FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION STATEMENT NO. 333-63024
MICROTEL INTERNATIONAL, INC.
PROSPECTUS SUPPLEMENT DATED DECEMBER 19, 2001
TO PROSPECTUS DATED JULY 30, 2001
The prospectus of MicroTel International, Inc. dated July 30, 2001 is
supplemented to include information from the quarterly report on Form 10-Q for
the quarter ended September 30, 2001 filed with the Securities and Exchange
Commission on November 14, 2001 and to include other updated information. Our
condensed consolidated financial statements and related notes for the three and
nine months ended September 30, 2001 are included at pages F-1 to F-8 of this
supplement.
THE FOLLOWING RISK FACTORS ARE UPDATED OR ADDED:
------------------------------------------------
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT THAT MAY CONTINUE IN
THE FUTURE AND THAT MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.
We incurred significant net operating losses in the year ended December
31, 1999 and recorded a net operating profit in the year ended December 31,
2000. We realized a net loss of approximately $4.6 million for the twelve months
ended December 31, 1999. For the twelve months ended December 31, 2000, we
recorded net income of $1.0 million. For the nine months ended September 30,
2001, we recorded a net loss of $120,000. Our accumulated deficit and
accumulated other comprehensive loss through September 30, 2001 were $18,903,000
and $827,000, respectively, and as of that date we had a total stockholders'
equity of $5,593,000. There is no assurance that we will attain or continue to
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 through debt or equity financing to the extent we may need it for
our continued operations or for planned expansion. Consequently, future losses
may 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 ADVERSELY AFFECT
OUR BUSINESS IF DEMAND IS REDUCED.
During the year ended December 31, 2000 and the nine months ended
September 30, 2001, the sale of telecommunications equipment and related
services accounted for approximately 56% and 55%, respectively, of our total
sales, and the sale of electronic components accounted for approximately 44% and
45%, respectively, of our total sales. In many cases we have long-term contracts
with our telecommunications and electronic components customers that cover the
general terms and conditions of our relationships with them but that do not
include long-term purchase orders or commitments. Rather, our customers issue
purchase orders requesting the quantities of telecommunications equipment they
desire to purchase from us, and if we are able and willing to fill those orders,
then we fill them under the terms of the contracts. Accordingly, we cannot rely
on long-term purchase orders or commitments to protect us from the negative
financial effects of a reduced demand for our products that could result from a
general economic downturn, from changes in the telecommunications and electronic
components industries, including the entry of new competitors into the market,
from the introduction by others of new or improved technology, from an
unanticipated shift in the needs of our customers, or from other causes.
1
IF WE ARE UNABLE TO FULFILL BACKLOG ORDERS DUE TO CIRCUMSTANCES INVOLVING
US OR ONE OR MORE OF OUR SUPPLIERS OR CUSTOMERS, OUR ANTICIPATED RESULTS OF
OPERATIONS AND CASH FLOWS WILL SUFFER.
As of September 30, 2001, we had $14,542,000 in backlog orders for our
products, which orders were due in large part to the long lead times associated
with our electronic components products. The amount of backlog orders represents
revenue that we anticipate recognizing in the future, as evidenced by purchase
orders and other purchase commitments received from customers, but on which work
has not yet been initiated or with respect to which work is currently in
progress. However, there can be no assurance that we will be successful in
fulfilling orders and commitments in a timely manner or that we will ultimately
recognize as revenue the amounts reflected as backlog.
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, we currently obtain some components
used in our products from single or limited sources. Some modem chipsets used in
our data communications products have been in short supply and are frequently on
allocation by semiconductor manufacturers. We have, from time to time,
experienced difficulty in obtaining some components. We do not have guaranteed
supply arrangements with any of our suppliers, and there can be no assurance
that our suppliers will continue to meet our requirements. Further, disruption
in transportation services as a result of the terrorist attacks in the United
States on September 11, 2001 and further enhanced security measures in response
to the attacks may cause some increases in costs and timing for both our receipt
of components and shipment of products to our customers. If our existing
suppliers are unable to meet our requirements, we could be required to alter
product designs to use alternative components or, if alterations are not
feasible, we could be required to eliminate products from our product line.
Shortages of components could not only limit our product line and
production capacity but also could result in higher costs due to the higher
costs of components in short supply or the need to use higher cost substitute
components. Significant increases in the prices of components could have a
material adverse effect on our results of operations because our products
compete on price, and therefore we may not be able to adjust product pricing to
reflect the increases in component costs. Also, an extended interruption in the
supply of components or a reduction in their quality or reliability would have a
material adverse effect on our financial condition and results of operations by
impairing our ability to timely deliver quality products to our customers.
Delays in deliveries due to shortages of components or other factors may result
in cancellation by our customers of all or part of their orders. Although
customers who purchase products from us, such as many of our digital switches,
that are not readily available from other sources would be less likely than
other customers of ours to cancel their orders due to production delays, we
cannot assure you that cancellations will not occur.
2
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE
RELEVANT FOREIGN CURRENCY THAT 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. Sales
of our products and services to customers located outside of the United States
accounted for approximately 53% of our net sales for the year ended December 31,
2000 and approximately 54% of our net sales for the nine months ended September
30, 2001. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2001. 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.
IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR COMPLETE STRATEGIC
ACQUISITIONS, OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER.
Our business strategy includes growth through acquisitions that we
believe will improve our competitive capabilities 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. Acquisitions may also require us to issue equity
securities that could result in dilution to existing stockholders and to expend
a substantial amount of cash or other resources, not only as a result of the
direct expenses involved in the acquisition transaction but also as a result of
ongoing research and development activities that may be required to maintain or
enhance the long-term competitiveness of acquired products, particularly those
products marketed to the rapidly evolving telecommunications industry. If we are
unable to complete strategic acquisitions due to our inability to identify
appropriate targets, to raise the necessary funds, particularly while our stock
price is low, or to manage the difficulties or costs involved in the
acquisitions, our long-term competitive positioning could suffer.
WE RELY HEAVILY ON OUR MANAGEMENT, 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, our Executive Vice President, Graham
Jefferies and our Senior Vice President and Chief Financial Officer, Randolph
Foote. Mr. Oliva co-founded XET Corporation and has developed personal contacts
and other skills that we rely upon in connection with our financing, acquisition
and general business strategies. Mr. Jefferies is a long-time employee of
MicroTel who we have relied upon in connection with our United Kingdom
acquisitions and who fulfills significant operational responsibilities in
connection with our foreign and domestic operations. Mr. Foote joined us over
two years ago, and we have relied upon his skills in financial reporting,
accounting and tax matters in addition to his skills in the analysis of
potential acquisitions and general corporate administration. Consequently, the
loss of Mr. Oliva, Mr. Jefferies, Mr. Foote 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 of our executive officers other than with Mr.
Oliva, Mr. Jefferies and Mr. Foote. 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.
3
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, our 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 future taxable income, which will negatively impact our results of
operations and cash flows.
WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF TERRORISM
AND THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND THE
PUBLIC MAY HAVE ON OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND CASH FLOWS.
The recent terrorist attacks in the United States, which have brought
devastation to many people and shaken consumer confidence, have disrupted
commerce throughout the world. The continuing threat of terrorism in the United
States and other countries and heightened security measures, as well as current
and any future military action in response to such threat, may cause significant
disruption to the global economy, including widespread recession. To the extent
that such disruptions result in a general decrease in spending that could
decrease demand for our current and planned products and services, in our
inability to effectively market, manufacture or ship our products and services,
or in financial or operational difficulties for various vendors on which we
rely, our business and results of operations could be materially and adversely
affected. We are unable to predict whether the continuing threat of terrorism or
the responses to such threat will result in any long-term commercial disruptions
or whether such terrorist activities or responses will have any long-term
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK.
The market prices of securities of technology-based companies,
especially telecommunications electronics 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:
o variations in our quarterly operating results;
o changes in market valuations of similar companies and stock market
price and volume fluctuations generally;
o economic conditions specific to the telecommunications electronics
industry;
o 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;
o regulatory developments;
o additions or departures of key personnel; and
o future sales of our common stock or other securities.
4
The price at which you purchase shares of common stock 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.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT
BE AVAILABLE TO US ON ACCEPTABLE TERMS OR AT ALL. IF WE OBTAIN FINANCING
THROUGH THE ISSUANCE OF EQUITY SECURITIES, FURTHER DILUTION TO EXISTING
STOCKHOLDERS MAY RESULT. WE MAY BE REQUIRED TO OBTAIN FINANCING THROUGH
ARRANGEMENTS THAT MAY REQUIRE US TO RELINQUISH RIGHTS OR CONTROL TO SOME OF
OUR PROPRIETARY TECHNOLOGIES.
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 additional financing will be available to us on acceptable terms, or at
all. Deteriorating global economic conditions and the effects of ongoing
military actions against terrorists may cause prolonged declines in investor
confidence in and accessibility to capital markets. If we raise additional funds
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 portions of our operations and product development and
marketing efforts or to obtain funds through arrangements with partners or
others that may require us to relinquish rights to some of our technologies or
potential products, services or other assets. Accordingly, the inability to
obtain financing could result in a significant loss of ownership and/or control
of our proprietary technology and other important assets and could also
adversely affect our ability to fund our continued operations and our product
development and marketing efforts that historically have contributed
significantly to our competitiveness.
SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC SALE
COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO
RAISE ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of November 28, 2001, we had outstanding 20,670,703 shares of common
stock, 20,570,703 of which shares were either unrestricted, registered for
resale under the Securities Act of 1933, or eligible for resale without
registration under Rule 144 of the Securities Act of 1933. As of November 28,
2001, we also had outstanding options, warrants and preferred stock that were
exercisable for or convertible into 6,330,555 shares of common stock. Of these,
1,594,924 shares of common stock underlying options, 1,686,055 shares of common
stock underlying warrants and 2,763,250 shares of common stock underlying
preferred stock were registered for resale. 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. Any
adverse effect on the market price for our common stock could make it difficult
for us to sell equity securities at a time and at a price that we deem
appropriate.
5
PRICE RANGE OF COMMON STOCK IS UPDATED TO INCLUDE THE FOLLOWING:
----------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
For the quarter ended September 30, 2001, the high and low closing bid
prices per share of our common stock were $0.45 and $0.26, respectively. As of
November 28, 2001, we had 20,670,703 shares of common stock outstanding held of
record by approximately 3,600 stockholders, and the high and low sale prices of
our common stock on the OTC Bulletin Board on that date were $0.33 and $0.30,
respectively.
THE CAPITALIZATION TABLE IS REPLACED WITH THE FOLLOWING:
--------------------------------------------------------
CAPITALIZATION
The following table sets forth our capitalization as of September 30,
2001. You should read this information together with our consolidated financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus.
SEPT. 30, 2001
--------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE DATA)
Long-term debt, less current portion.................................. $ 783
---------
Convertible redeemable preferred stock, $10,000 unit value.
Authorized 200 shares; issued and outstanding 25 shares
(aggregate liquidation preference of $250).......................... 267
Stockholders' equity:
Preferred Stock, $0.01 par value. Authorized 10,000,000 shares.
Convertible Series B Preferred Stock, $0.01 par value, 150,000
shares authorized, 150,000 shares issued and outstanding
(aggregate liquidation preference of $960) 938
Common Stock, $0.0033 par value. Authorized 50,000,000 shares;
issued and outstanding, 20,571,000............................... 68
Additional paid-in capital............................................ 24,317
Accumulated deficit................................................... (18,903)
Accumulated other comprehensive loss.................................. (827)
-----------
Total stockholders' equity.......................................... 5,593
-----------
Total capitalization................................................ $ 6,643
==========
6
THE SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA TABLE IS REPLACED WITH THE
FOLLOWING:
--------------------------------------------------------------------------------
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected consolidated historical financial data should be
read in conjunction with the consolidated financial statements and the notes to
those statements and the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus. The consolidated statements of operations and comprehensive income
data with respect to the years ended December 31, 1998, 1999 and 2000 and the
consolidated balance sheet data at December 31, 1999 and 2000 are derived from,
and are qualified by reference to, the consolidated audited financial statements
included elsewhere in this prospectus. The consolidated statements of operations
and comprehensive income data set forth below with respect to the nine month
periods ended September 30, 2000 and 2001 and the consolidated balance sheet
data as of September 30, 2001 are derived from unaudited financial statements
included elsewhere in the prospectus which, in the opinion of our management,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial data for these periods. The historical
results are not necessarily indicative of results to be expected for any future
periods.
THREE NINE MONTHS
YEAR MONTHS ENDED
ENDED ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30,
STATEMENTS OF OPERATIONS AND SEPT. 30, DEC. 31, --------------------------------------------- ---------------------
COMPREHENSIVE INCOME DATA: 1996 1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
Net sales............................ $ 14,270 $ 3,100 $ 27,251 $ 30,100 $ 25,913 $ 28,050 $ 19,559 $ 20,893
Cost of sales........................ 9,442 2,332 18,069 17,353 17,066 15,529 10,646 11,935
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit......................... 4,828 768 9,182 12,747 8,847 12,521 8,913 8,958
Selling, general and administrative
expenses........................... 3,426 1,045 8,608 10,202 10,584 9,827 6,826 7,943
Engineering and product development
expenses........................... -- -- 1,797 2,202 1,841 1,167 773 897
Write-down of goodwill............... -- -- 5,693 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations........ 1,402 (277) (6,916) 343 (3,578) 1,527 1,314 118
Total other income (expense)......... 304 49 (627) (804) (492) 207 61 (228)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes..... 1,706 (228) (7,543) (461) (4,070) 1,734 1,375 (110)
Income tax expense................... 20 30 97 101 128 31 13 10
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations......................... 1,686 (258) (7,640) (562) (4,198) 1,703 1,362 (120)
Discontinued operations:
Loss from operations of
discontinued segment............ (603) (647) (2,053) (1,203) (847) (212) (219) --
Gain (loss) on disposal of
discontinued segment including
provision for phase out period
of $158 in 2000.................. -- -- -- 580 44 (487) (634) --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... 1,083 (905) (9,693) (1,185) (4,596) 1,004 509 (120)
Foreign currency translation
adjustment........................ (89) 126 (260) 206 (325) (515) (435) (96)
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive income (loss).... $ 994 $ (799) $ (9,953) $ (979) $ (4,921) $ 499 $ 74 $ (216)
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share from
continuing operations.............. $ 0.27 $ (0.05) $ (0.76) $ (0.05) $ (0.26) $ 0.09 $ 0.07 $ (0.01)
========= ========= ========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share
from continuing operations......... $ 0.27 $ (0.05) $ (0.76) $ (0.05) $ (0.26) $ 0.07 $ 0.06 $ (0.01)
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share from
discontinued operations............ $ (0.10) $ (0.10) $ (0.20) $ (0.05) $ (0.02) $ (0.04) $ (0.05) $ --
========= ========= ========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share
from discontinued operations....... $ (0.10) $ (0.10) $ (0.20) $ (0.05) $ (0.02) $ (0.03) $ (0.04) $ --
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share...... $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ 0.05 $ 0.02 $ (0.01)
========= ========= ========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share.... $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ 0.04 $ 0.02 $ (0.01)
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares outstanding,
basic............................. 5,841 6,064 10,137 11,952 16,638 19,504 19,141 20,570
Weighted average shares outstanding,
diluted........................... 5,841 6,064 10,137 11,952 16,638 23,027 21,347 20,570
7
YEARS ENDED DECEMBER 31,
SEPTEMBER 30,--------------------------------------------------------- SEPT. 30,
1996 1996 1997 1998 1999 2000 2001
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA: (UNAUDITED)
Cash and cash equivalents...... $ 492 $ 574 $ 1,571 $ 450 $ 480 $ 756 $ 437
Working capital................ 3,911 3,554 4,625 4,999 1,080 2,780 3,120
Total assets................... 12,870 12,316 20,129 20,352 16,489 19,484 17,938
Long-term debt, net of current
portion..................... 1,755 2,019 2,012 1,175 143 282 783
Stockholders' equity........... 5,486 4,753 6,011 5,482 3,801 5,807 5,593
Convertible redeemable
preferred stock............. -- -- 1 1,516 588 259 267
No cash dividends on our common stock were declared during any of the
periods presented above. Shares outstanding and earnings (loss) per share have
been restated to give effect to the recapitalization of XET Corporation (the
accounting acquirer) in the reverse acquisition of MicroTel International, Inc.
by XET Corporation on March 26, 1997.
The historical financial data above for periods prior to the merger is
that of XET Corporation. In conjunction with the reverse acquisition accounting
treatment, XET Corporation changed its fiscal year end from September 30 to
December 31 to adopt the fiscal year end of MicroTel International, Inc. The
three-month period ended December 31, 1996 represents the "transition" period
between XET Corporation's fiscal year ended September 30, 1996 and the beginning
of its new fiscal year on January 1, 1997.
In October 2000, we decided to discontinue our circuits segment's
operations. Accordingly, all current and prior financial information related to
the circuits segment operations have been presented as discontinued operations
in historical financial data above.
8
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTION IS REPLACED WITH THE FOLLOWING:
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH OUR CONSOLIDATED CONDENSED FINANCIAL STATEMENTS AND NOTES AND THE
INFORMATION INCLUDED UNDER THE CAPTION "RISK FACTORS" INCLUDED ELSEWHERE IN THIS
PROSPECTUS.
OVERVIEW
We previously organized our operations in three business segments:
o Instrumentation and Test Equipment;
o Components and Subsystem Assemblies; and
o 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 circuits segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of our wholly-owned subsidiary, XET
Corporation (formerly XIT Corporation). We intend to retain our small Monrovia,
California circuit board manufacturing facility primarily as a captive supplier
of circuit boards to XET Corporation's Digitran Division.
Effective August 1, 2000, we acquired the assets and business
operations of T-Com, LLC, or T-Com, a telecommunications test instrument
manufacturer located in Sunnyvale, California. T-Com produced central office
equipment, which is equipment that is typically employed in switching and
network operating centers.
Through our three direct wholly-owned operating subsidiaries, XET
Corporation, CXR Telcom Corporation, or CXR Telcom, 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
material business segments:
o 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 public and private networks for the transmission
of data, voice and video)
9
o Electronic Components (digital switches and electronic power
supplies)
Our sales are primarily in North America, Europe and Asia. In the first
three quarters of 2001, approximately 55% of our sales were to customers in the
telecommunications industry, and the remainder of our sales were to aerospace,
military contractors and industrial customers.
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:
THREE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ---------------------------------
2001 2000 2000 1999 1998
------ ------ ------ ------ ------
Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 60.7 44.8 55.4 65.9 57.7
------ ------ ------ ------ ------
Gross profit..................................... 39.3 55.2 44.6 34.1 42.3
Selling, general and administrative expenses..... 38.8 35.4 35.0 40.8 33.9
Engineering and product development expenses..... 3.7 4.0 4.2 7.1 7.3
------ ------ ------ ------ ------
Operating income (loss).......................... (3.2) 15.8 5.4 (13.8) 1.1
Interest expense................................. (1.8) (1.8) (1.5) (1.6) (2.2)
Other income (expense)........................... 0.6 2.5 2.3 (0.3) (0.4)
------ ------ ------ ------ ------
Income (loss) from continuing operations before
income taxes................................... (4.4) 16.5 6.2 (15.7) (1.5)
Income taxes..................................... -- -- 0.1 0.5 0.4
------ ------ ------ ------ ------
Income (loss) from continuing operations......... (4.4) 16.5 6.1 (16.2) (1.9)
Loss from discontinued operations................ -- (1.0) (0.8) (3.2) (4.0)
Gain (loss) on disposal of discontinued segment.. -- (9.2) (1.7) 1.7 1.9
------ ------ ------ ------ ------
Net income (loss)................................ (4.4)% 6.3% 3.6% (17.7)% (3.9)%
====== ====== ====== ====== ======
CONTINUING OPERATIONS
NET SALES. Net sales for the three months ended September 30, 2001
decreased by $526,000 (7.7%) to $6,345,000, as compared to $6,871,000 for the
three months ended September 30, 2000.
Net sales of our telecommunications products for the three months ended
September 30, 2001 remained approximately unchanged at $3,483,000, as compared
to $3,487,000 for the comparable period in 2000. Net sales of our U.S.-based
telecom operation of CXR Telcom for the three months ended September 30, 2001
decreased by $443,000 (21.2%) to $1,643,000, as compared to $2,086,000 for the
comparable period in 2000. This decrease was partially due to a $423,000
reduction in net sales of our CXR HALCYON 704 series test equipment and a
$474,000 reduction in sales of T-Com central office test equipment. These
reductions were partially offset by a $309,000 increase in net U.S. sales of our
transmission products and a $146,000 increase in service and other revenues. Net
sales of our French subsidiary, CXR, S.A., for the three months ended September
30, 2001 increased by $439,000 (31.3%) to $1,840,000 as compared to $1,401,000
for the comparable prior year period. This increase was primarily due to a
$364,000 increase in net sales of transmission equipment and a $148,000 increase
in net sales of test equipment. These increases were offset with a $73,000
reduction in net sales for the Networking Division due to its closure.
10
Net sales of electronic components for the three months ended September
30, 2001 decreased by $522,000 (15.5%) to $2,862,000, as compared to $3,384,000
for the comparable period in 2000. The decrease primarily was due to a decline
in sales of electronic switches by the Digitran Division of our subsidiary, XET
Corporation, in Rancho Cucamonga, California. The Digitran Division's net sales
decreased $842,000 (44.7%) to $1,040,000 in the three months ended September 30,
2001 from $1,882,000 in the prior year period. The decrease was due to the
completion of the BAE Systems order earlier this year, which order contributed
$504,000 to sales in the third quarter of 2000. This decrease was offset by a
$245,000 (19.9%) increase in net sales of power supplies of our U.K. subsidiary,
XCEL Corporation, Ltd., or XCL, as measured in U.S. dollars, which net sales
increased from $1,229,000 for the three months ended September 30, 2000 to
$1,474,000 for the three months ended September 30, 2001. In addition, our
Japanese subsidiary, XCEL Japan Ltd., or XJL, increased its sales by $86,000
(36.4%) to $322,000 for the three months ended September 30, 2001 from $236,000
for the comparable period in 2000.
GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 39.3% for the three months ended September 30, 2001, as compared to 55.2% for
the comparable period in 2000. In dollar terms, total gross profit decreased by
$1,299,000 (34.3%) to $2,492,000 for the three months ended September 30, 2001,
as compared to $3,791,000 for the comparable period in 2000.
Gross profit for our telecommunications segment decreased in dollar
terms by $465,000 (24.2%) to $1,459,000 for the three months ended September 30,
2001, as compared to $1,924,000 for the comparable period in 2000, and decreased
as a percentage of net sales from 55.2% in 2000 to 41.9% in 2001. The decrease
in gross profit as a percentage of net sales was due primarily to the decrease
in sales of telecommunication test instruments which increased per unit costs.
In addition, sales of transmissions products increased, which products generally
carry a lower gross profit margin than test equipment.
Gross profit for our electronic components segment decreased in dollar
terms by $834,000 (44.7%) to $1,033,000 for the three months ended September 30,
2001, as compared to $1,867,000 for the comparable period in 2000, and decreased
as a percentage of related net sales from 55.2% in 2000 to 36.1% in 2001. This
percentage decrease was primarily the result of the completion of the BAE
Systems order that provided a substantial contribution to gross margin in the
third and fourth quarters of 2000 but was completed in the first quarter of 2001
so that there was no contribution from this contract in the current quarter. The
decrease was offset by improved gross margins at XCL in the U.K. as a result of
an increase in sales of custom military power supply units, or PSUs, in relation
to the PSUs sold in the commercial market. For the quarter ended September 30,
2001, custom PSU sales increased to 74.5% of the total PSUs sold, as compared to
61.5% in the three-month period ended September 30, 2000. The custom military
PSUs carry higher margins than the commercial PSUs. XCL's gross margin improved
from 28.1% of net sales in the third quarter of 2000 to 30.4% of net sales in
the current three-month period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased slightly by $26,000 (0.1%) to $2,457,000 for
the three-month period ended September 30, 2001, as compared to $2,431,000 for
the comparable period in 2000. These expenses included approximately $156,000 of
legal and accounting expenses for non-routine SEC filings in the three-month
period ended September 30, 2001. However, this is the last quarter in which we
expect to incur such expenses.
11
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses decreased by
$42,000 (15.2%) to $235,000 for the three months ended September 30, 2001, as
compared to $277,000 for the comparable prior year period. The decrease
primarily was due to the closure of our St. Charles, Illinois engineering
facility and the layoff of four engineers. Engineering functions have been
transferred to the Fremont, California facility.
OTHER INCOME AND EXPENSE. Interest expense decreased to $113,000 for
the three months ended September 30, 2001, from $126,000 in the comparable
period in 2000 due to lower debt balances. Other income of $33,000 in the third
quarter of 2001 declined from $177,000 in the third quarter of 2000 primarily
because we recorded a $197,000 gain on the sale of Wi-LAN, Inc. common stock in
the three months ended September 30, 2000.
NET INCOME OR LOSS. Net loss for the three months ended September 30,
2001 was $281,000 as compared to net income from continuing operations of
$1,132,000 for the prior year period. The current period loss included expenses
of approximately $156,000 for non-routine SEC filings and $72,000 in severance
pay related to staff reductions. The net income of the prior year period
included a $197,000 gain from the sale of Wi-LAN, Inc. common stock.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $702,000 for the three months ended September 30, 2000. Net sales, gross
profit and selling, general and administrative expenses for our circuits
business for the three months ended September 30, 2000 were $690,000, $51,000
and $147,000, respectively.
12
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2000
The following table sets forth, for the periods indicated, certain
statement of operations data expressed as a percentage of total net sales:
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------------------------------
2001 2000 2000 1999 1998
------ ------ ------ ------ ------
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 57.1 54.4 55.4 65.9 57.7
------ ------ ------ ------ ------
Gross profit............................... 42.9 45.6 44.6 34.1 42.3
Selling, general and administrative
expenses................................. 38.0 34.9 35.0 40.8 33.9
Engineering and product development
expenses................................. 4.3 4.0 4.2 7.1 7.3
------ ------ ------ ------ ------
Operating income (loss).................... 0.6 6.7 5.4 (13.8) 1.1
Interest expense........................... (1.5) (1.7) (1.5) (1.6) (2.2)
Other income (expense)..................... 0.3 2.0 2.3 (0.3) (0.4)
------ ------ ------ ------ ------
Income (loss) from continuing operations
before income taxes...................... (0.6) 7.0 6.2 (15.7) (1.5)
Income taxes............................... -- -- 0.1 0.5 0.4
------ ------ ------ ------ ------
Income (loss) from continuing operations... (0.6) 7.0 6.1 (16.2) (1.9)
Loss from discontinued operations.......... -- (1.1) (0.8) (3.2) (4.0)
Gain (loss) on disposal of discontinued
segment.................................. -- (3.3) (1.7) 1.7 1.9
------ ------ ------ ------ ------
Net income (loss).......................... (0.6)% 2.6% 3.6% (17.7)% (3.9)%
====== ====== ====== ====== ======
CONTINUING OPERATIONS
NET SALES. Net sales for the nine months ended September 30, 2001
increased by $1,334,000 (6.8%) to $20,893,000, as compared to $19,559,000 for
the nine months ended September 30, 2000.
Net sales of our telecommunications products for the nine months ended
September 30, 2001 increased by $771,000 (7.2%) to $11,451,000, as compared to
$10,680,000 for the comparable period in 2000. Net sales of our U.S.-based
telecom operation of CXR Telcom for the nine months ended September 30, 2001
increased by $590,000 (12.3%) to $5,384,000, as compared to $4,794,000 for the
comparable period in 2000. This increase was mainly due to a $203,000 increase
in service revenues and a $187,000 increase in net sales of T-Com, LLC products
that were acquired effective August 2000 with the acquisition of T-Com. CXR
Telcom sales of CXR HALCYON 704 series test equipment increased by $150,000
(4.9)% in the first three quarters of 2001 as compared to the comparable prior
year period. Net sales of our transmission and original equipment manufactured
test instruments by CXR, S.A. for the nine months ended September 30, 2001
increased by $181,000 (3.1%) to $6,067,000, as compared to $5,886,000 for the
comparable prior year period. This increase would have been 7.9% if not for the
decline in the value of the French Franc in relation to the value of the U.S.
dollar in the nine months ended September 30, 2001 as compared to their relative
values for the nine months ended September 30, 2000. The major reasons for the
increase in CXR, S.A.'s sale were a $719,000 increase in net sales of
transmission equipment and a $248,000 increase in net sales of test equipment.
These increases were partially offset by a $783,000 reduction of networking
products sales due to the closure of the Networking Division last year.
13
Net sales of our electronic components for the nine months ended
September 30, 2001 increased by $563,000 (6.3%) to $9,442,000, as compared to
$8,879,000 for the comparable period in 2000, primarily due to a $899,000
increase in sales of XCL, our U.K. subsidiary. This increase in net sales was
primarily due to an increase in deliveries of outstanding contracts of power
supplies. Also contributing to the increase in sales of our electronic
components segment was XJL, our Japanese subsidiary, which increased its sales
in the nine months ended September 30, 2001 by $118,000 (17.2%) to $803,000, as
compared to $685,000 for the comparable prior year period. This increase was
offset by a $430,000 decrease in XET's sales primarily due to a decline in
shipments of digital switches under its contract with BAE Systems, Canada due to
the completion of that contract in the first quarter of this year.
GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 42.9% for the nine months ended September 30, 2001, as compared to 45.6% for
the comparable period in 2000. In dollar terms, total gross profit increased
slightly by $45,000 (0.5%) to $8,958,000 for the nine months ended September 30,
2001, as compared to $8,913,000 for the comparable period in 2000.
Gross profit for our telecommunications segment increased in dollar
terms by $171,000 (3.6%) to $4,936,000 for the nine months ended September 30,
2001, as compared to $4,765,000 for the comparable period in 2000, and decreased
as a percentage of net sales from 44.6% in 2000 to 43.1% in 2001.
Gross profit for our electronic components segment decreased in dollar
terms by $126,000 (3.0%) to $4,022,000 for the nine months ended September 30,
2001, as compared to $4,148,000 for the comparable period in 2000, and decreased
as a percentage of related net sales from 46.7% in 2000 to 42.6% in 2001. This
decrease was primarily the result of the completion of the BAE Systems, Canada
contract in the first quarter of this year, which contract had provided for
sales of higher margin products and contributed to higher sales in the prior
year and the first quarter of this year at XET's Digitran Division in Rancho
Cucamonga, California. This decrease was partially offset by the improved profit
margins in connection with higher production volumes and a higher margin product
mix at XCL in the U.K., which contributed to a $564,000 increase in gross
profit. Also, XJL's gross profit margin increased by $44,000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1,117,000 (16.4%) to $7,943,000 for the
nine-month period ended September 30, 2001, as compared to $6,826,000 for the
comparable period in 2000. The increase was primarily due to increases of
$705,000 in legal and accounting fees, $107,000 of compensation expenses, and
$296,000 of administrative expenses at CXR Telcom due to the consolidation of
the business acquired with the acquisition of T-Com, LLC. The legal and
accounting fees in the first three quarters of 2001 include approximately
$608,000 incurred in connection with non-routine Securities and Exchange
Commission filings. However, we do not expect to incur any further such
expenses.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses increased by
$124,000 (16.0%) to $897,000 for the nine months ended September 30, 2001, as
compared to $773,000 for the comparable prior year period, reflecting new
product development activities. This increase primarily was due to the addition
of engineering staff during the earlier part of the year which was partially
offset by layoffs in August 2001 and the closure of the St. Charles, Illinois
engineering facility.
14
OTHER INCOME AND EXPENSE. Interest expense decreased to $311,000 for
the nine months ended September 30, 2001 from $321,000 in the comparable period
in 2000. Other income of $83,000 in the first three quarters of 2001 declined
from $381,000 in the first three quarters of 2000 primarily because in the
nine-month period ended September 30, 2000 we recorded a $197,000 gain on the
sale of stock of Wi-LAN, Inc. and the reversal of a warranty reserve of $116,000
for a warranty settlement related to sales made by the Company's former
subsidiary, HyComp, Inc., which was sold in April 1999.
NET INCOME OR LOSS. Net loss for the nine months ended September 30,
2001 was $120,000 as compared to net income from continuing operations of
$1,362,000 for the prior year period. The current nine-month period loss
included expenses of approximately $608,000 for non-routine SEC filings and
$72,000 in severance pay related to staff reductions. The net income of the
prior year period included a $197,000 gain from the sale of Wi-LAN, Inc. common
stock and a $116,000 gain related to the settlement of a warranty claim from the
sale of our former subsidiary, HyComp, Inc.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $853,000 for the nine months ended September 30, 2000. Net sales, gross
profit and selling, general and administrative expenses for our circuits
business for the nine months ended September 30, 2000 were $2,088,000, $166,000
and $454,000, respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
CONTINUING OPERATIONS
NET SALES. Net sales for the year ended December 31, 2000 increased by
$2,137,000 (8.2%) to $28,050,000 as compared to $25,913,000 for the year ended
December 31, 1999.
Net sales of our telecommunications products and services during 2000
declined slightly to $15,658,000 from $15,666,000 during 1999. Test equipment
sales during 2000 increased by $2,923,000 (58.7%) to $7,906,000 as compared to
$4,983,000 for 1999. This increase in sales of test equipment was primarily due
to the positive market acceptance of our CXR HALCYON 704 series product line
which accounted for $1,125,000 of the increase. The remaining $1,798,000 of this
increase was substantially attributable to additional test equipment sales as a
result of our acquisition of the business of T-Com in August 2000. This increase
in net sales of test equipment was offset by a reduction in sales of
transmission and networking equipment that are produced at our French
subsidiary, CXR S. A., of $2,931,000 (37.8%) from $10,683,000 during 1999 to
$7,752,000 for 2000. The decline in the net sales of these products was
primarily due to the conversion of sales amounts from French Francs to the U.S.
Dollars. The average U.S. Dollar value of the French Franc has declined
approximately 15% from 1999 to 2000. In addition, budget delays and reductions
within the French public sector also contributed to the reduction of
transmission equipment sales.
Net sales of electronic components for 2000 increased by $2,145,000
(20.9%) to $12,392,000 as compared to $10,247,000 for 1999. This increase was
primarily due to an increase in digital switch sales of XET Corporation's
Digitran Division of $2,905,000 (63%) for 2000 to $7,508,000 from $4,603,000 for
1999. Contributing to this increase was a large order for switches placed by BAE
Systems of Canada, which accounted for $1,656,000 of net sales in 2000. Sales
under our contract with BAE Systems Canada, Inc. ended during the first quarter
of 2001. This increase was offset by the termination of our subsystem assembly
business that accounted for $670,000 of sales in 1999.
15
GROSS PROFIT. Gross profit as a percentage of net sales increased to
44.6% for 2000 as compared to 34.1% for 1999. In dollar terms, gross profit
increased by $3,674,000 (41.5%) to $12,521,000 for 2000 as compared to
$8,847,000 for 1999. For 2000 and 1999, cost of sales included provisions for
inventory obsolescence of $893,000 and $1,144,000, respectively. Provisions for
inventory obsolescence are recorded as necessary to reduce obsolete inventory to
estimated net realizable value or to specifically reserve for obsolete inventory
that we intend to dispose of. Upon disposal of obsolete inventory, the inventory
is written off and the allowance for inventory obsolescence is reduced.
Gross profit for our telecommunications segment increased in dollar
terms by $1,292,000 (24.8%) to $6,508,000 for 2000 as compared to $5,216,000 for
1999 and increased as a percentage of related net sales from 33.4% in 1999 to
41.5% in 2000. This increase in gross profit was primarily due to a larger
portion of telecommunications segment sales consisting of higher margin test
equipment in 2000 which included the new CXR HALCYON 704 series test equipment
and our T-Com test equipment. These products, each of which contributed a
greater proportion of sales to this segment in 2000 than in 1999, generate a
higher gross profit margin than the older model test equipment and generally
contribute a higher margin than the transmission products.
Gross profit of our electronic components segment increased in total
dollar terms by $2,382,000 (65.6%) to $6,013,000 for 2000 from $3,631,000 in
1999 and increased as a percentage of related net sales from 35.2% in 1999 to
48.5% in 2000. The increase in gross profit margin in 2000 as compared to 1999
was primarily due to improved profit margins in connection with sales made by
XET Corporation which resulted from manufacturing efficiencies, reduced overhead
in connection with the move from the Ontario facility to our Rancho Cucamonga
facility, higher production volumes and a larger percentage of higher margin
night vision switches. These increases were slightly offset by a decline in
profit margin of sales of our U. K. subsidiary due to lower sales volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $757,000 (7.2%) to $9,827,000 for 2000 as
compared to $10,584,000 for 1999 and decreased as a percentage of net sales from
40.8% in 1999 to 35.0% in 2000. This decrease is attributable to a reduction in
selling expenses of $291,000 and reduction in general and administrative
expenses of $466,000. The decrease in general and administrative expenses was
primarily due to continued cost cutting efforts and due to certain expenses
incurred in 1999 that were not incurred in 2000. These expenses include a
$452,000 expense related to the establishment of a reserve for a note
receivable, a $522,000 charge related to our investor relations efforts and a
$193,000 charge related to a contingent stock agreement. Alternatively, there
were general and administrative expenses incurred in 2000 that were not incurred
in 1999 including approximately $200,000 of legal and accounting fees related to
the filing of a registration statement and other filings with the Securities and
Exchange Commission.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses decreased by
$674,000 (36.6%) to $1,167,000 for 2000 as compared to $1,841,000 for 1999. The
majority of this reduction is due to eliminating CXR Telcom's engineering
function in Fremont, California for test instruments and concentrating our
engineering efforts in only one location, our St. Charles, Illinois facility,
and the transfer of transmission and network access product engineering to CXR
S. A. in France with no additional staffing added there.
OTHER INCOME AND EXPENSE. Interest expense increased slightly to
$424,000 for 2000 as compared to $411,000 for 1999. Other income was $631,000
for 2000 as compared to an expense of $81,000 for 1999. Other income in 2000
included $197,000 of gain on the sale of common stock of Wi-LAN, Inc., $137,000
reduction in a warranty reserve, $90,000 for reductions in accruals for
settlements related to leased equipment and gain on foreign currency exchange of
$94,000.
16
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes and U.S. alternative minimum tax as we are in
a loss carryforward position for federal income tax purposes. At December 31,
2000 we had total net deferred income tax assets of approximately $16,321,000.
These potential income tax benefits, a significant portion of which relates to
net operating loss carryforwards, have been subjected to a 100% valuation
allowance since realization of these assets is not more likely than not in light
of our recurring losses from operations.
DISCONTINUED OPERATIONS
As a result of our decision in October 2000 to discontinue our last
remaining material circuits business, which operated as the XCEL Etch Tek
Division of our XET Corporation subsidiary, our circuits segment has been
accounted for as discontinued operations. We reported a net loss from
discontinued operations of $699,000 for 2000 as compared to a net loss of
$398,000 for 1999. The 2000 net loss included a loss of $487,000 from the
disposal of our discontinued operations, including $122,000 for phase out
period, as compared to a gain of $449,000 for 1999 relating to the sale of
HyComp, Inc., a subsidiary in our circuits segment, and the separate sale of its
corporate shell.
Net sales for our circuits business for 2000 decreased by $131,000
(5.5%) to $2,257,000 as compared to $2,388,000 for 1999 primarily due to the
sale of our circuits segment facility in November 2000, which resulted in 10 1/2
months of circuit segment sales during 2000.
Selling, general and administrative expenses related to our
discontinued operations declined by $288,000 (43.4%) to $375,000 for 2000 as
compared to $663,000 for 1999 primarily due to the sale of HyComp, Inc. in 1999
and cost reductions of Etch-Tek.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
CONTINUING OPERATIONS
NET SALES. Net sales for the year ended December 31, 1999 decreased by
$4,187,000 (13.9%) to $25,913,000 as compared to $30,100,000 for the year ended
December 31, 1998.
Net sales of our telecommunications products and services decreased by
$1,866,000 (10.6%) to $15,666,000 for 1999, as compared to $17,532,000 for 1998.
This decrease was primarily due to reduced sales of our older CXR 5200 series of
telecommunications test sets which we were in the process of replacing with our
new CXR HALCYON 700 series of equipment because the older models were not
computer compatible and were larger and heavier than the newer models. Sales of
our older models, which totaled $15,000 during 1999, declined at a faster rate
than the increase in sales of our new models, which sales totaled $1,940,000
during 1999. The decrease in net sales attributable to the decline in sales of
our older model test equipment was partially offset by a $937,000 increase in
U.S. sales of our transmission products. An increase in sales by CXR, S.A. was
not fully recognized by us as a result of a 18.4% decline in the value of the
French Franc in relation to the U.S. dollar. The net sales of CXR, S.A. in its
functional currency of French Francs were 16.9% greater in 1999 than in 1998.
However, because of the decline in the value of the French Franc in relation to
the U.S. dollar, CXR, S.A. net sales in U.S. dollars were 15% less in 1999 than
in 1998.
Net sales of electronic components decreased by $2,321,000 (18.5%) to
$10,247,000 for 1999 as compared to $12,568,000 for 1998 primarily due to the
discontinuance of our XCEL-Lite products, which represented no sales in 1999 as
compared to sales of $576,000 in 1998, the discontinuance of low margin
subsystem assembly business, which represented sales of $670,000 in 1999 as
compared to $1,069,000 in 1998, a $1,199,000 decline in sales of our digital
switches. We believe that the reduction in digital switch sales in 1999 as
compared to 1998 was at least partially due to a preannounced price increase
effective in early 1999 that caused some customers to purchase switches in 1998
rather than in 1999 in order to avoid the 1999 price increase.
17
GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 34.1% for 1999 as compared to 42.3% for 1998. In dollar terms, total gross
profit decreased by $3,900,000 (30.6%) to $8,847,000 for 1999 as compared to
$12,747,000 for 1998. For the years ended December 31, 1999 and 1998, cost of
sales included provisions for inventory obsolescence of $1,144,000 and $879,000,
respectively. Provisions for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that we intend to dispose of. Upon disposal of
obsolete inventory, the inventory is written off and the allowance for inventory
obsolescence is reduced.
Gross profit for our telecommunications segment decreased in dollar
terms by $2,836,000 (35.2%) to $5,216,000 for 1999 as compared to $8,052,000 for
1998 and decreased as a percentage of related net sales from 45.9% in 1998 to
33.3% in 1999 due largely to a 48% reduction in sales of our older test
equipment that had a higher margin than early initial production runs of our
newer products and due to a 77% increase in sales of our lower margin
transmission products. Our gross profit in this segment was also negatively
affected by the total reduction in sales that caused a lower absorption of fixed
costs. In addition, because of our cash flow constraints, we were unable to pay
many of our suppliers in a timely fashion. As a result, we were forced to use
higher cost suppliers for some of our parts. However, margins on the new test
instruments are expected to meet or exceed the margins of older products as
production lot sizes increase and other efficiencies are achieved as the new
products mature. As of April 2000, all lower margin transmission products had
been transferred from California to France, where those products are more
efficiently produced, thus achieving a higher margin on the same products now
being exported from France for resale in the U.S.
Gross profit for our electronic components segment decreased in total
dollar terms by $1,064,000 (22.7%) to $3,631,000 for 1999 as compared to
$4,695,000 for 1998 and decreased as a percentage of related net sales from
37.3% in 1998 to 34.1% in 1999 primarily due to additional costs incurred in
connection with the move from the Ontario facility to our Rancho Cucamonga
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $382,000 (3.7%) to $10,584,000 for 1999 as
compared to $10,202,000 for 1998. Our general and administrative expenses
increased by $400,000 (7.0%) to $6,094,000 for 1999 as compared to $5,694,000
for 1998 primarily due to the non-cash expense of $522,000 in shares of our
common stock and warrants to purchase our common stock to our investor relations
firms in connection with our plan to increase our visibility within the
investment community. Offsetting increases in general and administrative
expenses were reductions in expenses due to the transfer of the administrative
functions of CXR Telcom to our corporate office.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses, which consist primarily of research and product
development activities of our telecommunications segment, decreased by $361,000
(16.4%) to $1,841,000 in 1999 as compared to $2,202,000 for 1998. This reduction
was primarily due to elimination of the CXR engineering function in Fremont,
California in May 1999, which reduced engineering expenses by $294,000. The
engineering staff for our United States-based test equipment products is now
housed only in our St. Charles, Illinois facility. We believe that engineering
and product development are important to our future profitability. All
engineering for our transmission products has been consolidated in France at our
CXR, S.A. facility.
18
OTHER INCOME AND EXPENSE. Interest expense was $411,000 in 1999 as
compared to interest expense of $675,000 in 1998. This decrease in interest
expense was primarily a result in decreased average borrowings during 1999.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes as we are in a loss carryforward position for
federal income tax purposes. At December 31, 1999, we had total net deferred
income tax assets of approximately $18,335,000. These potential income tax
benefits, a significant portion of which relates to net operating loss
carryforwards, have been subjected to a 100% valuation allowance since
realization of these assets is not more likely than not in light of our
recurring losses from operations.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits operation in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $398,000 for 1999 as compared to a net loss of $623,000 for 1998.
Net sales for our circuits business for 1999 decreased by $4,773,000
(66.7%) to $2,388,000 as compared to $7,161,000 for 1998 primarily due to the
sale of HyComp, Inc. on March 31, 1999 and the sale of XCEL Arnold Circuits,
Inc. on March 31, 1998, which accounted for $3,880,000 of the reduction, as well
as a lack of working capital to acquire materials necessary to support customer
delivery requirements in the remaining XCEL Etch Tek Division because available
working capital was dedicated to higher margin components and telecommunications
products.
Gross profit for our circuits business decreased in total dollar terms
by $848,000 (131.9%) to gross loss of $(205,000) in 1999 as compared to gross
profit of $643,000 in 1998 and decreased as a percentage of related net sales
from 9.0% in 1998 to 8.6% in 1999 primarily due to the sale of HyComp, Inc. in
1999, which accounted for $1,292,000 of the reduction, and the booking of a
reserve in the amount of $250,000 to cover potential warranty claims associated
with products sold by HyComp, Inc. prior to its sale.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months ended September 30, 2001, we funded our
operations primarily through revenue generated from our operations and through
our line of credit with Wells Fargo Business Credit, Inc. As of September 30,
2001, we had working capital of $3,120,000, up 12.2% from working capital of
$2,780,000 as of December 31, 2000, an accumulated deficit of $18,903,000 and an
accumulated other comprehensive loss of $827,000. As of September 30, 2001, we
had $437,000 in cash and cash equivalents and $5,631,000 of accounts receivable.
As of December 31, 2000, we had an accumulated deficit of $18,775,000, $756,000
in cash and cash equivalents and $7,440,000 of accounts receivable.
Cash provided by our operating activities totaled $541,000 for the nine
months ended September 30, 2001. Cash used by operations for the nine months
ended September 30, 2000 was $646,000. This increase in cash provided by
operations during the nine months ended September 30, 2001 resulted primarily
from collection of accounts receivable, offset by increase in inventory and
payments of accounts payable.
19
Cash used in our investing activities totaled $7,000 for the nine
months ended September 30, 2001 as compared to cash provided by our investing
activities of $791,000 for the nine months ended September 30, 2000. We are
currently installing an enterprise resource planning system software that we
acquired under a capital lease in order to improve efficiencies. Included in the
2000 results are $520,000 from the sale of shares of common stock we held in
Digital Transmission Systems, Inc. and $918,000 from the sale of shares of
common stock we held in Wi-LAN, Inc. and usages of $592,000 and $83,000 for the
purchases of the Belix Ltd. companies in the U.K. and T-Com, respectively.
Cash used in financing activities totaled $772,000 for the nine
months ended September 30, 2001, as compared to cash provided by financing
activities of $418,000 for the nine months ended September 30, 2000, primarily
due to our payments against our bank debt, which reduced the balances of our
notes payable.
On June 23, 2000, our credit facility with our previous lender,
Congress Financial Corporation, or Congress Financial, expired while we were out
of compliance with the adjusted net worth covenant of this facility. Congress
Financial extended this facility through August 14, 2000. On August 16, 2000,
our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting
as guarantor, obtained a credit facility from Wells Fargo Business Credit, Inc.
This facility provides for a revolving loan of up to $3,000,000 secured by our
inventory and accounts receivable and a term loan in the amount of $687,000
secured by our machinery and equipment. As a condition of extending this credit
facility to our subsidiaries, Wells Fargo Business Credit, Inc. required our
President and Chief Executive Officer, Carmine Oliva, to personally guaranty a
portion of our indebtedness under the facility. On January 26, 2001, Mr. Oliva
was released from this guaranty. The initial annual interest rate on both
portions of the credit facility was the prime rate plus 2%. The facility
contains a performance-based interest reduction feature. Based upon our 2000
financial performance, we obtained a reduction in the interest rate to the prime
rate plus 1% effective April 1, 2001. The loan, however, requires a minimum
interest charge of $13,500 per month. The balance outstanding under this credit
facility was $1,128,000 on September 30, 2001. There was $281,000 of additional
borrowings available as of September 30, 2001. The credit facility expires on
August 16, 2003. Our foreign subsidiaries have obtained credit facilities with
Lloyds Bank in England, Banc National du Paris, Societe General and Banque
Hervet in France and Johan Tokyo Credit Bank in Japan. The balances outstanding
under our U.K., France and Japan credit facilities were $731,000, $645,000, and
$0, respectively, on September 30, 2001.
Our backlog is substantial and has increased to $14,542,000 as of
September 30, 2001, an increase of 16.3%, as compared to $12,500,000 as of
December 31, 2000. Our backlog as of September 30, 2001 is related approximately
95% to our electronic components business, which business tends to provide us
with long lead times for our manufacturing processes due to the custom nature of
the products, and 5% to our telecommunications business, which business tends to
deliver standard products from stock as orders are received. The amount of
backlog orders represents revenue that we anticipate recognizing in the future,
as evidenced by purchase orders and other purchase commitments received from
customers, but on which work has not yet been initiated or with respect to which
work is currently in progress. However, there can be no assurance that we will
be successful in fulfilling such orders and commitments in a timely manner or
that we will ultimately recognize as revenue the amounts reflected as backlog.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including the credit facilities we and our subsidiaries have with Wells Fargo
Business Credit, Inc., Lloyds Bank in England, and Banc National du Paris and
Banque Hervet in France, will be adequate to meet our anticipated working
capital and capital expenditure requirements for at least the next twelve
months. If, however, our capital requirements or cash flow vary materially from
our current projections or if unforeseen circumstances occur, we may require
additional financing. Deteriorating global economic conditions and the effects
of ongoing military actions against terrorists may cause prolonged declines in
investor confidence in and accessibility to capital markets. Our failure to
raise capital, if needed, could restrict our growth, limit our development of
new products or hinder our ability to compete.
20
LEGAL PROCEEDINGS
There are no material legal proceedings pending against us.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either us or our operating
subsidiaries.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board, or FASB,
finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No.
142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that we recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires upon adoption of SFAS 142 that we reclassify the
carrying amounts of intangible assets and goodwill based on the criteria in SFAS
141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that we identify reporting units for the purpose
of assessing potential future impairments of goodwill, reassess the useful lives
of other existing recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An intangible asset with an
indefinite useful life should be tested for impairment in accordance with the
guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recognized at that date, regardless of when those assets were initially
recognized. SFAS 142 requires us to complete a transitional goodwill impairment
test six months from the date of adoption. We are also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of SFAS 142.
Our previous business combinations were accounted for using the
purchase method. As of September 30, 2001, the net carrying amount of goodwill
was $2,643,000. Amortization expense during the nine-month period ended
September 30, 2001 was $303,000. Currently, we are assessing but have not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact our financial
position and results of operations.
In October 2001, the FASB issued FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," or SFAS 144. SFAS No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, is to be applied prospectively.
EURO CONVERSION
Our operating subsidiaries located in France and the United Kingdom
have combined net sales from operations approximating 51% of our total net sales
for the nine months ended September 30, 2001. Net sales from the French
subsidiary participating in the Euro conversion were 29% of our net sales for
the nine months ended September 30, 2001. We continue to review the impact of
the Euro conversion on our operations.
21
Our European operations took steps to ensure their capability of
entering into Euro transactions. No material changes to information technology
and other systems are necessary to accommodate these multiple currency
transactions because such systems already were capable of using multiple
currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on our European operations, at this time we do not foresee any
material impediments to our ability to compete for orders from customers
requesting pricing using the new exchange rate. Since we have no significant
direct sales between our United States and European operations, we regard
exchange rate risk as nominal.
22
SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected quarterly financial data. This
quarterly information is unaudited, has been prepared on the same basis as our
annual financial statements, and, in our opinion, reflects all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the information for periods presented. Operating results for any quarter are
not necessarily indicative of results for any future period.
CONSOLIDATED STATEMENTS
OF OPERATIONS AND
COMPREHENSIVE INCOME
DATA:
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC. 31, MAR 31, JUNE 30, SEPT 30,
1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net sales.................. $ 6,677 $ 6,319 $ 6,448 $ 6,469 $ 5,860 $ 6,828 $ 6,871 $ 8,491 $ 7,465 $ 7,083 $ 6,345
Cost of sales.............. 4,127 3,938 4,203 4,798 3,534 4,032 3,080 4,883 4,350 3,732 3,853
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit............... 2,550 2,381 2,245 1,671 2,326 2,796 3,791 3,608 3,115 3,351 2,492
Selling, general and
administrative expenses. 3,408 2,687 2,385 2,104 2,147 2,248 2,431 3,001 2,581 2,905 2,457
Engineering and product
development expenses.... 526 477 459 379 243 253 277 394 359 303 235
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations.............. (1,384) (783) (599) (812) (64) 295 1,083 213 175 143 (200)
Other income (expenses),
net..................... 379 164 (150) (885) -- 10 51 146 (65) (83) (80)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes..... (1,005) (619) (749) (1,697) (64) 305 1,134 359 110 60 (280)
Income tax expense......... 8 5 12 103 7 4 2 18 3 6 1
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations... (1,013) (624) (761) (1,800) (71) 301 1,132 341 107 54 (281)
Discontinued operations:
Income (loss) from operations
of discontinued segment. (293) (290) (273) 9 (56) (95) (68) 7 -- -- --
Gain (loss) on disposal
of discontinued segment. 331 -- -- 118 -- -- (634) 147 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).......... $ (975) $ (914) $(1,034) $(1,673) $ (127) $ 206 $ 430 $ 495 $ 107 $ 54 $ (281)
Other comprehensive gain
(loss), net............. (263) (161) 244 (145) 296 (436) (295) (70) (222) (104) 230
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive gain
(loss).................. $(1,238) $(1,075) $ (790) $(1,818) $ 169 $ (230) $ 135 $ 425 $ (115) $ (50) $ (51)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per
share from continuing
operations.............. $ (0.07) $ (0.04) $ (0.05) $ (0.10) $ (0.01) $ 0.02 $ 0.06 $ 0.02 $ 0.01 $ 0.00 $ (0.01)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share from continuing
operations.............. $ (0.07) $ (0.04) $ (0.05) $ (0.10) $ (0.01) $ 0.02 $ 0.05 $ 0.01 $ 0.00 $ 0.00 $ (0.01)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per
share from discontinued
operations.............. $ (0.00) $ (0.02) $ (0.01) $ 0.01 $ (0.00) $ (0.01) $ (0.04) $ 0.01 $ -- $ -- $ --
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share from
discontinued
operations.............. $ (0.00) $ (0.02) $ (0.01) $ 0.01 $ (0.00) $ (0.01) $ (0.03) $ 0.01 $ -- $ -- --
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share............... $ (0.07) $ (0.06) $ (0.06) $ (0.09) $ (0.01) $ 0.01 $ 0.02 $ 0.03 $ 0.01 $ 0.00 $ (0.01)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share............... $ (0.07) $ (0.06) $ (0.06) $ (0.09) $ (0.01) $ 0.01 $ 0.02 $ 0.02 $ 0.00 $ 0.00 $ (0.01)
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
23
The following table sets forth a portion of the above unaudited
information as a percentage of net sales.
CONSOLIDATED
STATEMENTS OF
OPERATIONS AND
COMPREHENSIVE INCOME
DATA:
QUARTER ENDED
--------------------------------------------------------------------------------------------------
MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC. 31, MAR 31, JUNE 30, SEPT 30,
1999 1999 1999 1999 2000 2000 2000 2000 2001 2001 2001
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net sales............. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales......... 62 62 65 74 60 59 45 58 58 53 61
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit.......... 38 38 35 26 40 41 55 42 42 47 39
Selling, general and
administrative
expenses........... 51 43 37 33 37 33 35 35 35 41 39
Engineering and
product
development
expenses........... 8 7 7 6 4 4 4 5 5 4 3
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations......... (21) (12) (9) (13) (1) 4 16 2 2 2 (3)
Other income
(expenses), net.... 6 2 (3) (13) -- -- 1 2 (1) (1) (1)
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing
operations before
income taxes....... (15) (10) (12) (26) (1) 4 17 4 2 1 (4)
Income tax expense.... -- -- -- 2 -- -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing
operations......... (15) (10) (12) (28) (1) 4 17 4 2 1 (4)
Discontinued
operations:
Loss from operations
of discontinued
segment............ (5) (5) (4) -- (1) (1) (2) -- -- -- --
Gain (loss) on
disposal of
discontinued
segment............ 5 -- -- 2 -- -- (9) 2 -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)..... (15) (15) (16) (26) (2) 3 6 6 2 1 (4)
Other comprehensive
gain (loss), net... (4) (2) 4 (2) 5 (6) (4) (1) (3) (1) 3
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive
gain (loss)........ (19)% (17)% (12)% (28)% 3% (3)% 2% 5% (2)% 0% (1)%
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Our operating results have fluctuated from quarter to quarter due to a
variety of reasons. We note below some of the larger changes in various line
items in the table above.
Net sales from continuing operations for the quarter ended March 31,
1999 were slightly below net sales from continuing operations for the quarter
ended March 31, 1998. However the loss from continuing operations for the
quarter ended March 31, 1999 increased by $234,000 (22.2%) to $1,013,000 from
$828,000 in the quarter ended March 31, 1998. The primary reason for the
increase in the loss from continuing operations was $522,000 of expense related
to our investor relations efforts. A gain of $331,000 was recorded for the gain
on the sale of HyComp, Inc. in the first quarter of 1999 and included in
discontinued operations.
Our operating results have fluctuated from quarter to quarter due to a
variety of reasons. We note below some of the larger changes in various line
items in the table above.
Net sales from continuing operations for the quarter ended June 30,
1999 declined by $1,205,000 (16.0%) to $6,319,000 from $7,524,000 for the
quarter ended June 30, 1998. Gross margins declined slightly to 37.7% for the
quarter ended June 30, 1999 from 41.3% for the quarter ended June 30, 1998. The
decrease in net sales was due to declines in sales in both the
telecommunications segment and the electronic components segment.
Net sales from continuing operations for the quarter ended September
30, 1999 declined $1,404,000 (17.9%) to $6,448,000 from $7,852,000 for the
quarter ended September 30, 1998. The primary reason for the reduction in net
sales was the reduced sales of our older CXR 5200 series telecommunications test
sets that we were in the process of replacing with our new CXR HALCYON 700
series of equipment because the older models were not computer compatible and
were larger and heavier than the new models. Sales of our older models, which
declined to $13,000 during the quarter ended September 30, 1999, declined at a
faster rate than the increase in sales of our new models, which sales totaled
$758,000 during the quarter ended September 30, 1999. A loss of $761,000 from
continuing operations was incurred in the third quarter of 1999.
Net sales from continuing operations for the quarter ended December 31,
1999 declined by $1,540,000 (19.2%) to $6,469,000 from $8,009,000 in the fourth
quarter of 1998. The primary reason for the decline was lower sales for our
telecommunications segment, which lower sales mainly resulted from reduced sales
of our older CXR 5200 series telecommunications test sets that we were in the
process of replacing with our new CXR HALCYON 700 series of equipment. We wrote
down the carrying value of our Digital Transmission System, Inc. stock by
$419,000 to the value received in consideration for the sale of the stock in
January 2000. This amount was included in other expense and contributed to the
loss from continuing operations after tax of $1,800,000 for the quarter ended
December 31, 1999.
24
Net sales from continuing operations for the quarter ended March 31,
2000 declined by $817,000 (12.2%) to $5,860,000 from $6,677,000 for the quarter
ended March 31, 1999. The primary cause of the sales reduction was the decline
in sales of our electronic components segment of $654,000 during the quarter
ended March 31, 2000. The majority of the decline in the electronic components
segment net sales resulted from short-term delays in production releases of some
contracts at our U. K. facility that manufactures power supplies. However, due
to a reduction in administrative expenses, we were able to limit our loss from
continuing operations to only $71,000 despite a considerable reduction in sales
in the first quarter of 2000 as compared to the first quarter of 1999.
Administrative expense in the quarter ended March 31, 1999 included $522,000 of
expenses related to our investor relations efforts.
Net sales from continuing operations for the quarter ended June 30,
2000 increased by $509,000 (8.1%) to $6,828,000 from $6,319,000 for the quarter
ended June 30, 1999. This increase was primarily the result of the acquisition
of Belix Ltd., or Belix, a power supply manufacturer based in the U. K. The
Belix acquisition was effective March 31, 2000 and contributed $658,000 of
revenue in the second quarter of 2000. Income from continuing operations in the
quarter ended June 30, 2000 was $301,000 as compared to a loss from continuing
operations of $624,000 in the quarter ended June 30, 1999. The primary
contributor to the improved profit was an overall increase in gross margins in
both our telecommunications and electronic components segments resulting in a
gross margin of 41.0% for the quarter ended June 30, 2000 as compared to a gross
margin of 37.7% for the quarter ended June 30, 1999. Gross margins were improved
by moving our U. S. electronic components segment manufacturing operation to a
smaller facility and improving the efficiency of manufacturing the new CXR
HALCYON test sets in our telecommunications segment.
Net sales from continuing operations for the quarter ended September
30, 2000 increased by $423,000 (6.6%) to $6,871,000 from $6,448,000 for the
quarter ended September 30, 1999. Our electronic components segment provided an
increase of $858,000 primarily due to a large order for digital switches from
BAE Systems, Canada which accounted for $504,000 of this increase. The increase
in sales of our electronic component segment was offset by a $435,000 decrease
in sales of our telecommunications segment mainly due to lower sales reported by
our facility in France which resulted from late approvals of the capital budgets
of some of its customers. Gross margins improved to 55% in the third quarter of
2000 from 34.8% in the third quarter of 1999. Contributing to the gross profit
increase was the high gross profit generated by the assets of T-Com that were
newly acquired for our telecommunications segment. In addition, efficiencies due
to the relocation of our Digitran Division of XET Corporation improved overall
margins in our electronic components segment. These improvements in operating
performance contributed to income from continuing operations of $1,132,000 for
the quarter ended September 30, 2000 as compared to a loss from continuing
operations of $761,000 for the quarter ended September 30, 1999. The $1,132,000
income for the quarter ended September 30, 2000 includes $197,000 from the sale
of Wi-LAN, Inc. stock and $237,000 income contributed by T-Com, which was
acquired as of August 2000.
During the quarter ended September 30, 2000 we sold XCEL Etch Tek, the
last of our former circuits segment operations, and we reported the $634,000
loss on the sale of XCEL Etch Tek and the $68,000 operating losses of XCEL Etch
Tek as losses from discontinued operations.
25
Net sales from continuing operations for the three month period ended
December 31, 2000 increased $2,022,000 (31.3%) to $8,491,000 as compared to
$6,469,000 for the quarter ended December 31, 1999. The primary reasons for this
increase were $717,000 of sales due to the acquisition of T-Com and a $1,097,000
increase in digital switch sales. Gross profit, as a percentage of net sales,
increased from 25.8% for the quarter ended December 31, 1999 to 42.5% for the
quarter ended December 31, 2000 primarily due to higher volumes, reduced
overhead in connection with the move from the Ontario facility to the Rancho
Cucamonga facility and a larger percentage of higher margin night vision
switches. Gross margins declined to 42% in the fourth quarter of 2000 from 55%
in the third quarter of 2000. This reduction in gross margins was primarily due
to lower margins for our U.S.-based telecommunications equipment resulting from
our use of more costly contract manufactured circuit boards rather than circuit
boards that we previously assembled in-house. In addition to increased circuit
board costs, the cost of lost demo inventory and obsolete inventory contributed
to reduced gross margins. Also, the reduction in sales of U.S.
telecommunications test equipment from $2,086,000 during the third quarter to
$1,746,000 during the fourth quarter adversely affected gross margins due to
overhead expenses being applied to less units. Costs associated with the
integration of the T-Com acquisition and associated manufacturing consolidation
temporarily reduced efficiency and also was a factor in reducing gross margins
during the fourth quarter. Operating expenses increased to $3,001,000 during the
quarter ended December 31, 2001 as compared to $2,104,000 for the quarter ended
December 31, 1999 primarily due to higher legal and accounting fees and higher
expenses associated with the T-Com acquisition.
Net sales for the quarter ended March 31, 2001 declined $1,026,000
(12.1%) to $7,465,000 as compared to $8,491,000 for the three months ended
December 31, 2000. The majority of the reduction in sales was attributable to a
slowdown in sales for our U.S. produced telecommunication test equipment.
Management believes that the cause of this slowdown was primarily due to the
late release of capital budgets of our telecommunications customers. Gross
profit as a percentage of net sales declined slightly to 41.7% in the quarter
ended March 31, 2001 as compared to 42.5% in the quarter ended December 31,
2001. Gross profit in dollar terms declined $493,000 to $3,115,000 in the
quarter ended March 31, 2001 as compared to $3,608,000 in the quarter ended
December 31, 2000 primarily due to lower sales. Operating expenses declined
$455,000 (13.4%) in the quarter ended March 31, 2001 to $2,940,000 as compared
to $3,395,000 in the quarter ended March 31, 2000 primarily due to lower selling
expenses and legal and accounting fees.
Net sales for the quarter ended June 30, 2001 decreased $382,000 (5.1%)
to $7,083,000 as compared to $7,465,000 for the quarter ended March 31, 2001.
The decrease in net sales primarily resulted from a reduction in sales of power
supplies and digital switches of our electronic components segment. Such sales
declined by $805,000 (21.8%) from $3,693,000 for the quarter ended March 31,
2001 to $2,888,000 for the quarter ended June 30, 2001. The decline primarily
resulted from the completion of a major contract for digital switches and delays
in shipment of our power supplies. This impact was partially offset by a
$424,000 (11.2%) increase in sales of our telecommunications segment from
$3,772,000 for the quarter ended March 31, 2001 to $4,196,000 for the quarter
ended June 30, 2001. Gross profit as a percentage of net sales increased to
47.3% in the second quarter of 2001 as compared to 41.7% in the previous
quarter. This increase was primarily due to increased unit margins on
telecommunications test equipment as a result of improved efficiencies and sales
volume. General and administrative expenses increased by $324,000 (12.6%) to
$2,905,000 for the three months ended June 30, 2001 as compared to $2,581,000
for the previous three-month period. This increase was primarily caused by an
increase in legal and accounting fees of approximately $257,000 related to
non-routine Securities and Exchange Commission filings.
26
Net sales for the quarter ended September 30, 2001 decreased $738,000
(10.4%) to $6,345,000 as compared to $7,083,000 for the quarter ended June 30,
2001. The decrease in net sales primarily resulted from a $998,000 reduction in
net sales of test equipment, partially offset with an increase in sales of
telecommunications transmission equipment. Sales in our electronic components
segment increased slightly due to stronger sales of power supplies, partially
offset with a reduction in sales of electronic switches. Gross profit as a
percentage of net sales decreased to 39.3% in the third quarter of 2001 as
compared to 47.3% in the second quarter of 2001. This decrease in gross profit
margin was primarily due to a decrease in the sales of high margin night vision
digital switches and a decrease in the volume of telecommunications test
equipment that raised the unit costs due to overhead absorption being applied to
fewer units. Selling, general and administrative expenses decreased by $448,000
(15.4%) to $2,457,000 for the three months ended September 30, 2001 as compared
to $2,905,000 for the previous three-month period. This decrease was primarily
caused by a $160,000 reduction in sales commissions, an approximately $151,000
reduction in legal and accounting expenses related to non-routine SEC filings
and general cost reductions and reductions in compensation expense. Engineering
expense decreased by $68,000 (22.4%) to $235,000 in the three-month period ended
September 30, 2001 as compared to $303,000 in the three month period ended June
30, 2001. The reduction was primarily due to the closure of the St. Charles,
Illinois facility and layoff of the four engineers who worked there. We plan to
continue engineering activities from the Fremont, California facility of CXR
Telcom Corporation.
27
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.
A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates.
The following table provides information about our domestic and foreign
debt obligations that are sensitive to changes in interest rates. All dollars
are in thousands. The symbol "P" represents the prime rate. The symbol "B"
represents the lender's base rate. Balances are as of December 31, 2000.
FAIR
VALUE
LIABILITIES 2001 2002 2003 2004 2005 THEREAFTER TOTAL 12/31/00
----------- ---- ---- ---- ---- ---- ---------- ----- --------
Line of Credit $1,798 $1,798 $1,798
(domestic)
Average Interest P+ 1%
Rate
Line of Credit $1,377 $1,377 $1,377
(Foreign)
Average Interest B+ 2.5%
Rate
Term Loan $137 $137 $83 $8 $5 $370 $370
Average Interest P+ 2% P+ 2% P+ 2% P+ 2% P+ 2%
Rate
28
THE PRINCIPAL AND SELLING SECURITY HOLDERS SECTION IS REPLACED WITH THE
FOLLOWING:
--------------------------------------------------------------------------------
PRINCIPAL AND SELLING SECURITY HOLDERS
As of November 28, 2001, a total of 20,670,703 shares of our common
stock were outstanding. The following table sets forth information as of
November 28, 2001 regarding the beneficial ownership of our common stock both
before and immediately after the offering by:
o each person known by us to own beneficially more than five
percent, in the aggregate, of the outstanding shares of our common
stock as of the date of the table;
o each selling security holder;
o each of our directors;
o each named executive officer in the Summary Compensation Table
contained elsewhere in this prospectus; and
o all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. Except as indicated in the footnotes to the
table, we believe each holder possesses sole voting and investment power with
respect to all of the shares of common stock owned by that holder, subject to
community property laws where applicable. In computing the number of shares
beneficially owned by a holder and the percentage ownership of that holder,
shares of common stock subject to options or warrants or underlying preferred
stock held by that holder that are currently exercisable or convertible or are
exercisable or convertible within 60 days after the date of the table are deemed
outstanding. Those shares, however, are not deemed outstanding for the purpose
of computing the percentage ownership of any other person or group.
The shares of common stock being offered under this prospectus may be
offered for sale from time to time during the period the registration statement
of which this prospectus is a part remains effective, by or for the accounts of
the selling security holders described in the table below. All of the shares
being offered under this prospectus were issued or are issuable upon exercise of
common stock purchase warrants or upon conversion of shares of Series B
Preferred Stock that were acquired by the selling security holders from us in
the following private placement transactions:
o In June and July 1998, we sold 200 shares of Series A Preferred
Stock to Fortune Fund Ltd. Seeker III, or Fortune Fund, Rana
General Holding, Ltd., or Rana, and Resonance, Ltd., or Resonance,
each of which entities was an institutional investor. Each share
of Series A Preferred Stock is convertible into 50,530 shares of
common stock. In the offering of Series A Preferred Stock, we
issued to the three investors warrants to purchase up to an
aggregate of 1,000,000 shares of common stock at an exercise price
of $1.25 per share. The warrant exercise price was adjusted to
$0.75 in November 1998 and to $0.25 in December 1999. In December
1999, Rana and Resonance sold their remaining unconverted shares
of Series A Preferred Stock and related warrants to Orbit II
Partners, L.P., or Orbit, which was an institutional investor that
had acquired 4.9% of our outstanding common stock prior to the
transfer, Carmine T. Oliva, our President, Chief Executive Officer
and Chairman of the Board, and Samuel J. Oliva and Samuel G.
Oliva, who are the brother and son, respectively, of Carmine T.
Oliva. We have included for resale under this prospectus an
aggregate of 1,263,250 shares of common stock underlying Series A
Preferred Stock, 722,500 shares of common stock underlying the
warrants held by Fortune Fund, Rana and Resonance and 45,000
shares of common stock that were issued upon exercise of warrants
previously held by the Olivas and Rana.
29
o In July 1998, we issued warrants to purchase an aggregate of
250,000 shares of common stock at an exercise price of $1.25 per
share to one individual in consideration for investor relations
services rendered. The individual exchanged the warrant in the
exchange offer we conducted between February and April 2000 for a
warrant to purchase up to 125,000 shares of common stock at an
exercise price of $0.625 per share. We have included for resale
under this prospectus the 125,000 shares of common stock
underlying the warrant.
o In December 1998, we issued warrants to purchase up to an
aggregate of 152,381 shares of common stock at an exercise price
of $0.65625 per share to one limited partnership in exchange for
an option to purchase from the limited partnership an ownership
interest in Digital Transmission Systems, Inc. The limited
partnership subsequently distributed the warrants to fifteen
entities that were its limited and special limited partners and
four individuals that were its general partners. We have included
for resale under this prospectus an aggregate of 123,055 shares of
common stock underlying warrants that are held by thirteen
entities and four individuals. Two of the entities that are
selling security holders received their warrants from two of the
entities that were partners of the limited partnership.
o In the mid-1980s, XET Corporation issued warrants to purchase an
aggregate of 150,000 shares of common stock to Carmine T. Oliva's
father in connection with accounting services rendered to XET
Corporation. When we acquired XET Corporation in March 1997, the
warrants were converted into warrants to purchase shares of our
common stock. Following the death of Carmine T. Oliva's father,
Carmine T. Oliva's mother gifted the warrants to Carmine T. Oliva,
Samuel J. Oliva, George Farndell, who is Carmine T. Oliva's
brother-in-law, and Ronald Oliva, who is Carmine T. Oliva's
brother. We have included for resale under this prospectus 150,000
shares of common stock underlying the warrants held by the four
transferees.
o In March 1999, we issued warrants to purchase an aggregate of
15,000 shares of common stock at an exercise price of $0.75 per
share to one individual in consideration for investment banking
services rendered to us. We have included for resale under this
prospectus the 15,000 shares of common stock underlying the
warrant.
o In March 1999, we issued warrants to purchase an aggregate of
50,000 shares of common stock at an exercise price of $0.75 per
share to one individual in consideration for investor relations
services rendered to us. We have included for resale under this
prospectus the 50,000 shares of common stock underlying the
warrant.
o In March 1999, we issued two warrants to purchase 100,000 shares
of common stock and 50,000 shares of common stock, respectively,
at an exercise price of $0.75 per share to Jason Oliva, the son of
Carmine T. Oliva, and another individual, respectively, in
consideration for consulting services rendered to us. We have
included for resale under this prospectus the 150,000 shares of
common stock underlying those warrants.
30
o In May 2000, we issued warrants to purchase an aggregate of
100,500 shares of common stock at an exercise price of $1.00 per
share to Samuel G. Oliva, Samuel J. Oliva and Jason Oliva in
connection with consulting services rendered to us. We have
included for resale under this prospectus the 100,500 shares of
common stock underlying those warrants.
o In September 2000, we issued 150,000 shares of Series B Preferred
Stock and a warrant to purchase an aggregate of 250,000 shares of
common stock to T-Com, LLC in a private placement transaction in
consideration for our receipt of the assets and certain
liabilities of T-Com, LLC. T-Com, LLC subsequently distributed the
shares of Series B Preferred Stock and the warrant to fifteen
individuals and eight entities that were its members. One of the
entities that is a selling security holder received its shares of
Series B Preferred Stock and its warrant as successor by merger
with one of the entities that was a member of T-Com, LLC. The
warrants have an exercise price of $1.25 per share of common
stock, are exercisable for a period of 24 months following
September 22, 2000 and contain a cashless exercise feature. Each
share of Series B Preferred Stock is or will become convertible
into ten shares of common stock on the terms described in this
prospectus under the heading "Description of Capital Stock--
Series B Preferred Stock." Under those terms, 100,000 of the
150,000 shares of Series B Preferred Stock may be converted into
shares of common stock within 60 days after the date of the table.
However, we have included for resale under this prospectus all of
the 1,500,000 shares of common stock that may become issuable upon
conversion of the Series B Preferred Stock, in addition to the
shares of common stock issuable upon exercise of the warrants.
Consequently, the number of shares of common stock being offered
for resale by the transferees exceeds the number of shares of
common stock beneficially owned by the transferees as of the date
of the table.
The Equitable Life Assurance Society of the United States is affiliated
with members of the NASD. However, The Equitable Life Assurance Society of the
United States has represented to us that it is not acting as an underwriter in
this offering, it purchased the securities to be resold by it under this
prospectus in the ordinary course of business, and at the time of such purchase
it had no agreements or understandings, directly or indirectly, with any person
to distribute the securities.
This prospectus originally covered the sale of up to 4,520,555 shares
of common stock by the selling security holders. Warrants held by the selling
security holders to purchase up to 26,250 shares of common stock that were
originally covered by this prospectus have expired. Consequently, this
prospectus currently covers the sale of up to 4,494,305 shares of common stock
by the selling security holders. We will not receive any of the proceeds from
the sale of the shares of common stock offered by the selling security holders
under this prospectus. Unless otherwise indicated, "Shares Being Offered" are
shares of common stock underlying warrants.
31
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO THE OFFERING OWNED AFTER THE OFFERING(1)
--------------------- SHARES ---------------------------
NAME OF BENEFICIAL OWNER NUMBER % OF CLASS BEING OFFERED NUMBER % OF CLASS
------------------------ ------ ---------- ------------- ------ ----------
Donald Skipwith 1,982 (2) * 262 1,720 *
Placido Albanese 30,000 (3) * 15,000 15,000 *
Crossroads Capital Limited
Partnership 9,902 (3) * 9,902 -- --
George Farndell 37,500 (3) * 37,500 -- --
Herb Lanzet 50,000 (3) * 50,000 -- --
Ronald Oliva 37,500 (3) * 37,500 -- --
Resonance, Ltd. 365,000 (3) 1.74% 365,000 -- --
William Setteducato 125,000 (3) * 125,000 -- --
Landmark Equity Partners II, L.P. 5,865 (3) * 5,865 -- --
Landmark Equity Partners V, L.P. 17,595 (3) * 17,595 -- --
Landmark Venture Partners L.P. 11,730 (3) * 11,730 -- --
Amberbrook II, LLC 66,532 (4) * 8,798 57,734 *
Bankers Trust, Trustee of the
Jack Eckerd Corporation
Pension Plan Trust 44,355 (5) * 5,865 38,490 *
Montauk Partners, L.P. 44,355 (5) * 5,865 38,490 *
Chase Manhattan Bank N.A. -
Trustee IBM Retirement Plan 44,355 (5) * 5,865 38,490 *
C.P. & Co. Venture Partners, L.P. 22,180 (6) * 2,933 19,247 *
Robert Crane 2,360 (7) * 312 2,048 *
The Equitable Life Assurance
Society of the United States 71,767 (8) * 9,490 62,277 *
Laurence P. Finnegan, Jr. 144,171 (9) * -- 144,171 *
Randolph D. Foote 55,000 (10) * -- 55,000 *
Fortune Fund Limited Seeker III 1,260,600 (11) 5.75% 1,260,600 (11) -- --
Steven Jacobus 100,801 (12) * 50,000 50,801 *
Graham Jefferies 129,563 (13) * -- 129,563 *
Frank LaHaye 26,135 (14) * 3,457 22,678 *
Gene Miller 26,135 (14) * 3,457 22,678 *
New York State Common Retirement
Fund 88,711 (15) * 11,730 76,981 *
Portland General Holdings, Inc. 88,711 (15) * 11,730 76,981 *
Montgomery Associates 1992, L.P. 62,006 (16) * 8,199 53,807 *
Carmine T. Oliva 1,497,438 (17) 7.11% 93,030 (18) 1,404,408 6.70%
Jason Oliva 133,515 (19) * 133,500 15 *
Samuel G. Oliva 309,010 (20) 1.48% 144,560 (21) 164,450 *
Samuel J. Oliva 815,060 (22) 3.91% 182,060 (23) 633,000 3.06%
Orbit II Partners, L.P. 3,015,685 (24) 14.59% -- 3,015,685 14.59%
Rana General Holding, Ltd. 127,500 (25) * 127,500 (25) -- --
Robert B. Runyon 338,145 (26) 1.62% -- 338,145 1.62%
Comerica Bank-California,
successor by merger to
Imperial Bank 416,666 (27) 1.98% 583,333 (28) -- --
Everett T. and Rowena K. Bahre
1992 Family Trust 195,832 (29) * 277,499 (30) -- --
J. F. Shea Co., Inc. as nominee
1998-44 185,171 (31) * 259,240 (32) -- --
James S. Walsh 178,265 (33) * 248,904 (34) -- --
Rogers Family Trust 105,333 (35) * 142,000 (36) -- --
The Fuller Foundation 38,578 (37) * 54,009 (38) -- --
Isabella Partners 34,719 (39) * 48,607 (40) -- --
Walter R. Smith 18,857 (41) * 25,400 (42) -- --
Robert P. Bahre 15,431 (43) * 21,604 (44) -- --
Edward Ip 13,333 (45) * 20,000 (46) -- --
Tenley Shaw 11,666 (47) * 17,500 (48) -- --
32
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO THE OFFERING OWNED AFTER THE OFFERING(1)
--------------------- SHARES ---------------------------
NAME OF BENEFICIAL OWNER NUMBER % OF CLASS BEING OFFERED NUMBER % OF CLASS
------------------------ ------ ---------- ------------- ------ ----------
The Timken Living Trust UAD
9/14/99 7,715 (49) * 10,802 (50) -- --
F. Ward and Mary P. Paine Trust 7,715 (49) * 10,802 (50) -- --
David Walsh 5,000 (51) * 7,500 (52) -- --
Richard Pinsker 3,333 (53) * 5,000 (54) -- --
Terrance G. Kissinger 3,333 (53) * 5,000 (54) -- --
John C. Morrissey 3,085 (55) * 4,320 (56) -- --
Steven L. Baker 1,542 (57) * 2,160 (58) -- --
Richard L. and Carla L. Perry 1,542 (57) * 2,160 (58) -- --
Russell Hansen 771 (59) * 1,080 (60) -- --
Pallas Hansen 771 (59) * 1,080 (60) -- --
Roberta Allen 1,333 (61) * 2,000 (62) -- --
All executive officers and
directors as a group (5
persons) 2,164,317 (63) 10.07% 93,030 (18) 2,071,287 9.67%
---------------
* Less than 1.00%
(1) Assumes all shares being offered are sold.
(2) Includes 262 shares of common stock underlying warrants.
(3) Represents shares of common stock underlying warrants. Power to vote or
dispose of the shares being offered by Crossroads Capital Limited
Partnership is held by Matt Mitchell. Mr. Farndell is a brother-in-law of
Carmine T. Oliva. Power to vote or dispose of the shares being offered by
Resonance, Ltd. is held by Moishe Bodner. Power to vote or dispose of the
shares being offered by Landmark Equity Partners II, L.P. and Landmark
Venture Partners L.P. is shared by Stanley F. Aufeld, John A. Griner and
Timothy L. Havolen. Power to vote or dispose of the shares being offered
by Landmark Equity Partners V, L.P. is shared by James P. McConnell,
Stanley F. Aufeld, John A. Griner and Timothy L. Havolen. Ronald Oliva is
the brother of Carmine T. Oliva.
(4) Includes 8,798 shares of common stock underlying warrants. Power to vote
or dispose of the shares being offered by Amberbrook II, LLC is held by M.
Luisa Hunnewell.
(5) Includes 5,865 shares of common stock underlying warrants. Power to vote
or dispose of the shares being offered by Bankers Trust, Trustee of the
Jack Eckerd Corporation Pension Plan Trust, is shared by John C. Carcy,
Dennis P. Miller and Robert E. Lewis as members of the Pension Plan
Committee. Power to vote or dispose of the shares being offered by Montauk
Partners, L.P. is held by Brian Smith. Chase Manhattan Bank shares voting
and investment power with Credit Suisse Warburg Pincus Asset Management.
The signatory for Chase Manhattan Bank is John Geronimo.
(6) Includes 2,933 shares of common stock underlying warrants. Power to vote
or dispose of the shares being offered by C.P. & Co. Venture Partners,
L.P. is held by Ellen Lazarus.
(7) Includes 312 shares of common stock underlying warrants.
(8) Includes 9,490 shares of common stock underlying warrants. The Equitable
Life Assurance Society of the United States is affiliated with the
following NASD members: Sanford C. Bernstein & Co., LLC, Alliance Fund
Distributors, Inc., Equitable Distributors, Inc. and AXA Advisors, LLC.
Power to vote or dispose of the shares being offered by The Equitable Life
Assurance Society of the United States is held by Basil Livanos.
(9) Includes 100,000 shares of common stock underlying options. Mr. Finnegan
is a director of MicroTel.
(10) Includes 50,000 shares of common stock underlying options. Mr. Foote is
the Senior Vice President and Chief Financial Officer of MicroTel.
(11) Includes 250,000 shares of common stock underlying warrants and 1,010,600
shares of common stock underlying Series A Preferred Stock. Power to vote
or dispose of the shares being offered by Fortune Fund Limited Seeker III
is shared by Patrick Siaretta, as fund manager, and Greg Fenlon, as fund
administrator. The address for Mr. Siaretta is Avenida Republica do Libano
331, 04501-000, Sao Paulo, SP Brazil. The address for Mr. Fenlon is Kaya
Flamboyan #9, Willenstad, Curacao, Netherlands Antilles.
(12) Includes 50,000 shares of common stock underlying warrants.
(13) Includes 126,287 shares of common stock underlying options. Mr. Jefferies
is the Executive Vice President and Chief Operating Officer of our
Telecommunications Group and Managing Director of various subsidiaries of
MicroTel.
(14) Includes 3,457 shares of common stock underlying warrants.
(15) Includes 11,730 shares of common stock underlying warrants. Power to vote
or dispose of the shares being offered by the New York State Common
Retirement Fund is held by John E. Hull, Deputy Comptroller as
representative of H. Carl McCall, Comptroller of the State of New York.
Power to vote or dispose of the shares being offered by Portland General
Holdings, Inc. is held by James Piro.
(16) Includes 8,199 shares of common stock underlying warrants. Power to vote
or dispose of the shares being offered by Montgomery Associates 1992, L.P.
is shared by Bruce G. Potter and John K. Skeen.
33
(17) Includes 81,889 shares of common stock held individually by Mr. Oliva's
spouse, 180,633 shares of common stock underlying options, 162,500 shares
of common stock underlying warrants and 50,530 shares of common stock
underlying Series A Preferred Stock. Mr. Oliva is a director and the
Chairman of the Board, President and Chief Executive Officer of MicroTel.
The address for Mr. Oliva is 9485 Haven Avenue, Suite 100, Rancho
Cucamonga, California 91730.
(18) Represents 5,000 outstanding shares of common stock, 37,500 shares of
common stock underlying warrants and 50,530 shares of common stock
underlying Series A Preferred Stock.
(19) Includes 133,500 shares of common stock underlying warrants. Jason Oliva
is the son of Carmine T. Oliva.
(20) Includes 33,500 shares of common stock underlying warrants, 36,287 shares
of common stock underlying options and 101,060 shares of common stock
underlying Series A Preferred Stock. Samuel G. Oliva is the son of Carmine
T. Oliva.
(21) Represents 10,000 outstanding shares of common stock, 33,500 shares of
common stock underlying warrants and 101,060 shares of common stock
underlying Series A Preferred Stock.
(22) Includes 71,000 shares of common stock underlying warrants, 21,772 shares
of common stock underlying options and 101,060 shares of common stock
underlying Series A Preferred Stock. Samuel J. Oliva is the brother of
Carmine T. Oliva.
(23) Represents 10,000 outstanding shares of common stock, 71,000 shares of
common stock underlying warrants and 101,060 shares of common stock
underlying Series A Preferred Stock.
(24) Alan S. MacKenzie, Jr., David N. Marino and Joel S. Kraut are: the
managing partners of Orbit II Partners, L.P., a broker-dealer and member
of the American Stock Exchange; the managing members of MKM Partners, LLC,
an NASD-registered broker-dealer and member of the Pacific Stock Exchange;
and general partners of OTAF Business Partners, a general partnership that
owns over 10% of the outstanding membership interests in Blackwood
Securities, LLC, an NASD member. Excludes 7,500 shares of common stock
held directly by Mr. MacKenzie. The address for Orbit II Partners, L.P. is
2 Rector Street, 16th Floor, New York, New York 10006.
(25) Represents 20,000 outstanding shares of common stock and 107,500 shares of
common stock underlying warrants. Power to vote or dispose of the shares
being offered by Rana General Holding, Ltd. is held by Mazen Hassounah.
(26) Includes 158,060 shares of common stock underlying options. Mr. Runyon is
a director and the Secretary of MicroTel.
(27) Represents 83,333 shares of common stock underlying warrants and 333,333
shares of common stock underlying Series B Preferred Stock. Power to vote
or dispose of the securities being offered by Comerica Bank-California is
held by Susan Gill, Senior Vice President.
(28) Represents 83,333 shares of common stock underlying warrants and 500,000
shares of common stock underlying Series B Preferred Stock.
(29) Represents 32,499 shares of common stock underlying warrants and 163,333
shares of common stock underlying Series B Preferred Stock. Power to vote
or dispose of the shares being offered by Everett T. and Rowena K. Bahre
1992 Family Trust is held by Everett and Rowena Bahre, Trustees.
(30) Represents 32,499 shares of common stock underlying warrants and 245,000
shares of common stock underlying Series B Preferred Stock.
(31) Represents 37,035 shares of common stock underlying warrants and 148,136
shares of common stock underlying Series B Preferred Stock. Power to vote
or dispose of the shares being offered by J. F. Shea Co., Inc. as nominee
1998-44 is held by Edmund H. Shea, Jr., Vice President.
(32) Represents 37,035 shares of common stock underlying warrants and 222,205
shares of common stock underlying Series B Preferred Stock.
(33) Represents 36,987 shares of common stock underlying warrants and 141,278
shares of common stock underlying Series B Preferred Stock. Mr. Walsh is
the President of CXR Telcom Corporation, a wholly-owned subsidiary of
MicroTel.
(34) Represents 36,987 shares of common stock underlying warrants and 211,917
shares of common stock underlying Series B Preferred Stock.
(35) Represents 32,000 shares of common stock underlying warrants and 73,333
shares of common stock underlying Series B Preferred Stock. Power to vote
or dispose of the shares being offered by Rogers Family Trust is held by
Roy L. Rogers, Trustee.
(36) Represents 32,000 shares of common stock underlying warrants and 110,000
shares of common stock underlying Series B Preferred Stock.
(37) Represents 7,716 shares of common stock underlying warrants and 30,862
shares of common stock underlying Series B Preferred Stock. Power to vote
or dispose of the shares being offered by The Fuller Foundation is held by
Joanna Rice and Samuel L. Delcamp.
(38) Represents 7,716 shares of common stock underlying warrants and 46,293
shares of common stock underlying Series B Preferred Stock.
(39) Represents 6,944 shares of common stock underlying warrants and 27,775
shares of common stock underlying Series B Preferred Stock. Power to vote
or dispose of the shares being offered by Isabella Partners is held by
Michael W. Wilsey, Brian B. Wilsey and Matthew R. Wilsey, General
Partners.
(40) Represents 6,944 shares of common stock underlying warrants and 41,663
shares of common stock underlying Series B Preferred Stock.
(41) Represents 5,772 shares of common stock underlying warrants and 13,085
shares of common stock underlying Series B Preferred Stock.
(42) Represents 5,772 shares of common stock underlying warrants and 19,628
shares of common stock underlying Series B Preferred Stock.
34
(43) Represents 3,087 shares of common stock underlying warrants and 12,344
shares of common stock underlying Series B Preferred Stock.
(44) Represents 3,087 shares of common stock underlying warrants and 18,517
shares of common stock underlying Series B Preferred Stock.
(45) Represents 13,333 shares of common stock underlying Series B Preferred
Stock.
(46) Represents 20,000 shares of common stock underlying Series B Preferred
Stock.
(47) Represents 11,666 shares of common stock underlying Series B Preferred
Stock.
(48) Represents 17,500 shares of common stock underlying Series B Preferred
Stock.
(49) Represents 1,543 shares of common stock underlying warrants and 6,172
shares of common stock underlying Series B Preferred Stock. Power to vote
or dispose of the shares being offered by The Timken Living Trust UAD
9/14/99 is held by William R. and Judith P. Timken, Trustees.
(50) Represents 1,543 shares of common stock underlying Series B Preferred
Stock.
(51) Represents 5,000 shares of common stock underlying Series B Preferred
Stock.
(52) Represents 7,500 shares of common stock underlying Series B Preferred
Stock.
(53) Represents 3,333 shares of common stock underlying Series B Preferred
Stock.
(54) Represents 5,000 shares of common stock underlying Series B Preferred
Stock.
(55) Represents 617 shares of common stock underlying warrants and 2,468 shares
of common stock underlying Series B Preferred Stock.
(56) Represents 617 shares of common stock underlying warrants and 3,703 shares
of common stock underlying Series B Preferred Stock.
(57) Represents 308 shares of common stock underlying warrants and 1,234 shares
of common stock underlying Series B Preferred Stock.
(58) Represents 308 shares of common stock underlying warrants and 1,852 shares
of common stock underlying Series B Preferred Stock.
(59) Represents 154 shares of common stock underlying warrants and 617 shares
of common stock underlying Series B Preferred Stock.
(60) Represents 154 shares of common stock underlying warrants and 926 shares
of common stock underlying Series B Preferred Stock.
(61) Represents 1,333 shares of common stock underlying Series B Preferred
Stock.
(62) Represents 2,000 shares of common stock underlying Series B Preferred
Stock.
(63) Includes 162,500 shares of common stock underlying warrants, 614,980
shares of common stock underlying options, 81,889 shares of common stock
held individually by Mr. Oliva's wife and 50,530 shares of common stock
underlying Series A Preferred Stock.
35
OUR FINANCIAL STATEMENTS AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
2001 AND 2000 ARE REPLACED WITH THE FOLLOWING:
Financial Statements as of and for the Three and Nine Months ended September 30,
2001 and 2000
--------------------------------------------------------------------------------
Consolidated Condensed Balance Sheets as of September 30, 2001
(unaudited) and December 31, 2000........................................F-1
Consolidated Condensed Statements of Operations and Comprehensive
Income for the three and nine months ended September 30, 2001
and 2000 (unaudited).....................................................F-2
Consolidated Condensed Statements of Cash Flows for the nine months
ended September 30, 2001 and 2000 (unaudited)............................F-3
Notes to Consolidated Condensed Financial Statements (unaudited).............F-4
36
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 30, December 31,
2001 2000
------------- -------------
ASSETS (unaudited)
Cash and cash equivalents $ 437 $ 756
Accounts receivable - net 5,631 7,440
Notes receivable 53 130
Inventories 7,514 6,298
Other current assets 411 750
------------- -------------
Total current assets 14,046 15,374
Property, plant and equipment-net 710 809
Goodwill-net 2,644 2,737
Other assets 538 564
------------- -------------
$ 17,938 $ 19,484
============= =============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,746 $ 3,661
Current portion of long-term debt 591 614
Accounts payable 4,718 5,222
Accrued expenses 2,871 3,082
Net liability of discontinued operations -- 15
------------- -------------
Total current liabilities 10,926 12,594
Long-term debt, less current portion 783 282
Other liabilities 369 542
------------- -------------
Total liabilities 12,078 13,418
Convertible redeemable preferred stock,
$10,000 unit value. Authorized 200 shares;
issued and outstanding 25 shares (aggregate
liquidation preference of $250) 267 259
Stockholders' equity:
Convertible Series B Preferred stock, $0.01
par value. Authorized 10,000,000 shares;
150,000 shares issued and outstanding
(aggregate liquidation preference of $960) 938 938
Common stock, $.0033 par value
Authorized 50,000,000 shares; 20,571,000 and
20,570,000 shares issued and outstanding at
September 30, 2001 and December 31, 2000,
respectively 68 68
Additional paid-in capital 24,317 24,307
Accumulated deficit (18,903) (18,775)
Accumulated other comprehensive loss (827) (731)
------------- -------------
Total stockholders' equity 5,593 5,807
------------- -------------
$ 17,938 $ 19,484
============= =============
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 Nine months ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net sales $ 6,345 $ 6,871 $ 20,893 $ 19,559
Cost of sales 3,853 $ 3,080 11,935 10,646
--------- --------- --------- ---------
Gross profit 2,492 3,791 8,958 8,913
Operating expenses:
Selling, general and administrative 2,457 2,431 7,943 6,826
Engineering and product development 235 277 897 773
--------- --------- --------- ---------
Income (loss) from operations (200) 1,083 118 1,314
Other income (expense):
Interest expense (113) (126) (311) (321)
Other income 33 177 83 382
--------- --------- --------- ---------
Income (loss) from continuing operations
before income taxes (280) 1,134 (110) 1,375
Income tax expense 1 2 10 13
--------- --------- --------- ---------
Income (loss) from continuing operations
(281) 1,132 (120) 1,362
--------- --------- --------- ---------
Discontinued operations:
Loss from operations of discontinued segment -- (68) -- (219)
Loss on disposal of discontinued segment,
including provision for phase out period
of $158 in 2000 periods -- (634) -- (634)
--------- --------- --------- ---------
-- (702) -- (853)
--------- --------- --------- ---------
Net income (loss) (281) 430 (120) 509
--------- --------- --------- ---------
Other comprehensive income (loss):
Changes in unrealized gain in
marketable securities -- (78) -- --
Foreign currency translation adjustment 230 (217) (96) (435)
--------- --------- --------- ---------
Total comprehensive income (loss) $ (51) $ 135 $ (216) $ 74
========= ========= ========= =========
Earnings (loss) per share:
Continuing operations:
Basic $ (0.01) $ 0.06 $ (0.01) $ 0.07
========= ========= ========= =========
Diluted $ (0.01) $ 0.05 $ (0.01) $ 0.06
========= ========= ========= =========
Discontinued operations:
Basic $ -- $ (0.04) $ -- (0.05)
========= ========= ========= =========
Diluted $ -- $ (0.03) $ -- (0.04)
========= ========= ========= =========
Net income (loss):
Basic $ (0.01) $ 0.02 $ (0.01) $ 0.02
========= ========= ========= =========
Diluted $ (0.01) $ 0.02 $ (0.01) $ 0.02
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
-------------------
2001 2000
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (120) $ 509
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
Depreciation and amortization 272 230
Amortization of intangibles 303 207
Stock and warrants issued as compensation 10 110
Gain on sale of fixed assets -- (43)
Gain on sale of Wi-LAN, Inc. stock -- (197)
Other noncash items -- 648
Net change in operating assets of discontinued operations -- 658
Changes in operating assets and liabilities:
Accounts receivable 1,818 1,179
Inventories (1,205) (986)
Other assets 366 (58)
Accounts payable and accrued expenses (903) (2,903)
-------- --------
Cash provided by (used in) operating activities 541 (646)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable 77 --
Net purchases of property, plant and equipment (84) (15)
Cash received for sale of DTS stock -- 520
Proceeds from sale of fixed assets -- 43
Proceeds from sale of Wi-LAN, Inc. stock -- 918
Acquisition of T-Com, LLC assets -- (83)
Investment in Belix Ltd. companies -- (592)
-------- --------
Cash provided by (used in) investing activities (7) 791
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable and long-term debt (772) 330
Proceeds from exercise of warrants and employee stock options -- 88
-------- --------
Cash provided by (used in) financing activities (772) 418
-------- --------
Effect Of Exchange Rate Changes (81) (349)
-------- --------
Net Increase (Decrease) In Cash and Cash Equivalents (319) 214
-------- --------
Cash and Cash Equivalents At Beginning Of Period 756 480
-------- --------
Cash and Cash Equivalents At End Of Period $ 437 $ 694
======== ========
Cash paid for:
Income taxes $ 34 $ 13
======== ========
Interest $ 304 $ 245
======== ========
See accompanying notes to consolidated condensed financial statements.
F-3
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the "Company") operates through three
wholly-owned subsidiaries: CXR Telcom Corporation, CXR, S.A. and XET
Corporation, formerly XIT Corporation ("XET"). CXR Telcom Corporation and CXR,
S.A. design, manufacture and market electronic telecommunication test equipment
and transmission and network access products. XET and its subsidiaries design,
manufacture and market digital switches and power supplies. The Company conducts
its operations out of various facilities in the U.S., France, England and Japan
and organizes itself in two product line segments: telecommunications and
electronic components.
In October 2000, the Company decided to discontinue its circuits
segment operations. At that time, the circuits segment operations consisted of
XCEL Etch Tek, a wholly-owned subsidiary, and XCEL Circuits Division ("XCD"), a
division of XET. XCEL Etch Tek was offered for sale and sold in November 2000.
XCD, predominantly a captive supplier of printed circuit boards to the
electronic components segment, has been retained and is now included in the
electronic components segment. Accordingly, all prior financial information
related to the circuits segment operations has been presented as discontinued
operations in the accompanying consolidated condensed financial statements.
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 September 30, 2001 and December 31, 2000 and the results of
operations and cash flows for the related interim periods ended September 30,
2001 and 2000. 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 Amendment No. 2
to its 2000 Annual Report on Form 10-K.
F-4
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(2) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share (in thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands, except per share amounts)
NUMERATOR:
Net income (loss) $ (281) $ 430 $ (120) $ 509
Less: accretion of the excess of the redemption
value over the carrying value of redeemable
preferred stock 3 23 9 69
--------- --------- --------- ---------
Net income (loss) attributable to common stockholders $ (284) $ 407 $ (129) $ 440
========= ========= ========= =========
DENOMINATOR:
Weighted average number of common shares outstanding
during the period 20,571 20,537 20,570 19,141
Incremental shares from assumed conversions of
warrants, options and preferred stock -- 1,921 -- 2,206
--------- --------- --------- ---------
Adjusted weighted average shares 20,571 22,458 20,570 21,347
========= ========= ========= =========
Basic earnings (loss) per share $ (0.01) $ 0.02 $ (0.01) $ 0.02
========= ========= ========= =========
Diluted earnings (loss) per share $ (0.01) $ 0.02 $ (0.01) $ 0.02
========= ========= ========= =========
The computation of diluted loss per share for the three and nine month
periods ended September 30, 2001 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 in 2001 or because such instruments had exercise prices greater than the
average market price of the common shares during the periods presented.
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(3) INVENTORIES
Inventories consist of the following.
September 30, 2001 December 31, 2000
------------------ -----------------
(unaudited)
Raw materials $2,949,000 $ 2,777,000
Work-in-process 2,917,000 1,914,000
Finished goods 1,648,000 1,607,000
----------- -----------
$7,514,000 $6,298,000
========== ==========
(4) NOTES PAYABLE
The domestic credit facility agreement with Wells Fargo Business
Credit, Inc. contains restrictive financial and non-financial covenants that
were revised effective September 20, 2001. As of September 30, 2001, the Company
was in compliance with such covenants.
(5) COMMITMENTS AND CONTINGENCIES
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
may not be predictable because of considerable uncertainties that may 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.
The Internal Revenue Service is currently examining the Company's 1997
federal income tax return, the effect of which examination cannot be determined
at this time.
(6) REPORTABLE SEGMENTS
The Company has two reportable segments: telecommunications and
electronic components. The telecommunications 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 electronic components segment operates in the U.S.,
European and Asian markets and designs, manufactures and markets primarily
digital switches and power supplies.
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.
F-6
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 Amendment No. 2 to its
2000 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 Nine months Nine months
Sept. 30, Sept. 30, ended Sept. 30, ended Sept. 30,
2001 2000 2001 2000
------------------- ------------------- ------------------- ----------------
Sales to external customers:
Telecommunications $ 3,483,000 $ 3,487,000 $11,451,000 $10,680,000
Electronic Components 2,862,000 3,384,000 9,442,000 8,879,000
------------ ------------- ------------ -------------
$ 6,345,000 $ 6,871,000 $20,893,000 $19,559,000
============ ============ =========== ===========
Segment pretax profits:
Telecommunications $ 53,000 $ 422,000 $ 180,000 $ 468,000
Electronic Components 322,000 1,137,000 1,969,000 2,232,000
------------- ------------- ------------- -------------
$ 375,000 $ 1,559,000 $ 2,149,000 $ 2,700,000
============= ============ ============ ============
Sept. 30, December 31,
2001 2000
------------ -------------
Segment assets:
Telecommunications $ 8,009,000 $ 9,901,000
Electronic Components 9,233,000 8,876,000
------------ -------------
$ 17,242,000 $ 18,777,000
============ =============
The following is a reconciliation of the reportable segment income and
(loss) from continuing operations and assets to the Company's consolidated
totals:
Three months ended Three months ended Nine months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
------------------- ------------------- ------------------- ------------------
Pretax income
Total income for reportable $ 375,000 $ 1,559,000 $ 2,149,000 $ 2,700,000
segments
Unallocated amounts:
Gain on sale of -- 197,000 -- 197,000
Wi-LAN, Inc. stock
Warranty reserve reversal -- 110,000 -- 110,000
Unallocated general corporate
expenses (655,000) (732,000) (2,259,000) (1,632,000)
--------------- --------------- --------------- ---------------
Consolidated income before
income taxes $ (280,000) $ 1,134,000 $ (110,000) $ 1,375,000
=============== ============== =============== ===============
F-7
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Sept. 30, December 31,
2001 2000
-------------- --------------
Assets
Total assets for reportable segments $ 17,242,000 $ 18,777,000
Other assets 696,000 707,000
-------------- --------------
Total consolidated assets $ 17,938,000 $ 19,484,000
============== ==============
(7) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB")
finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No.
142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the
use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS 141 also requires that the Company recognize acquired
intangible assets apart from goodwill if the acquired intangible assets meet
certain criteria. SFAS 141 applies to all business combinations initiated after
June 30, 2001 and for purchase business combinations completed on or after July
1, 2001. It also requires upon adoption of SFAS 142 that the Company reclassify
the carrying amounts of intangible assets and goodwill based on the criteria in
SFAS 141.
SFAS 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS 142 requires that the Company identify reporting units for the
purpose of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using
the purchase method. As of September 30, 2001, the net carrying amount of
goodwill was $2,643,000. Amortization expense during the nine-month period ended
September 30, 2001 was $303,000. Currently, the Company is assessing but has not
yet determined how the adoption of SFAS 141 and SFAS 142 will impact its
financial position and results of operations.
In October 2001, the FASB issued FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS No. 144
requires that those long-lived assets be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 is effective for
financial statements issued for fiscal years beginning after December 15, 2001
and, generally, is to be applied prospectively.
F-8