ ----------------- Consolidated loss before income taxes $ 30,000 $ (1,876,000) ================== ================ June 30, December 31, 2000 1999 ---- ---- ASSETS Total assets for reportable segments $ 17,215,000 $ 14,552,000 Other assets 1,439,000 2,069,000 ------------------ --------------- Total consolidated assets $ 18,654,000 $ 16,621,000 ================== =================
F-9 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 discussion 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 THREE MONTHS ENDED JUNE 30, 2000 VERSUS THREE MONTHS ENDED JUNE 30, 1999 NET SALES Consolidated net sales for the second quarter of 2000 increased by $711,000 or 10.5% compared with the same period in 1999. The table below shows the composition of consolidated net sales by business segment.
Three Months Ended Three Months Ended Variance- Percent Segment June 30, 2000 June 30, 1999 Increase (Decrease) Change ------- ------------- ------------- ------------------- ------ Test Equipment $ 3,641 $ 3,649 $ (8) (0.2)% Components 3,143 2,622 521 19.9% Circuits 728 530 198 37.4% ----------- ----------- ---------------- Total $ 7,512 $ 6,801 $ 711 10.5% =========== ============ ================
The relative percent of net sales by segment between the respective periods experienced the following changes:
Three Months Ended Three Months Ended Segment June 30, 2000 June 30, 1999 ------- ------------- ------------- Test Equipment 48.5% 53.7% Components 41.8% 38.5% Circuits 9.7% 7.8% ---------- ---------- Total 100.0% 100.0% ========== ==========
The Instrument and Test Equipment segment sales remained approximately the same in the second quarter of 2000 compared to the second quarter of 1999. CXR Telcom experienced a $665,000 increase in sales of its test equipment in the second quarter of 2000 as compared to the prior year period as a result of favorable acceptance of the Company's new compact series 704 test equipment. This increase was offset by lower than expected sales of transmission equipment from CXR S. A. such as ISDN products and modems. The U. S. transmission product line was transferred from CXR Telcom in Fremont, California to CXR S. A. in France effective April 1, 2000. The Component segment sales increased $521,000 or 19.9% in the second quarter of 2000 over such sales in the prior year period. The Rancho Cucamonga, California based XIT Corporation ("XIT") increased its sales by $119,000 in the second quarter of 2000 as compared to the second quarter of 1999 primarily due to the acceleration of orders of one of XIT's largest customers for the final year of a five year contract. The Company's Japanese subsidiary XCEL Japan, Ltd. increased its sales by $140,000 in the current quarter as compared to the prior year period primarily as result of improved economic conditions in Asian markets. The remaining increase in sales of $262,000 for the second quarter of 2000 as compared to the second quarter of 1999 for the Component segment was primarily due to the net addition to sales that the acquisition of Belix Ltd. contributed to the Company's U. K. subsidiary, XCEL Power Systems, Ltd. ("XPS"). Belix contributed $658,000 of revenue in the second quarter of 2000. The Circuit segment increased sales by $198,000 or 37.4% in the second quarter of 2000 from the second quarter of 1999. The increase in sales was the result of the Company's effort to increase this segment's sales to unrelated third parties in conjunction with a planned reduction of intercompany sales. However, management believes it may be in the Company's long term interest to exit the Circuit segment. -5- GROSS PROFIT Consolidated gross profit as a percent of net sales increased to 37.5% in the second quarter of 2000 from 35.1% in the second quarter of 1999. The composition of consolidated gross profit by business sector and the percentages of related net sales are shown in the following table for the periods indicated:
Three Months Ended Percent of Related Three Months Ended Percent of Related June 30, 2000 Net Sales June 30, 1999 Net Sales SEGMENT ------------- --------- ------------- --------- Test Equipment $ 1,490 40.9% $ 1,446 39.6% Components 1,284 40.9% 933 35.6% Circuits 40 5.5% 11 2.0% ----------- ------------ Total $ 2,814 37.5% $ 2,390 35.1% =========== ============
Gross profit for the Instrumentation and Test Equipment segment as a percent of net sales improved to 40.9% in the second quarter of 2000 from 39.6% in the second quarter of 1999. The gross profit improvement primarily resulted from a greater percentage of higher margin test equipment sold in the current quarter than in the prior year quarter in comparison to total sales of test equipment and transmission equipment. The increase in relatively high margin test equipment sales more than offset the lower margins related to the transmission and modem sales. The gross profit at CXR Telcom improved to 50% in the second quarter of 2000 as compared to 45% in the second quarter of 1999. For the same comparison period, CXR S. A.'s gross profit fell to 35.4% from 37.4%. This reduction in margin was primarily the result of lower quantities of transmission and modem production sold and to higher material costs due to the lower valuation of the French Franc in relation to U. S. dollars. The Component segment improved its gross profit as a percentage of sales substantially to 40.9% in the second quarter of 2000 from 35.6% in the second quarter of 1999. XIT greatly improved its gross profit margin as a percent of sales to 66.5% in the current quarter from 41.8% in the prior year quarter. This highly improved performance primarily resulted from additional manufacturing efficiencies, less overhead due to the relocation last November into less costly facilities, the discontinuation of the less profitable subsystem assemblies business and higher production volumes. Partially offsetting such improvements was a reduction in gross profit as a percent of sales at XPS to 15.4% in the second quarter of 2000 from 27.2% in the second quarter of 1999. Incomplete engineering and delays in the receipt of components negatively impacted Belix and delays in production releases for existing contracts unfavorably impacted XPS. Belix contributed $658,000 of revenue in the second quarter of 2000. The Circuits segment improved its gross profit as a percent of net sales in the second quarter of 2000 to 5.5% from 2% in the second quarter of 1999. The improvement mainly was due to the to higher prices from more outside business and improved efficiencies due to higher volumes. -6- OPERATING EXPENSES Operating expense for the three months ended June 30, 2000 and 1999 were comprised of the following:
Three Months Ended Three Months Ended June 30, 2000 June 30, 1999 ------------- ------------- Commissions $ 209 $ 189 Other selling expense 796 850 ------- ------- Total selling expense 1,005 1,039 General & administrative 1,454 1,851 ------- ------- Total selling, general & administrative $ 2,459 $ 2,890 ======= ======= Engineering & product development $ 253 $ 477 ======= =======
Total selling expense as a percentage of net sales decrease to 13.3% from 15.3% for the three months ended June 30, 2000 and 1999, respectively, primarily due to cost reductions at CXR Telcom in Fremont, California. Commissions, as a percentage of net sales, remained relatively stable at 2.8% for both the current quarter and the prior year second quarter. General and administrative expenses ("G&A") declined to $1,454,000 or 19.4% of net sales in the current quarter from $1,851,000 or 27.2% of net sales in the second quarter of 1999. The G&A for the prior year period included an expense of $466,000 to establish a reserve for a note receivable. Without this charge the prior year period G&A would have been $1,385,000 and would have represented 20.4% of sales. Engineering and product development costs were incurred by the Instrumentation and Test Equipment segment in the second quarters of 2000 and 1999. Such costs were $253,000 or 3.4% of net sales in the second quarter of 2000 compared to $477,000 or 7% of net sales in the second quarter of 1999. The majority of the reduction in engineering and product expenses in the current quarter as compared to the prior year period is due to the closing down of the engineering function at the CXR Telcom facilities in Fremont, California and concentrating the engineering efforts in the St. Charles, Illinois engineering facility. Management believes a substantial engineering and product development effort is necessary to maintain the Company's competitive position. OTHER INCOME AND EXPENSE Interest expense increased slightly in the second quarter of 2000 from the second quarter of 1999. Other income of $110,000 included a reversal of a warranty reserve related to the prior year sale of HyComp, Inc., a former subsidiary of the Company. The reserve was partially reversed due to the settlement of a warranty issue and therefore the Company recorded other income of $116,000. -7- SIX MONTHS ENDED JUNE 30, 2000 VERSUS JUNE 30, 1999 NET SALES Consolidated net sales for the first six months of 2000 decreased by approximately $313,000 or 2.2% compared with the same period in 1999. The table below shows the composition of consolidated net sales by business sector.
Variance- Six Months Ended Six Months Ended Increase/ Percent Segment June 30, 2000 June 30, 1999 (Decrease) Change ------- ------------- ------------- ---------- ------ Test Equipment $ 7,193 $ 7,357 $ (164) (2.2)% Components 5,408 5,540 (132) (2.4)% Circuits 1,397 1,414 (17) (1.2)% ------------- ------------ ---------- Total $ 13,998 $ 14,311 $ (313) (2.2)% ============ =========== ===========
The relative percent of net sales by segment between the respective periods experienced the following changes:
Six Months Ended Six Months Ended Segment June 30, 2000 June 30, 1999 ------- ------------- ------------- Test Equipment 51.4% 51.4% Components 38.6% 38.7% Circuits 10.0% 9.9% --------- --------- Total 100.0% 100.0% ========= =========
The Instrument and Test Equipment segment sales declined by 2.2% in the first half of 2000 compared to the first half of 1999. However, CXR Telcom experienced a $1,366,000 increase in sales of test equipment in the first half of 2000 as compared to the prior year period in which $630,000 of test equipment was sold. The increase was primarily due to favorable acceptance of the Company's new compact series 704 test equipment. This represents a 217% increase in test equipment sales in the first half of 2000 from the first half of 1999. This increase was offset by lower than expected sales of transmission equipment from CXR S. A. such as ISDN products and modems. The U. S. transmission product line was transferred from CXR Telcom in Fremont, California to CXR S. A. in France effective April 1, 2000. The Component segment sales decreased slightly by 2.4% in the six-month period ended June 30, 2000 from the prior year six-month period. XPS in the U. K. incurred a sales decline of 9.8% in the first half of 2000 as compared to the first half of 1999 primarily due to delays in the release of production for certain contracts. However, the Company's Japanese subsidiary, XCEL Japan, Ltd., increased its sales by $132,000, or 41.8% in the current six-month period as compared to the prior year period due to strong sales in the Asian market for components. Belix contributed $658,000 of revenue during the first half of 2000. The Circuit segment sales remained relatively flat in the six-month period ended June 30, 2000 as compared to the six-month period ending June 30, 1999. The first six-month period of 1999 included $456,000 sales of HyComp, Inc. a former subsidiary that was sold on March 31, 1999. Excluding the HyComp Inc. sales from the first half of 1999, the circuit segment sales increased to $1,397,000 in the first six-month period of 2000 from $958,000 in the first six-month period of 1999 which represents a $439,000 increase in sales or a 45.8% increase. The dramatic improvement in sales volume has been attained by concentrated effort to replace intercompany sales with more profitable third party sales. Notwithstanding the remarkable progress that has been achieved in this segment, management believes it may be in the long-term interest of the Company to leave this segment. -8- GROSS PROFIT Consolidated gross profit as a percent of net sales increased to 37.1% in the first half of 2000 from 34.9% in the first half of 1999. The composition of consolidated gross profit by business sector and the percentages of related net sales are shown in the following table for the periods indicated:
Six Months Ended Percent of Related Six Months Ended Percent of Related Segment June 30, 2000 Net Sales June 30, 1999 Net Sales ------- ------------- --------- ------------- --------- Test Equipment $ 2,842 39.5% $ 2,900 39.4% Components 2,230 41.2% 2,016 36.4% Circuits 115 8.2% 81 5.7% ----------- ---------- Total $ 5,187 37.1% $ 4,997 34.9% =========== ==========
Gross profit for the Instrumentation and Test Equipment segment as a percent of net sales was relatively unchanged in the six-month period of 2000 as compared to the six-month period of 1999. The gross profit at CXR Telcom improved to 45% in the first half of 2000 as compared to 38.1% in the first half of 1999. For the same comparison period, CXR S. A.'s gross profit fell to 36.2% from 40%. This reduction in margin was primarily the result of higher material costs due to the lower valuation of the French Franc in relation to U. S. dollars. The Component segment improved its gross profit as a percentage of sales to 41.2% in the six-month period ending on June 30, 2000 from 36.4% in the six-month period ending on June 30, 1999. XIT greatly improved its gross profit margin as a percent of sales to 62.2% in the first half from 42.4% in the comparable prior year period. This improved performance primarily resulted from additional manufacturing efficiencies, less overhead due to the relocation last November into less costly facilities, the discontinuation of the less profitable subsystem assemblies business and higher production volumes. Partially offsetting such improvements was a reduction in gross profit as a percent of sales at XPS to 15.4% in the first half of 2000 from 28.7% in the first six months of 1999. The reduction primarily resulted from the additional costs associated with integrating the Belix operations into the XPS operations. Also, both Belix and XPS experienced lower than expected sales. Incomplete engineering and delays in the receipt of components negatively impacted Belix and delays in production releases for existing contracts unfavorably impacted XPS. Belix contributed $658,000 of revenue in the first half of 2000. The Circuits segment improved its gross profit as a percent of net sales in the first half of 2000 to 8.2% from 5.7% in the first half of 1999. The improvement mainly was due to a 45.8% increase in sales of the Company's remaining Circuit segment facilities which was due to higher prices from more outside business and improved efficiencies due to higher volumes. -9- OPERATING EXPENSES Operating expense for the six months ended June 30, 2000 and 1999 were comprised of the following.
Six Months Ended Six Months Ended June 30, 2000 June 30, 1999 ------------- ------------- Commissions $ 414 $ 439 Other selling expense 1,541 1,788 ---------- --------- Total selling expense 1,955 2,227 General & Administrative 2,716 4,380 ---------- --------- Total S,G & A $ 4,671 $ 6,607 ========== ========= Engineering & product development $ 496 $ 1,035 ========== =========
Total selling expense as a percentage of net sales decrease to 13.9% from 15.6% for the six months ended June 30, 2000 and 1999, respectively, primarily due to cost reductions at CXR Telcom in Fremont, California. Commissions, as a percentage of net sales, remained stable at 3% for both the current six-month period and the prior year six-month period. General and Administrative Expenses ("G&A") declined dramatically to $2,716,000 or 19.4% of net sales in the first half of 2000 from $4,380,000 or 30.6% of net sales in the first half of 1999. The G&A for the prior year period of 1999 included an expense of $466,000 to establish a reserve for a note receivable, a charge of $522,000 associated with the company's program to retain its listing on Nasdaq and a $193,000 charge related to a 1997 acquisition. Without these charges the prior year period G&A would have been $3,199,000 and would have represented 22.4% of sales. The reduction of G&A expenses to 19.4% of sales represents the results of much of the company's cost cutting efforts of 1999 and early 2000. Management is continuing to reevaluate all costs and intends to continue reducing administrative expenses in relation to the Company's business levels. Engineering and product development costs were incurred by the Instrumentation and Test Equipment segment in the first half of 2000 and 1999 except for $32,000 of such costs incurred by the Circuits segment in the first quarter of 1999. Engineering and product and development costs were $496,000 or 3.5% of net sales in the first half of 2000 compared to $1,035,000 or 7.2% of net sales in the first half of 1999. The majority of reduction in engineering and product expenses in the current quarter as compared to the prior year period is due to the closing down of the engineering function at the CXR Telcom facilities in Fremont, California and concentrating the engineering efforts in the St. Charles, Illinois engineering facility. Management believes a substantial engineering and product development effort is necessary to maintain the Company's competitive position. OTHER INCOME AND EXPENSE Interest expense decreased slightly in the second half of 2000 from the second half of 1999. Other income of $110,000 included a reversal of a warranty reserve related to the prior year sale of HyComp, Inc., a former subsidiary of the Company. The reserve was partially reversed due to the settlement of a warranty issue and therefore the Company recorded other income of $116,000. The other income category for the period ended June 30, 1999 included $331,000 gain on the sale of HyComp, Inc., a former subsidiary and $727,000 of recorded earnings based on the equity method as result of earnings of the Company's former ownership of 37% of the common stock of Digital Transmission Systems, Inc. -10- LIQUIDITY AND CAPITAL RESOURCES Cash of $759,000 was used by operations in the first six months of 2000 compared to cash of $328,000 provided by operations in the first six months of 1999. The decrease in cash used in operations resulted primarily from substantial payments of accrued expenses and accounts payable. Accounts receivables collection provided much of the cash to partially offset the cash used in the reduction in accrued expenses and payables. Cash flows from investing activities included cash received from the sale of the Company's 37% interest in Digital Transmission Systems, Inc. ("DTS") offset with the investment in Belix. Financing activities provided $925,000 of cash flow primarily from additional debt related to the acquisition of Belix. On January 7, 2000, the Company sold all of its interest in the common stock of ("DTS") to Wi-LAN, Inc., a public company based in Alberta, Canada. As consideration, the Company received $520,000 in cash and 28,340 shares of Wi-LAN common stock valued at approximately $720,000 at the time of the transaction. The Company used the cash to pay down debt. In conjunction with the transaction, the Company's lender, Congress Financial Corporation ("Congress"), agreed to waive certain defaults of the loan agreement relating to a $350,000 overdraft the Company was required to pay down by September 22, 1999 and eliminated the requirement of a $350,000 target reserve. The target reserve was a funding requirement to pay down the principal of the term loan by $350,000 in addition to the regular monthly principal payments secured by the Wi-LAN stock. Due to rules of the Toronto Stock Exchange, where Wi-LAN, Inc. stock trades, the Company was prohibited from selling its interest in the Wi-LAN, Inc. stock for six months after acquisition because the stock was acquired in a transaction related to the sale or purchase of a company. However, the Company's lender did increase the Company's borrowing availability by $400,000 on February 29, 2000 by providing an authorized overdraft. On July 7, 2000, the Company sold all its shares of Wi-LAN common stock for net proceeds of $917,000. The sale resulted in a gain of approximately $197,000 which will be included in the Company's results of operations in the third quarter of 2000. The proceeds were used to pay down debt owed Congress eliminating the overadvance and paying down the term loan balance to $55,000. The financing facility provided by Congress expired on June 23, 2000. Congress has twice amended its loan agreement with the Company to extend its credit facility through August 14, 2000. The Company expects to have completed the process of obtaining new financing with the business credit operations of a well-known national lending institution and anticipates paying off its Congress debt by August 14. However, there can be no assurance that the new financing will be obtained. The Company's cash situation continues to improve in the domestic operations. In light of the recent efforts in cost cutting, reorganizing in the Instrument and Test Equipment segment and the improvement in recent orders, management believes the Company's cash situation has improved substantially since the fourth quarter of 1999. The Company expects to further improve its cash position on the effective date of the new financing discussed above. LEGAL PROCEEDINGS There are no material legal proceedings pending against the Company (see Note 4 to the Consolidated Condensed Financial Statements included elsewhere herein). -11- YEAR 2000 To date, the Company experienced no material effects related to computer operations and the arrival of the year 2000 as of the date of this report. Management does not expect any disruptions due to the year 2000 as management believes all its current systems are year 2000 compliant. EFFECTS OF INFLATION The impact of inflation and changing prices has not been significant on the financial condition or results of operations of either the Company or its various operating subsidiaries. EURO CONVERSION The Company has operating subsidiaries located in France and the U.K. with combined net sales from these operations approximating 49% of total Company net sales for the first half of 2000. Net sales from the French subsidiary participating in the Euro conversion were 32% of the Company's net sales for the first half of 2000. The Company continues to review the impact of the Euro conversion on its operations. In 1998, the Company's European operations took steps to ensure their capability of entering into Euro transactions as of January 1, 1999. No material changes to information technology and other systems were necessary to accommodate these transactions as such systems previously had the capability to utilize multiple currencies. While it is difficult to assess the competitive impact of the Euro conversion on the Company's European operations, at this time, the Company does not foresee any material impediments in its ability to compete for orders from customers requesting pricing using the new exchange rate. Since the Company has no significant direct sales between its U.S. operations and Europe, exchange rate risk is regarded as nominal. 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 -12- 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. 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 -13- 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. 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 -14- 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 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 -15- 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. 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. -16- 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. 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. -17- 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 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. -18- 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 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. -19- 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. 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. -20- 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. In June 2000, the Registrant issued an aggregate of 55,000 shares of common stock to three employees upon exercise of warrants at an exercise price of $0.20 per share. In June 2000, the Registrant issued 1,743,285 shares of common stock to one investor upon conversion of 34.5 shares of the Registrant's Series A Preferred Stock. In June 2000, the Registrant issued an aggregate of 217,500 shares of common stock to five investors, including the Registrant's Chief Executive Officer and his brother and son, in connection with the exercise of warrants with an exercise price of $0.25 per share. 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 -21- 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. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. As of June 30, 2000, we were in default of the tangible net worth covenant of our domestic credit facility. The balance due under this facility was $2,577,945 as of June 30, 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 10.1 Share Purchase Agreement dated April 17, 2000 between XCEL Power Systems Limited and the stockholders of The Belix Company Limited* 27.1 Financial Data Schedule* - -------------- * Filed as an exhibit to the initial filing of this Form 10-Q on August 14, 2000. (b) REPORTS ON FORM 8-K A report on Form 8-K was filed on May 5, 2000 to report under Item 5 - Other Events the Registrant's acquisition of Belix Company, Ltd. A report on Form 8-K was filed on June 28, 2000 to report under Item 5 - Other Events the extension of the Registrant's credit facility with Congress Financial Corporation. -22- 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) -23- -----END PRIVACY-ENHANCED MESSAGE-----