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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-10346
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MICROTEL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0226211
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9485 HAVEN AVENUE, SUITE 100, (909) 297-2699
RANCHO CUCAMONGA, CALIFORNIA, 91730 (Registrant's telephone number,
(Address of principal executive offices) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.0033 par value None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
TITLE OF CLASS
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such a shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock at March 14, 2000 held
by nonaffiliates was approximately $36,354,000.
As of March 14, 2000, there were 18,177,000 shares of Common Stock, Par
Value $.0033, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. The definitive proxy statement in respect
of the 2000 Annual Meeting of Shareholders of the Company is incorporated by
reference into Part III of this Form 10-K.
-2-
PART I
ITEM 1. BUSINESS
WHEN USED ANYWHERE IN THE DISCUSSION OF "BUSINESS" BELOW, THE WORDS
"MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT,"
"INTEND," "SHOULD," "BELIEVE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING
EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE
PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION.
SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN THE FOLLOWING SECTIONS
BELOW: "OVERVIEW"; "INSTRUMENTATION AND TEST EQUIPMENT SECTOR;" "COMPONENTS AND
SUBSYSTEM ASSEMBLIES SECTOR;" "CIRCUITS SECTOR;" "PRODUCT DEVELOPMENT AND
ENGINEERING;" "COMPETITION;" "REGULATION," AND "EMPLOYEES." PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS.
OVERVIEW
MicroTel International, Inc. (the "Company"), through its various
direct and indirect subsidiaries, designs, manufactures and distributes a wide
range of electronics hardware products and provides related services primarily
to the telecommunications industry. Approximately 55% of the Company's product
sales are to customers in the telecommunications industries, including, among
many others, AT&T and the Regional Bell Operating Companies ("RBOCs")
domestically, and France Telecom in Europe. The remainder of the sales are
various information technology products for industrial, medical, military and
aerospace applications. The Company does not market the products manufactured
and distributed by its subsidiaries in connection with the "MicroTel" name but
rather such products are distributed under each subsidiary's market-recognized
brand-names.
The Company's objective is to become a leader in quality, cost
effective solutions to meet the global requirements of telecommunications and
information technology customers. The Company believes that it can achieve this
objective through customer-oriented product development, superior product
solutions, and excellence in local market service and support in North America,
Europe and Asia.
In 1984, MicroTel International, Inc. began operations as CXR Telcom
Corporation. In 1989, a holding company, CXR Corporation, a Delaware
corporation, was formed with two operating subidiaries, CXR Telcom Corporation,
based in the United States, and CXR, S.A., based in France (collectively,
"CXR"). CXR manufactures and distributes telecommunications testing and
transmission equipment. In 1995, CXR Corporation changed its name to MicroTel
International, Inc.
On March 26, 1997, the Company consummated a merger pursuant to which
XIT Corporation ("XIT") became a wholly-owned subsidiary of the Company, with
XIT as the surviving subsidiary (the "Merger"). Because the Merger was accounted
for as a reverse acquisition, historical financial information referred to
herein as that of the Company shall refer to the historical financial
information of XIT.
During 1999, the Company achieved certain objectives. In January 1999,
the Company acquired approximately 41% of the common stock of Digital
Transmission Systems, Inc. ("DTS"), a public company (OTC BB - DTSX), to expand
the Company's range of products to include wireless voice and data transmission
products. As part of its strategy to divest itself of certain subsidiaries, the
Company sold substantially all of the assets of HyComp, Inc. ("HyComp") which
manufactured hybrid circuits.
-3-
In November, 1999, the Company relocated and downsized its corporate
headquarters and the Digitran component operations of its XIT Corporation
("XIT") subsidiary to Rancho Cucamonga from a 63,000 square foot facility in
Ontario, California. The corporate headquarters were relocated to a 5,400 square
foot office suite and the XIT operations were moved to a 15,745 square foot
manufacturing facility. Both new locations are located in the City of Rancho
Cucamonga and are approximately within one mile of each other. The move reduced
monthly rental expense by $23,500 as well as reducing utility expenses.
Concurrent with the relocation, the Company sold its interest in Capital Source
Partners, a partnership that owned the building from which the Company moved.
In January 2000 the Company sold all of its interest in DTS to Wi-LAN,
Inc. of Alberta, Canada in exchange for $520,000 and 28,340 shares of Wi-LAN,
Inc. common stock , which is traded on the Toronto, Ontario stock exchange. The
market value of the acquired common stock of Wi-LAN, Inc. was approximately
$720,000 on the date of the transaction. The Company's decision to sell the DTS
stock was due to (1) the investment in DTS not providing expected benefits and
(2) the Company's need to increase liquidity and working capital.
Within the electronics industry, the Company now manufactures and
distributes three product lines and is organized into three related business
segments (which are described as sectors throughout this document) that are
discussed below.
1. INSTRUMENTATION AND TEST EQUIPMENT SECTOR
The Instrument and Test Equipment Sector is the Company's largest
sector reporting 55% of the Company's net sales in 1999 and is considered the
Company's core business which is the focus of the Company's growth strategy. The
products of this sector are manufactured by CXR and CXR S. A. In addition, CXR,
S.A. performs network integration services and distributes test equipment and
data, voice and video transmission products manufactured by third parties. Their
customers include AT&T, France Telecom,the RBOCs, interconnect carriers,
independent telephone operating companies, private communications networks,
banks, brokerage firms and government agencies.
TELECOMMUNICATIONS TEST EQUIPMENT. The CXR HALCYON line of telecommunications
test equipment is used for installation, service and maintenance of
telecommunications services. With the explosive expansion of analog and
high-speed digital internet services and other competitive service alternatives,
the market for this test equipment has expanded dramatically. Regional Bell
Operating Companies ("RBCs"), Competitive Local Exchange Carriers ("CLECs"),
Long Distance Providers and Internet Service Providers ("ISPs") have been forced
to develop the capacity to install, identify and isolate troubles in the
transmission facilities and terminating equipment. In addition, with the growth
of e-commerce and internet related Business-to-Business activities, the
Information Technology ("IT") managers of Fortune-1000 companies have had to
incorporate internal test and maintenance organizations to ensure that corporate
Wide Area Networks ("WANs") are fully operational with minimum downtime.
The CXR HALCYON line of telecommunications equipment provides an
exceptional solution to integrated services installation, maintenance and
testing. Incorporation of the "Critical Communications" product line, acquired
in October 1997, has been completed and the stage has been set to take advantage
of the unique combination of performance and value offered by these products.
-4-
The new 700 series of telecommunications test sets, acquired through
the Critical Communications, Inc. acquisition, are a modular, rugged,
lightweight and hand-held line of products which are used predominantly by
telephone and internet companies to qualify and certify service offerings to end
users. These sets are configured in a variety of models designed to perform
analog and digital measurements from voice grade to wide-band Internet circuit
applications. Testing of the physical copper pair and qualifying it for
wide-band Digital Subscriber Services ("DSL") is a primary concern of the
telephone service providers. These voice and internet services include Plane Old
Telephone services (POTs, Caller-ID, CO/PBX), Digital Data Services (ISDN, DDS,
T-1 and FT1), High Capacity Digital Subscriber Lines ("HDSL") and Asymmetrical
Digital Subscriber Lines ("ADSL"). The unique modular nature of this test
equipment provides an easy configuration and upgrade path for testing of the
specific services offered by the various regional service providers. The 700
series of telecommunications test equipment supports national and international
(CCITT) service applications.
Recent key performance enhancements to the 700 series product family
address the enormous appetite for conversion of analog service installations to
high-speed digital access lines. Some of these key features are: 1) 23-tone
test, an automated single key-stroke test which performs the equivalent of over
12 individual test sequences, 2) Load-Coil analysis, which identifies the
presence of voice coils which prevent high-speed digital access, 3) DS3,
installation and test of very high-speed digital transmission service -
equivalent to 28 T-1 circuits and 4) Voice analysis and testing individual T-1
Channels. These enhancements allow further penetration of CXR HALCYON test
equipment into the enormous telecommunications services market.
TRANSMISSION AND NETWORK ACCESS PRODUCTS. CXR develops, manufactures, and sells
a broad line of Anderson Jacobson ("AJ") transmission and network access
products. These include a line of high quality professional grade modems, which
are used worldwide for networking and central office telecommunications
applications including voice mail and billing systems. These modems are sold as
stand-alone devices for remote sites or as rackmount versions for central site
applications with end-to-end management. All Anderson Jacobson modems are
"feature rich" and generally offer more capabilities and better performance than
competing products especially when operating over poor quality lines. This
characteristic alone has made the AJ modems the modem of choice for voice-mail
applications where they are deployed in large numbers throughout the United
States. These products are also available in more rugged versions for industrial
applications like telemetry and remote monitoring.
Together with modems, CXR also offers a line of ISDN terminal adapters,
the digital equivalent of the analog modems. These terminal adapters are used in
a broad range of applications including point of sale and videoconferencing.
These adapters are available in standalone as well as rackmount versions. CXR is
also manufacturing a line of ISDN intelligent multiplexer/switches called the
CB2000, which are used to convert ISDN primary accesses into multiple basic
accesses with port-to-port switching. This product, which was designed primarily
for the European market, allows for a better use of ISDN resources and
facilitates the migration from basic rate to primary rate access.
The MD2000 is a new addition to the growing family of AJ transmission
products. It allows data transmission over a single copper pair at E1 or FE1
speed over a distance of up to 8.0 miles. It comes with a choice of different
interfaces including an Ethernet port with full bridging capability.
The AJ Smart rack is a universal shelf rack that holds up to sixteen
cards including analog modems, ISDN adapters and MDSL modems and CSU/DSU's. When
the optional intelligent controller card is installed, the data center manager
can keep track and modify configurations, run diagnostic routines or record
alarms. The main advantage of the Smart rack is the simplicity of operation
through a menu driven user interface.
-5-
REMOTE ACCESS PRODUCTS. CXR also markets a line of Remote Access Servers (RAS)
to address the Internet Service Providers market as well as corporate user
market. In a corporate environment these products are used to connect remote
users to the corporate local area network ("LAN") via the telephone network or
via the ISDN network using analog modems or terminal adapters. Systems range
from 8 to 64 ports with built-in security. Like all other AJ products the RAS
products are fully remotely manageable.
NETWORKING SYSTEMS. In 1996 CXR, S.A. formed a new business unit to market
several lines of products used to build multimedia enterprise networks. These
products are all purchased from third-party vendors under OEM or distributorship
agreements. These network products are sold to customers in a turnkey solution
and includes network design, installation and maintenance.
The product lines marketed consist of three main categories: (i)
Data-voice multiplexers to transport voice data and video over point to point
lease lines or frame relay networks; (ii) ISDN routers used to connect remote
offices to corporate offices; (iii) terminal servers and remote access servers
to connect local and remote users to the corporate LAN.
2. COMPONENTS AND SUBSYSTEM ASSEMBLIES SECTOR
The Components and Subsystem Assemblies Sector is the Company's second
largest and most profitable business sector representing approximately 36% of
1999 net sales. This business will continue to be managed for profitability and
growth for so long as it contributes to profitability, diversification of
earnings and contributes to the growth of the core Instruments and Test
Equipment Sector. Components and Subsystem Assemblies products are produced
and/or sold by XIT's Digitran Division, based in Rancho Cucamonga, California,
XCEL Ltd. and XCEL Power Systems, Ltd., wholly-owned subsidiaries of XIT based
in England, and another wholly-owned subsidiary, XCEL Japan, Ltd. XIT's Digitran
Division relocated from its Ontario facility to a smaller, lower cost facility
in Rancho Cucamonga in November 1999 simultaneously with the relocation of the
corporate headquarters from Ontario to an office suite in Rancho Cucamonga.
Although the Company plans to intensify its focus on the telecommunications
sector, the Company intends to continue its efforts to increase the
profitability and growth of the component sector businesses.
COMPONENTS
XIT's Digitran Division manufactures and sells digital switch products
serving aerospace, military, communications, industrial and commercial
applications. Thumbwheel, push button, and lever modules, together with
assemblies, are manufactured in 16 different model families. The Digitran
Division also offers a wide variety of custom keypads. The Digitran Division
previously produced the XCEL-Lite display color monitor product which was sold
in December 1998. Color and monochrome monitors (including XCEL-Lite) are sold
in Europe through XCEL Ltd.
XCEL Power Systems Ltd., located in Ashford, Kent, England, produces a
range of high and low voltage, high specification, compact and microelectronic
power supplies for an international customer base, including telecommunications,
aerospace and military customers.
XCEL JAPAN Ltd. resells various Digitran Division Products and other
third party Asian source components primarily into Japan and also into other
highly industrialized Asian countries. -6-
SUBSYSTEMS
The Company's Digitran Division previously produced subsystem
assemblies but discontinued marketing this service to new customers early in
1999. However, Digitran does continue this service for selected previous
customers. The Company's XCEL Power Systems, Ltd. UK subsidiary offers complete
manufacturing solutions to OEMs, outside and internal divisions and
subsidiaries, including concurrent engineering, assembly of printed circuit
boards and front panel assemblies incorporating its input and display
components, assembly of subsystems, test engineering, software development and
accessory packaging. The Company's XCEL Ltd. subsidiary believes its ability to
manufacture various electronic components, combined with its engineering
integration capability, provides it with a number of competitive advantages in
providing custom contract assembled subsystem assemblies. XCEL UK is able to
engineer and manufacture communications, medical, industrial, and military input
and display subsystems and other subsystem assemblies.
3. CIRCUITS SECTOR
This is the Company's smallest sector, generating approximately 9% of
net sales in 1999. Two of the previous units making up this sector, XCEL Arnold
Circuits, Inc. and HyComp, Inc. have been sold and the Company intends to
evaluate its alternatives related to this sector, including the possible
divestiture of its remaining XCEL Etch-Tek Division.
CUSTOMERS AND MARKETING
Customers for the Company's Instrumentation and Test product line
include AT&T, the RBOCs, international telephone companies - including France
Telecom - and private communications networks. Datacom test equipment and modem
equipment are purchased by telecommunications equipment manufacturers and used
in the design, manufacture, installation and maintenance of the electronic
equipment they provide. Telecom test instruments are purchased by the major long
distance and local loop carriers.
The principal customers for Components and Subsystems are OEMs in the
electronics industry and include manufacturers of communications equipment,
industrial computers, automatic teller machines, medical devices, industrial
instruments and test equipment, and aerospace and military products. Such
customers include Boeing, Lockheed Martin, Raytheon, Litton, Rockwell, Teledyne,
Honeywell, NCR, Eastman Kodak, British Aerospace, Aerospatiale, Pilkington,
Sagem, Toshiba and Hyundai, among many others.
During the periods presented in this report, the customers for the
Circuits Sector included GenRad, Raytheon, Lockheed Martin, Tektronics,
Teradyne, Holland Signal, Racal, EFW and Loral among others.
The Company's largest customer was Motorola which accounted for
approximately 14%, of the net sales for the year ended December 31, 1997. These
sales were made by XCEL Arnold, the assets of which were sold by the Company on
March 31, 1998. No other customer accounted for more than 10% of the Company's
net sales in 1999 or 1998.
The Company markets its products through a combination of direct sales
engineers, distributors and independent sales representatives primarily in the
United States, Europe and Japan (See Note 15 to the Consolidated Financial
Statements included elsewhere in this Report).
-7-
BACKLOG
The Company's business is not generally seasonal, with the exception
that the capital equipment purchases by telecom customers are lower than average
during the first quarter of each year as new budgets for calendar year purchases
of capital equipment are typically not approved until late in the first quarter,
thereby impacting the Instrumentation and Test Equipment sector. The Company's
backlog of firm, unshipped orders was as follows by business sector at December
31, 1999, 1998 and 1997, respectively.
DEC. 31, 1999 DEC. 31, 1998 DEC. 31, 1997
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(IN THOUSANDS)
Instrumentation and
Test Equipment $ 824 $ 1,861 $ 985
Components and
Subsystem Assemblies 5,380 7,137 6,452
Circuits 113 993 5,397
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$ 6,317 $ 9,991 $ 12,834
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The backlog for the Instrumentation and Test Equipment Sector is not
deemed a significant measure of business, as customers generally order on a
just-in-time basis. The increase in backlog for the Components and Subsystem
Assemblies Sector at December 31, 1998 resulted from an increase of
approximately $1,060,000 at XPS principally in the fourth quarter of 1998 and an
increase in the orders for the remainder of the Sector from programs which did
not order in 1997. Order backlog for XPS is volatile and the decline from
December 31, 1998 to December 31, 1999 does not indicate an adverse trend. The
Company's order backlog at December 31, 1999 will be mostly shipped during 2000
with some contracts requiring shipments in 2001 and 2002. The overall decline in
backlog for the Circuits Sector from December 31, 1997 to December 31, 1998 was
principally the result of the sale of XCEL Arnold, which had a backlog of
approximately $3,400,000 at December 31, 1997. The decline in backlog for this
sector in 1999 as compared to 1998 resulted mainly from the sale of the assets
of HyComp, Inc on March 31, 1999.
MANUFACTURING
The Company purchases the electronic components required for the
manufacture of its various product lines from a number of vendors and has
experienced no significant difficulties in obtaining timely delivery of
components. Management is implementing a plan of outside contract manufacturing
for its U. S. produced telecom test equipment. Also, the Company is
consolidating all its transmission and modem manufacturing for the North
American and European markets at its French manufacturing facility at CXR, S. A.
-8-
PRODUCT DEVELOPMENT AND ENGINEERING
The Company's product development and engineering is critical in view
of rapid technological innovation in the electronics hardware industry. Current
research and development efforts are concentrated in the Instrumentation and
Test Equipment Sector (CXR and CXR, S.A.). For the years ended December 31,
1999, 1998 and 1997, engineering and product development costs of the Company
were $1,873,000, $2,454,000 and $2,046,000, respectively. The decline in these
expenses in 1999 as compared to 1998 was primarily due to the sale of HyComp in
March 1999 as the net 1999 amount represents a slight increase exclusive of the
HyComp affect.
The product development costs of CXR and CXR, S.A. were $1,213,000,
$2,202,000 and $1,797,000 during the years ended December 31, 1999, 1998 and
1997, respectively. These product development costs were related primarily to
development of new telecommunications test equipment, trunk testing system
products and data communications equipment. Current research expenditures are
directed principally towards enhancements to the current test instrument product
line and development of increased band width (faster speed) transmission
products. These expenditures are intended to improve market share and gross
profit margins, although no assurances may be given that such improvements will
be achieved.
CXR and CXR SA also makes use of the latest CAD (Computer Aided Design)
equipment to design and package its products. This puts CXR in the position to
take full advantage of the latest CAE (Computer Aided Engineering), and EDA
(Engineering Design Automation) workstation tools to design, simulate and test
its advanced product features or product enhancements for custom circuits and
miniaturization purposes. With the above mentioned tools, product developments
are turned around quickly, keeping the highest quality and reliability
integrated as part of the overall development process. This kind of capability
also allows CXR to offer custom featured designs for the potentially expanding
Original Equipment Manufacturer ("OEM") customers, whose needs require the
integration of CXR's products with their own.
PATENTS AND TRADEMARKS
The Company regards its software, hardware and manufacturing processes
as proprietary and relies on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions,
including employee and third-party nondisclosure agreements, to protect its
proprietary rights. The Company seeks to protect its software, documentation and
other written materials under trade secret and copyright laws, which afford some
limited protection. The laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. The Company requires that its employees enter into confidentiality
agreements as a condition of employment.
COMPETITION
The Instrumentation and Test Equipment Sector has numerous competitors
with greater technological, financial and marketing resources than those
possessed by the Company. The ability of the Company to compete in the
Instrumentation and Test product lines is dependent on several factors including
price, technology, product performance, service and its ability to attract and
retain qualified management and technical personnel.
-9-
The Company's Components and Subsystem Assemblies Sector competes in a
highly fragmented market composed of a diverse group of manufacturers. The
Company believes that the primary bases of competition in this market segment
are capability, price, manufacturing quality, advanced manufacturing technology
and reliable delivery. The Company believes that by focusing on low to
medium-volume production, and by manufacturing subsystems using its in-house
manufactured components, the Company can successfully compete, particularly in
Europe. Additionally, by taking on a wider range of systems than its larger
competitors and by having access to a diversified customer base, the Company
believes it is able to diversify its workload and is not as dependent as some of
its competitors on individual contracts, customers or industries.
The market for printed circuit boards in the United States is
fragmented and very competitive. The Company believes there are over 700
companies producing circuit boards in the United States. The Company competes
primarily against other independent manufacturers. A number of the Company's
competitors are larger than the Company and have greater financial, marketing
and other resources. It is for these reasons the Company is evaluating plans to
effectively exit this market.
REGULATION
The Federal Communication Commission ("FCC") has adopted regulations
with respect to the interconnection of communications equipment with telephone
lines and radiation emanations of certain equipment. CXR has complied with these
regulations and received all necessary FCC approvals for its line of trunk
testing equipment. As additional products require certification, CXR believes it
will be able to satisfy all such future requirements. The Company believes it
complies with environmental regulations since it assembles, rather than
manufactures, electronic components and therefore discharges into the
environment are believed to be negligible.
The Company's product lines are subject to certain federal and state
statutes governing safety and environmental protection. The Company believes
that it is in substantial compliance with all such regulations and is not aware
of any proposed or pending safety or environmental rule or regulation which, if
adopted, would have a material impact on its business or financial condition.
EMPLOYEES
As of December 31, 1999, the Company employed 223 persons. Of these
employees, 127 employees are employed in the United States and 96 are employed
in Europe and Japan. None of the Company's employees are represented by unions
and there have not been any work stoppages at any of the Company's facilities.
The Company believes that its relationship with its employees is good.
-10-
ITEM 2. PROPERTIES
The Company leases or owns approximately 100,000 square feet of
administrative, production, storage and shipping space. All of these facilities
are leased other than the Abondant, France facility.
BUSINESS UNIT LOCATION FUNCTION
- ------------------------------------- ----------------------- ----------------
MicroTel International Inc. Rancho Cucamonga, Administrative
(Corporate Headquarters) California
XIT Corporation/Digitran Rancho Cucamonga, Manufacturing
(Components and subsystem assemblies) California
XCEL Etch Tek Concord, California Manufacturing
(Circuits) Monrovia, California
XCEL Power Systems, Ltd. and XCEL Ltd. Ashford, United Kingdom Administrative/
(Components and subsystem assemblies) Manufacturing
XCEL Japan, Ltd. Higashi-Gotanda Tokyo, Japan Sales/Assembly
(Components and subsystem assemblies)
CXR, S.A Paris, France Administration/
(Instrumentation and test equipment) Sales
CXR, S.A Abondant, France Manufacturing/
(Instrumentation and test equipment) Engineering
CXR
(Instrumentation and test equipment) Fremont, California Administrative/
Manufacturing
CXR St. Charles, Illinois Engineering/
(Instrumentation and test equipment) Customer Service
The lease for the Fremont facility will expire in or about September
2002, with one five-year renewal option. The Company has subleased approximately
12,000 square feet of this facility. The lease for the Paris, France facility
expires in April 2007. The Monrovia facility was covered by a lease that expired
in October 1999 and is currently being rented on a month to month basis until a
new lease is executed. The Concord facility is subject to a lease that expires
in September 2001, with options to renew until April 2016. The Ashford facility
is subject to a fifteen-year lease which expires in September 2011, subject to
the right of the Company to terminate the lease after five years, and the rights
of the Company or the landlord to terminate the lease after ten years.
On October 16, 1999, the Company sold its interest in the partnership
that owned the property at 4290 E. Brickell Street, Ontario, California, which
the Company leased, for assumption of the Company's rent debt of $152,000,
$75,000 in cash and forgiveness of certain other debt of approximately $17,000.
The sale also included a provision to release the company of its future lease
obligations consisting of seven remaining years and approximately $3,000,000 of
future lease payments regarding such property. As part of the mutual release,
the Company relinquished its claim on a $51,000 deposit and $115,000 note
receivable from the lessor. In accordance with this agreement, the Company
vacated the Brickell Street property on October 31, 1999. The Company relocated
-11-
its XIT Corporation components manufacturing operations to a 15,745 square foot
manufacturing facility at 9654 Hermosa Avenue, Rancho Cucamonga, California and
relocated its administration and executive headquarters to a 5,400 square foot
office facility at 9485 Haven Avenue, Rancho Cucamonga, California. The lease on
the Hermosa Avenue property expires on November 30, 2004 and the lease on the
Haven Avenue property expires on October 31, 2002. The relocation to Rancho
Cucamonga, California and the subleasing of part of the Fremont facility are
expected to reduce costs by approximately $500,000 per year.
The Company believes that these facilities are adequate for the current
business operations but with the planned transition to contract manufacturing by
CXR of test instruments and with the consolidation and transfer of transmission
products, manufacturing and engineering to France, the Company intends to
sublease an additional 13,000 square feet of its Fremont facility in the year
2000 leaving a residual of 2,000 square feet at the Fremont, California
facility.
ITEM 3. LEGAL PROCEEDINGS
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
In October 1996, David Scheinfeld brought an action in the Supreme
Court of the State of New York, County of New York, to recover monetary damages
in the amount of $300,000 allegedly sustained by the failure of the Company, its
stock transfer agent and its counsel to timely deliver and register 40,000
shares of common stock purchased by Mr. Scheinfeld. The Company was informed by
Mr. Scheinfeld that in order to settle his claims, the Company would have to
issue him unrestricted shares of common stock. Since, in the absence of
registrations, the Company could not issue unrestricted shares, the Company
answered Mr. Scheinfeld's motion and sought to compel him to serve a complaint
upon the defendants. On June 30, 1997, the complaint was served, and the Company
subsequently answered, denying the material allegations of the complaint.
During the third quarter of 1999, settlement was reached with respect
to the Scheinfeld case. The Company agreed to pay $75,000 payable in an initial
payment of $6,250 and eleven monthly payments of $6,250 thereafter without
interest.
DANIEL DROR & ELK INTERNATIONAL, INC. V. MICROTEL INTERNATIONAL, INC.
In November 1996, the Company entered into an agreement (the
"Agreement") with the former Chairman of the Company, which involved certain
mutual obligations. In December 1997, the former Chairman defaulted on the
repayment of the first installment of a debt obligation which was an obligation
set forth in the Agreement. Also in December 1997, the former Chairman of the
Company, filed suit in the District Court for Galveston County, Texas alleging
the Company had breached an alleged oral modification of the Agreement. In
January 1998, the Company answered the complaint denying the allegation and
litigation commenced in Texas.
In April 1998, the Company brought an action in California against the
former Chairman for breach of the Agreement and sought recovery of all stock,
warrants and debt due the Company. The Company obtained a judgement against the
former Chairman in this litigation.
In December 1997, Elk International Corporation Limited ("Elk"), a
stockholder of the Company, brought an action in Texas against the Company's
current Chairman and an unrelated party, alleging certain misrepresentations
during the merger discussions between XIT and the Company. In February 1999, Elk
filed suit against the Company, the current Chairman and the Company's general
counsel in connection with a stop transfer placed by the Company on certain
common shares held by Elk.
In March 1999, the parties entered into a settlement agreement which
terminated all of the aforementioned actions. The agreement calls for the
Company to issue to Elk, Dror and other parties $60,000 and 150,000 shares of
the Company's common stock with a fair market value of approximately $56,000. In
addition, the Company issued 1,000,000 warrants to purchase the Company's common
stock at an exercise price of $1.37 per share for two years in exchange for the
returning 750,000 options and returning 90,000 warrants all to purchase the
Company's common stock at an exercise price of $2.50 per share for 2.8 years.
The fair value of the warrants granted over the options and warrants returned on
the date of the settlement was approximately $17,000. The Company accrued for
this settlement in the accompanying 1998 consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) MARKET INFORMATION.
Until May 11, 1999, the Company's common stock was traded on the Nasdaq
SmallCap Market. On May 12, 1999, the listing of the Company's common stock on
the Nasdaq SmallCap Market was discontinued and thereafter, the Company's common
stock has been traded on the OTC Bulletin Board under the symbol "MCTL". As a
consequence, the Company could find it more difficult to obtain capital through
an equity offering of its stock in the future.
-12-
On December 23, 1999, two preferred shareholders sold all their
preferred shares and the prorated portion of warrants applicable to the
unconverted preferred shares. The purchasers of such shares and prorated stock
warrants are Orbit II Partners, L. P., a limited partnership formed under the
laws of Delaware, Samuel J. Oliva, Samuel G. Oliva and Carmine T. Oliva. Carmine
T. Oliva is the company's President and Chairman of the Board. Samuel J. Oliva
and Samuel G. Oliva are relatives of Carmine T. Oliva. The conversion ratio of
the preferred shares sold and outstanding was changed to a fixed factor whereby
one share of preferred is convertible into 50,530 shares of common stock. Also,
all the warrants issued in conjunction with the preferred stock were amended to
reduce the exercise price to $0.25 per share and to extend the expiration date
to December 22, 2002. These conversion and exercise terms were also applied to
the remaining preferred stock and warrants applicable to the preferred stock
that were not part of this exchange.
The table below shows the high and low sales prices per share of the
Company's common stock by quarter for the years ended December 31, 1999, 1998
and 1997.
CALENDAR YEAR HIGH LOW
- -------------- ------------ ------------
1999
Fourth Quarter $ 0.4375 $ 0.1562
Third Quarter 0.3906 0.1875
Second Quarter 0.5625 0.25
First Quarter 1.0938 0.375
1998
Fourth Quarter $ 0.875 $ 0.375
Third Quarter 1.063 0.438
Second Quarter 1.25 0.938
First Quarter 1.625 1.00
1997
Fourth Quarter $ 2.4375 $ 1.1563
Third Quarter 2.625 2.375
Second Quarter 2.8125 1.875
First Quarter 3.4375 1.4375
(b) SHAREHOLDERS
As of March 23, 2000, the Company had 3,663 stockholders of record, of
which 450 were round lot stockholders, and approximately 3,800 beneficial
stockholders.
(c) DIVIDENDS
No dividends on the Common Shares have been paid by the Company to
date. The Company's Loan and Security Agreement with Congress Financial
Corporation prohibits the payment of cash dividends on the Common Shares. The
Company currently intends to retain future earnings to fund the development and
growth of its business and, therefore, does not anticipate paying cash dividends
on the Common Shares within the foreseeable future. Any future payment of
dividends on the Common Shares will be determined by the Company's Board of
Directors and will depend on the Company's financial condition, results of
operations and other factors deemed relevant by its Board of Directors.
-13-
ITEM 6. SELECTED FINANCIAL DATA.
The following table summarizes selected consolidated financial data for
the Company for the years ended December 31, 1999, 1998 and 1997, the three
months ended December 31, 1996 and the years ended September 30, 1996 and 1995.
The data has been derived from and should be read in conjunction with the
Company's Consolidated Financial Statements, the related Notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations. The financial data as of and for the three months ended December 31,
1996 are not necessarily indicative of results that may be expected for the full
year.
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE
YEAR ENDED YEAR ENDED YEAR ENDED MONTHS ENDED YEAR ENDED YEAR ENDED
DEC 31, 1999 DEC 31, 1998 DEC 31, 1997 DEC 31, 1996 SEP 30, 1996 SEP 30, 1995
------------- ------------- ------------- ------------- ------------- -------------
Net sales $ 28,301 $ 37,261 $ 43,098 $ 7,886 $ 31,249 $ 19,602
Net income (loss) $ (4,596) $ (1,185) $ (9,693) $ (905) $ 1,083 $ 337
Income (loss) available to
common stockholders $ (4,637) $ (1,245) $ (9,753) $ (924) $ 1,003 $ 327
Basic and diluted earnings
(loss) per share $ (.28) $ (.10) $ (.96) $ (.15) $ .17 $ .07
Total assets $ 16,621 $ 21,242 $ 25,440 $ 20,564 $ 19,613 $ 15,955
Long-term obligations,
less current portion $ 947 $ 2,384 $ 3,319 $ 3,549 $ 2,678 $ 1,524
Redeemable preferred stock $ 588 $ 1,516 $ 714 $ 794 $ 775 $ 835
Stockholders' equity $ 3,801 $ 5,482 $ 6,015 $ 5,047 $ 5,845 $ 4,464
Shares outstanding at
period end 18,152 12,622 11,926 6,064 6,064 5,814
No cash dividends on the Company's common stock were declared during
any of the periods presented. Shares outstanding and earnings (loss) per share
have been restated to give effect to the recapitalization of XIT Corporation
(the accounting acquirer) in the "reverse acquisition" of MicroTel
International, Inc. by XIT Corporation on March 26, 1997.
As discussed previously, the historical financial data above prior to
the Merger is that of XIT Corporation (the "Accounting Acquirer"). In
conjunction with the reverse acquisition accounting treatment, XIT 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 XIT's fiscal year ended September 30,
1996 and the beginning of its new fiscal year, January 1, 1997.
-14-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT,"
"ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND," "SHOULD," "BELIEVE"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND
FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS,
BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY,
FORWARD-LOOKING STATEMENTS ARE INCLUDED IN THE FOLLOWING SECTIONS BELOW:
LIQUIDITY AND CAPITAL RESOURCES AND OUTLOOK, PROSPECTIVE INVESTORS, READERS OR
OTHER USERS OF THIS REPORT ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES
AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
As discussed previously herein and in the notes to the accompanying
consolidated financial statements, the consolidated financial statements
presented are those of XIT Corporation and its wholly and majority-owned
subsidiaries and beginning March 26, 1997, include the Company and its
subsidiaries CXR Telcom Corporation and CXR, S.A. (the "Former Company"). This
is the result of the reverse acquisition by XIT of MicroTel International, Inc.
("the Registrant") and its subsidiaries in a merger on March 26, 1997 (the
"Merger"). The Former Company and "accounting acquiree" is described as "CXR" in
the discussion below. XIT Corporation is referred to as "XIT."
The Company conducts its operations out of various facilities in the
U.S., France, England, and Japan and organizes itself in three product line
sectors; Instrumentation and Test Equipment, Components and Subsystem Assemblies
and Circuits. The Instrumentation and Test Equipment Sector operates principally
in the U. S. and European markets. The Components and Subsystem Assemblies
Sector operates in U. S., European and Asian markets. The Circuits Sector
operates principally in the U. S. market. The Instrumentation and Test Equipment
Sector and the Components and Subsystems Assembly Sector are referred to as "the
Test Equipment Sector" and "the Components Sector" in the discussion below for
brevity.
-15-
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED DECEMBER 31, 1998
NET SALES
Consolidated net sales decreased by $8,960,000 or 24% in 1999 compared
with 1998. The table below sets forth the composition of consolidated net sales
by business sector, separately identifying the operations of the Company's
HyComp subsidiary and XCEL Arnold Circuits, Inc. ("XCEL Arnold") subsidiary
during the years ended December 31, 1999 and 1998.
DOLLARS
IN THOUSANDS INCREASE/(DECREASE)
Sector 1999 1998 VARIANCE PERCENT
- ------------ ----------- ----------- ----------- -----------
Test Equipment $ 15,666 $ 17,532 $ (1,866) (10.6)%
Components 10,080 12,412 (2,332) (18.8)%
Circuits 2,099 2,981 (882) (29.6)%
HyComp Inc. (sold 3/31/99) 456 2,826 (2,370) (83.9)%
XCEL Arnold (sold 3/31/98) -- 1,510 (1,510) (100.0)%
----------- ----------- -----------
Total Sales $ 28,301 $ 37,261 $ (8,960) (24.0)%
=========== =========== ===========
The Test Equipment Sector sales declined by $1,866,000 or 10.7% in 1999
as compared to 1998. The major reason for the decline was caused by reduced
sales of the older 5200 series test equipment. The newer 700 series replaced the
older model but the older model's sales declined at a faster rate than the
increase in sales of the new models. Since most of the decline in sales of the
older models has been realized, it is expected that increases in the sales of
the newer 700 series equipment should result in net increases in total sales in
the year 2000 for this sector. Offsetting some of the decrease was an increase
of 77% of U. S. transmission product sales in 1999 as compared to 1998.
Transmission products increased their share of total U. S. Test equipment Sector
sales to 38% in 1999 from 16% in 1998. The sales of CXR, S.A., based in France,
grew in 1999 compared to 1998, but was offset by a decline in the value of the
Franch Franc in relation to the U.S. dollar.
Net sales for the Component Sector decreased by $2,332,000 or 18.8% in
1999 as compared to 1998. The sales decline resulted from the discontinuance of
the XCEL-Lite products, discontinuance of low margin subsystem assemblies, loss
of keypad business for NCR in Scotland and a decline in the switch business of
about $743,000 in sales for 1999 as compared to 1998.
The Circuits Sector, exclusive of the sold operations, realized a
reduction in sales of $882,000 or 29.6%. The reduction in sales was primarily
the result of the lack of working capital available to acquire the materials
necessary to support customer delivery requirements.
-16-
GROSS PROFIT
The composition of consolidated gross profit by business sector and the
percentages of related net sales are as follows for the years ended December 31,
1999 and 1998.
1999 1998
----------- -----------
(DOLLARS IN THOUSANDS)
Sector
------
Test Equipment $ 5,216 33.3% $ 8,052 45.9%
Components 3,606 35.8% 4,650 37.5%
Circuits 70 2.7% 688 9.4%
Circuits - HyComp Warranty (250) --
----------- -----------
Total Gross Profit $ 8,642 30.5% $ 13,390 35.9%
=========== ===========
Consolidated gross profit as a percentage of net sales decreased 5.4
percentage points in 1999 as compared to 1998,
The gross profit for the Test Equipment Sector decreased to 33.3% in
1999 from 45.9% in 1998. The major reasons for the decline were a 48% reduction
in the relatively high margin older test instrument sales and a 77% increase in
lower margin transmission product sales. The gross margin was also negatively
affected by the total reduction in sales that caused a lower absorption of fixed
costs. In addition, CXR has been forced to use higher cost suppliers than those
used previously due to the Company's failure to comply with some payment terms.
The decrease in gross profit of 1.7 percentage points in 1999 as
compared to 1998 for the Component Sector was mainly because of additional
costs, incurred and recorded in the fourth quarter, associated with the move
from the Ontario facility to the Rancho Cucamonga facility.
The gross margin of the Circuit Sector was reduced by 6.7 percentage
points in 1999 as compared to 1998. This reduction was primarily due to the sale
of HyComp in March 1999. Etch-Tek, the major remaining Circuit Sector business,
reduced its negative margin of 5.6% in 1998 to 4.4% in 1999, despite a reduction
in sales, due to cost cutting. Also a reserve of $250,000 was
established for potential warranty claims associated with products sold by
HyComp prior to its sale.
-17-
OPERATING EXPENSES
Operating expenses for the years ended December 31, 1999 and 1998 were
comprised of the following:
(In thousands)
1999 1998
------------- -------------
Commissions $ 786 $ 1,167
Other selling 3,467 4,230
------------- -------------
Total selling expense 4,253 5,397
General & administrative expense 6,542 6,429
------------- -------------
Total selling, general & administrative $ 10,795 $ 11,826
============= =============
Engineering & product development $ 1,873 $ 2,454
============= =============
Total selling expense as a percentage of net sales was 15.0% and 14.5%
for the years ended December 31, 1999 and 1998, respectively. Commission expense
as a percentage of net sales was 2.8% in 1999 as compared to 3.1% in 1998. Total
selling expenses for 1999 were $1,144,000 less than in 1998. The reduction in
selling expenses is the result of the divestitures of HyComp and XCEL Arnold
Circuits to the extent of $475,000 of the reduction. The remaining difference of
$669,000 was due to reductions in sales volumes, cost reductions in the Test
Equipment Sector and the elimination of product lines in the Component Sector
that required substantial selling efforts.
General and administrative expense increased by $113,000 in 1999 from
1998. Such expenses represented 23.1% of net sales in 1999 as compared to 17.2%
of net sales in 1998. This increase largely resulted from $522,000 paid in the
Company's common stock and warrants associated with the Company's program to
retain its listing on the Nasdaq SmallCap Market that was unsuccessful. These
expenses are non recurring. Offsetting such increases in general and
administrative expenses were reductions in expenses due to the transfer of the
administrative functions of CXR Telcom to the corporate office and the reduction
in such expenses as a result of the divestitures of XCEL Arnold Circuits, Inc.
and HyComp, Inc.
Engineering and product development costs originated principally from
the research and product development activities of the Test Equipment Sector and
decreased by $581,000 in 1999 from 1998. $219,000 of this reduction was due to
the divestiture of HyComp, Inc. on March 31, 1999. Also, in May 1999, the
Company eliminated the CXR engineering function in Fremont, California thereby
reducing the Test Equipment Sector's engineering expense by $294,000. The
Company's engineering staff for its U. S. based test equipment products is now
primarily operating out of the St. Charles, Illinois facility. The Company
believes that engineering and product development are important to its future
profitability. All engineering for its instrumentation products has been
consolidated in France at its CXR, S.A. facility and a higher level of
engineering expense at both St. Charles, Illinois and France is expected in
2000.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $264,000 in 1999 compared to 1998
resulted principally from decreased average borrowings during the respective
periods. Other expenses of $390,000 in 1999 include a $452,000 write-off of a
note receivable related to the divestiture of XCEL Arnold Circuits, Inc. This
expense was offset with the net effect of the equity in earnings of the
unconsolidated subsidiary and the write-down of the Company's investment in this
subsidiary.
INCOME TAXES
Income taxes, while nominal in both respective periods, consist
primarily of foreign taxes as the Company is in a loss carryforward position for
federal income tax purposes. At December 31, 1999, the Company has total net
deferred income tax assets of approximately $18,335,000. Such 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 such assets is not more likely than not in light of the Company's
recurring losses from operations.
-18-
YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997
NET SALES
Consolidated net sales decreased by $5,837,000 or 13.5% in 1998
compared with 1997. This decrease in sales was due in large part to the sale of
XCEL Arnold as of March 31, 1998. The table below sets forth the composition
of consolidated net sales by business sector, separately identifying the
operations of XCEL Arnold during the years ended December 31, 1998 and 1997.
1998 1997
---- ----
INCREASE/(DECREASE)
Sector (IN THOUSANDS) VARIANCE PERCENT
----------- ----------- ----------- ----------- -----------
Test Equipment $ 17,532 $ 15,054 $ 2,478 16.5%
Components 12,412 12,197 215 1.8%
Circuits 5,807 6,817 (1,010) (14.8)%
XCEL Arnold (sold 3/31/98) 1,510 9,030 (7,520) (83.3)%
----------- ----------- -----------
Total Sales $ 37,261 $ 43,098 $ (5,837) (13.5)%
=========== =========== ===========
During 1998, the Test Equipment Sector experience a substantial
increase in net sales in that Sector's French business operation, CXR, S.A,
which increased sales to $2,668,000 or 31.5% over its sales levels in 1997. The
Sector's CXR Telcom business unit experience a slight decline in sales of
$190,000 or 2.8% compared with prior year as the growth in the sale of new test
instruments substantially replaced products which are reaching the end of their
life. The growth in the French business operation resulted from increased sales
of both internally produced and third party resale products..
Net sales in the Component Sector increased only slightly as sales of
digital switch products increased in 1998 to offset a decline in sales of custom
engineered subsystem component and display products, both of which have now been
discontinued as part of the Company's strategic decision to focus its attention
and resources on only higher margin products and core instrumentation and test
products. The backlog for this Sector rose approximately 11% or $685,000 from
December 31, 1997 to December 31, 1998 indicating a continued demand for both
digital switch products, despite the aging of the product line, and custom power
supply products which are manufactured and distributed in the Sector's United
Kingdom operations.
Overall Circuits Sector sales, excluding XCEL Arnold, decreased as
sales for XIT's XCEL Etch-Tek division ("Etch-Tek") decreased approximately $1
million from 1997 levels, particularly in the latter half of 1998, as
insufficient working capital was available to enable Etch-Tek to acquire the
necessary raw materials and process supplies to accept higher levels of
"quick-turn" (short manufacturing time) order commitments. The sales at Etch-Tek
are not expected to return to former levels in the foreseeable future and the
Company has instituted significant cost reduction measures to bring the
operation's overhead expenses into line with anticipated internal requirements
and outside customer sales levels.
-19-
GROSS PROFIT
The composition of consolidated gross profit by business sector and the
percentages of related net sales are as follows for the years ended December 31,
1998 and 1997.
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
Sector
------
Test Equipment $ 8,052 45.9% $ 6,319 42.0%
Components 4,650 37.5% 2,863 23.5%
Circuits 688 9.4% 1,246 7.9%
----------- -----------
Total Gross Profit $ 13,390 35.9% $ 10,428 24.2%
=========== ===========
Consolidated gross profit as a percentage of net sales increased 11.7%
percentage points in 1998 from 1997, as the impact of the higher margin sales in
the Test Equipment Sector represented a larger component of the consolidated
sales mix for 1998. Gross profit margin percentages in the Test Equipment Sector
increased in 1998 from 1997 and the Sector's net sales as a percent of total net
sales increased to 47.1% in 1998 from 34.9% in 1997. Accordingly, the Company
generated an increase of approximately $3.0 million in gross profit on $5.8
million less in net sales. Additionally, gross profit margins as a percent of
net sales rose substantially in the Components Sector where net sales remained
stable.
The improvement in gross profit percentage for the Test Equipment
Sector resulted from the introduction in early 1998 of a new line of test
instruments at the Company's CXR Telcom subsidiary. These new,
software-intensive test instruments were designed to replace aging,
hardware-intensive products which had comparatively lower margins. Additionally,
sales mix at the Company's CXR, S.A subsidiary shifted to higher margin,
internally manufactured products in 1998 and as management sought to improve
profits through the addition of new third-party products.
The improvement in gross profit percentage for the Components Sector
was the combined result of (i) a favorable product mix shift to higher margin
digital switch products noted above under Net Sales and (ii) relatively higher
margins for products sold by XCEL Power Systems, Inc., located in the U.K.
("XPS"), in 1998 which also experienced a shift in product mix as management
focused sales efforts on more desirable custom power supply products with
associated higher gross profit margins.
The increase in gross profit percentage for the Circuits Sector was
principally the result of the sale of XCEL Arnold and the associated avoidance
of continued negative margins at that operation in 1998 as compared with 1997,
the effect of which was partially offset by relatively higher costs for the
Sector's Etch Tek division's product sales in 1998 compared with 1997 due to the
underabsorption of fixed manufacturing costs related to declining sales levels.
-20-
OPERATING EXPENSES
Operating expenses for the years ended December 31, 1998 and 1997 were
comprised of the following:
1998 1997
------------- -------------
Commissions $ 1,167 $ 1,511
Other selling 4,230 3,690
------------- -------------
Total selling expense 5,397 5,201
General & administrative expense 6,429 6,160
------------- -------------
Total selling, general & administrative $ 11,826 $ 11,361
============= =============
Engineering & product development $ 2,454 $ 2,046
============= =============
Total selling expense as a percentage of net sales was 14.5% and 12.1%
for the years ended December 31, 1998 and 1997, respectively. Commissions as a
percentage of net sales decreased slightly from 3.5% in 1997 to 3.1% in 1998 as
a result of and in direct relation to the decrease in Circuits Sector sales. In
contrast to Components Sector sales which are primarily achieved through direct
selling, the majority of Circuits Sector sales are made through manufacturer
representatives. The increase in other selling expense, which consists of sales
and marketing departmental costs, from 1997 to 1998, occurred principally in the
Test Equipment Sector as the other Sectors remained relatively stable. This
increase in the Test Equipment Sector was the result of the inclusion of CXR's
operations for the entire twelve months in 1998 versus nine months in 1997
subsequent to the Merger on March 26, 1997.
General and administrative expense increased by $269,000 in 1998 versus
1997. This increase occurred in the Test Equipment Sector and was the result of
the inclusion of CXR's operations for the entire twelve months in 1998 versus
nine months in 1997. General and administrative expenses represent not only
those costs associated with general corporate overhead but also reflects the
dispersion of the Company's business operations onto three continents as well as
the broad diversity of products which are produced in each of the local markets
served by those business operations. Additionally, included in this category are
expenses associated with legal matters which, although resolved in late 1998 and
early 1999, pre-date the Merger (see Item 3 - Legal Proceedings and Note 14 to
the Consolidated Financial Statements included elsewhere in this report).
Engineering and product development costs originated principally from
the research and product development activities of the Test Equipment Sector and
increased by $408,000 in 1998 versus 1997 as additional engineering staff
associated with the introduction of new test instruments was added.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $220,000 in 1998 from 1997 resulted
principally from decreased average borrowings during the respective periods.
Fluctuations in other expense (income), net resulted principally from
differences in foreign currency exchange gains and losses incurred during the
respective periods. Other income in 1998 also included the gain on the sale of
XCEL Arnold of $580,000.
INCOME TAXES
Income taxes, while nominal in both respective periods, consists
primarily of foreign taxes as the Company is in a loss carryforward position for
Federal income tax purposes. At December 31, 1998, the Company has total net
deferred income tax assets of approximately $16,591,000. Such 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 such assets is not more likely than not in light of the Company's
recurring losses from operations.
-21-
LIQUIDITY AND CAPITAL RESOURCES
The Company generated $1,166,000 in cash flow from operations in 1999.
The major contributions to the cash flow were substantial decreases in accounts
receivable, inventories and prepaid expenses and other assets. Also contributing
to the cash flow was an increase in accounts payable. In addition to the cash
generated by operations, the Company received $868,000 cash for the sale of its
HyComp, Inc. subsidiary. The cash generated from operations and investing
activities was used to pay down $1,685,000 of short and long-term debt. The
Company's cash flow in 1999 compares favorably to 1998 in which the Company used
$3,133,000 to fund its operations and 1997 in which the Company's operations
used cash of $1,668,000.
The improvements in operating cash flow are the result of management's
efforts to cut costs, reorganize and improve the efficiency of the organization.
Capital expenditures were $124,000, $182,000 and $424,000 in the years
ended December 31, 1999, 1998, and 1997, respectively. There are currently no
formal commitments for future capital expenditures.
On January 7, 2000, the Company sold all of its interest in the common
stock of Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc., a public
company based in Alberta, Canada. As consideration, the Company received
$520,000 in cash and 28,340 shares of Wi-LAN common stock valued at
approximately $720,000 at the time of the transaction. The Company used the cash
to pay down debt. In conjunction with the transaction, the Company's lender,
Congress Financial Corporation ("Congress"), agreed to waive certain defaults of
the loan agreement relating to a $350,000 overdraft the Company was required to
pay down by September 22, 1999 and eliminated the requirement of a $350,000
target reserve. The target reserve was a funding requirement to pay down the
principal of the term loan by $350,000 in addition to the regular monthly
principal payments.
Due to rules of the Toronto Stock exchange, where Wi-LAN, Inc. stock
trades, the Company is prohibited from selling its interest in the Wi-LAN, Inc.
stock for six months after acquisition because the stock was acquired in a
transaction related to the sale or purchase of a company. However, the Company's
lender did increase the Company's borrowing availability by $400,000 on February
29, 2000 based on the market value of the Company's 28,340 shares of Wi-LAN
stock on that date of $1,571,000.
The financing facility provided by Congress expires on June 23, 2000.
Congress has informed management that it will not renew the loans and such loans
will be due and payable on that day. The Company has begun the process of
obtaining alternative sources of financing. If the Company is unable to secure
alternative financing by the date of the expiration of the Congress financing
facility, the Company may not be able to continue its domestic operations.
Management believes the Company's cash position is inadequate for the
capital needs of the Company. The Company is unable to pay some of its vendors
on a timely basis and some suppliers have placed the Company on COD terms.
Management has taken actions to improve the cash position of the Company such as
selling the DTS stock, relocating the corporate headquarters and XIT, subleasing
part of the Fremont, California facility, restructuring CXR and streamlining the
Test Equipment Sector's management structure. In order to further enhance the
Company's performance, management is considering plans to divest itself from the
Circuit Sector, convert CXR to use contract manufacturers and pursue strategic
acquisitions that will add profit to the Company. The Company has recently
considered an offer to buy its XIT components business. In February 2000, the
Company decided not to sell XIT based on the offer presented.
-22-
The Company is implementing a corporate finance program designed to
improve its working capital structure by replacing its existing domestic credit
facilities. The Company is actively searching for alternative financing to
replace the current domestic credit facility. Although no replacement lender has
been selected as of the date of this report, the Company has identified several
prospective lenders, one of whom has submitted a proposal to the Company. The
finance program also involves the potential private placement of certain debt or
equity securities. Additionally, management is exploring the potential to
further leverage its Wi-LAN stock which has a market value of approximately
$1,600,000, at the date of this report. Congress is at present lending $400,000
against this asset. In addition, as part of an acquisition financing, the
Company plans to leverage its existing U. K. operations to provide additional
working capital for operations and acquisitions. Finally, management has
developed and continues to implement plans to reduce existing cost structures,
improve operating efficiencies and strengthen the Company's operating
infrastructure.
The accompanying consolidated financial statements contained elsewhere
in this report have been prepared assuming that the Company will continue as a
going concern. The Company has suffered recurring losses from operations and is
in default of a provision of its domestic credit facility, the effects of which
raise substantial doubt about its ability to continue as a going concern (see
Note 16 to the Consolidated Financial Statements included elsewhere in this
report). The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
YEAR 2000
To date, the Company experienced no material effects related to
computer operations and the arrival of the year 2000 as of the date of this
report. Management does not expect any disruptions due to the year 2000 as
management believes all its current systems are year 2000 compliant.
At certain of its domestic facilities, the Company has installed
accounting and operations management computer applications which are Year 2000
compliant and which operate on computer operating systems that are also Year
2000 compliant. The Company did not initiate such changes in application and
operating software systems in order to accommodate the Year 2000 issue but
rather to upgrade and enhance its management information systems capability. As
a part of its selection criteria, the Company considered the impact of the Year
2000 issue. The Company has not experienced Year 2000 disruptions with its
suppliers or customers and management believes that such entities are Year 2000
compliant with respect to their systems that could affect the Company.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either the Company or its
various operating subsidiaries.
OUTLOOK FOR THE COMPANY
The Company's overall strategy is to expand its Test Equipment Sector
through the acquisition and/or development of new products, product lines and/or
separate operating companies while concurrently continuing to evaluate existing
lower-margin or loss operations elsewhere throughout the Company, with a view
toward divestment and downsizing so as to redirect capital to the higher margin
Test Equipment Sector. In addition, the Company will continue to seek to
maximize short to intermediate term profitability on existing maturing product
lines in all sectors through price increases and lower operating costs. Over the
last year, the Test Equipment Sector in the United States market has
successfully integrated the products of its state-of-the-art, customer-premises
-23-
hand-held test equipment acquired from Critical Communications, Inc. The
acquired products have replaced existing, aged products and have become the
majority portion of the net sales of the CXR US operation. Production of this
product line has been transferred to and consolidated with the CXR Telcom
facility in Fremont, California and the St. Charles facility has been
repositioned as an engineering, R&D and customer support center. Additionally,
the French Test Equipment subsidiary has begun to market a broader range of
test, transmission and networking products sourced through licensing, reseller
and other agreements.
CXR Telcom has released a new universal ADSL/xDSL facility test set
incorporating IEEE 23 tone test technique that should result in a significant
increase in the sale of its 704A universal test set. Also, CXR, S. A. has
introduced in Europe its new high speed mSDSL multirate modem. This new Fastline
2000 modem varies its transmission rate to provide maximum performance over
single pair copper wires. In the Component Sector, XIT's Digitran Division has
achieved recertification by the U. S. government's Defense Supply center to
manufacture the Digitran patented family of Binary Coded Digital switches for
the government's Qualified Parts List.
In the US Test Equipment Sector, the recent completion of mergers of
various Regional Bell Operating Companies is beginning to produce new
opportunities. The consolidation of Southwest Bell and Pacific Bell is now
complete and release of equipment purchases has once again returned to
traditional levels. Although the NYNEX and Bell Atlantic merger had initially
created some uncertainty and delayed capital equipment purchases, this merger,
now being complete, has afforded the Company the opportunity to provide the
combined entity with the Company's newer test equipment products. Domestic sales
of transmission products have expanded with the introduction of Remote Access
Server products for Internet applications as well as for other transmission
products for billing and voice mail applications which are currently being sold
to SBC Communications, GTE and others. Additionally, in-house efforts are being
directed toward developing software which will allow the recently acquired test
equipment products to be marketed in both Europe and Latin America.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information appears in a separate section of this Report following
Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-24-
PART III
ITEMS 10 - 13.
The information required by Items 10 - 13 will either be set forth in
the definitive proxy statement in respect of the 2000 Annual Meeting of
Stockholders of the Company to be filed within 120 days of December 31, 1999
pursuant to Regulation 14A under the Securities Exchange Act of 1934, which is
incorporated herein by reference, or the required information will be included
as an amendment to this Form 10-K Annual Report filed on or before April 29,
2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) Reference is made to the "Index to Consolidated Financial
Statements and Financial Statement Schedule" appearing in a
separate section of this Report following this Part IV.
(a)(3) Exhibits. See attached Exhibit Index.
(b) None
(c) The exhibits required by this portion of Item 14 are submitted
as a separate section of this Report.
(d) None.
-25-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MicroTel International Inc.
By: /S/ Carmine T. Oliva
-----------------------------------
Carmine T. Oliva
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/S/ Carmine T. Oliva President, Chief Executive March 30, 2000
- ----------------------------- Officer and Director
Carmine T. Oliva (Principal Executive Officer)
/S/ Laurence P. Finnegan, Jr. Director March 30, 2000
- -----------------------------
Laurence P. Finnegan, Jr.
/S/ Robert B. Runyon Director March 30, 2000
- -----------------------------
Robert B. Runyon
/S/ Randolph D. Foote Chief Financial Officer March 30, 2000
- ----------------------------- (Principal Accounting and
Randolph D. Foote Financial Officer)
-26-
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
2. Merger Agreement dated December 31, 1996 between XIT
Corporation, XIT Acquisition, Inc. and MicroTel
International, Inc.(1)
3.1 Certificate of Incorporation of MicroTel International, Inc.
as amended to date.(2)
3.2 Bylaws of MicroTel International, Inc.(3)
3.3 Amended Certificate of Incorporation of MicroTel
International, Inc.(7)
4.1 Certificate of Designations, Preferences and Rights of
Preferred Stock of MicroTel International Inc., a
Delaware Corporation. (12)
4.2 Warrant to Purchase Common Stock of MicroTel International,
Inc. Issued to DDC.(4)
4.3 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Yorkton Securities, Inc.(7)
4.4 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to Entrenet Group, L.L.C.(7)
4.5 Form of Warrant to Purchase Common Stock of MicroTel
International, Inc. issued to various subscribers.(7)
4.6 Amended Certificate of Designations, Preferences and Rights of
Preferred Stock of MicroTel International, Inc. a Delaware
Corporation.(11)
4.7 Second Amended and Restated Certificate of Designations,
Preferences and Rights of Preferred Stock of MicroTel
International Inc.(#)
10.1 1986 Incentive Stock Option Plan.(3)
10.2 Form of Officers Deferred Compensation Agreement by and
between Raymond E. Jacobson and CXR Corporation.(5)
10.3 Agreement from San Jose National Bank for CXR Telcom
Corporation dated May 19, 1995.(2)
10.4 Qualified Employee Stock Purchase Plan.(3)
10.5 1993 Incentive Stock Option Plan.(6)
10.6 Stock Purchase Agreement with DDC.(4)
-27-
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.7 First Amendment to Stock Purchase Agreement with DDC.(4)
10.8 Agreement between MicroTel International, Inc. and Elk
International Corporation, Ltd. dated November 15, 1996
(without Exhibits).(8)
10.9 Settlement Agreement between MicroTel International, Inc. and
Daniel Dror dated December 3, 1996 (without Exhibits).(8)
10.10 Agency Agreement between MicroTel International, Inc. and
Yorkton Securities, Inc.(7)
10.11 Form of Subscription Agreement between MicroTel International,
Inc. and various subscribers.(7)
10.12 Employment Arrangement between Henry Mourad and Registrant
(without Exhibits).(7)
10.13 Employment Arrangement between Barry Reifler and Registrant
(without Exhibits).(7)
10.14 Employment Agreement dated January 1, 1996 between XIT and
Carmine T. Oliva.(8)
10.15 Lease Agreement between XIT Corporation and P&S
Development.(8)
10.16 Lease Agreement between XIT Corporation and Don Mosco.(8)
10.17 General Partnership Agreement between XIT Corporation and P&S
Development.(8)
10.18 Lease Agreement between XCEL Arnold Circuits, Inc. and RKR
Associates.(8)
10.19 Option Agreement between MicroTel International, Inc. and Elk
International Corporation dated November 15, 1996.(8)
10.20 Amendment to Option Agreement between MicroTel International,
Inc. and Daniel Dror dated November 15, 1996.(8)
10.21 Option Agreement between MicroTel International, Inc. and Elk
International Corporation dated December 3, 1996.(8)
10.22 Warrant to Purchase Common Stock of MicroTel International,
Inc. issued to Elk International Corporation.(8)
10.23 Agreement of Settlement and Mutual Release between MicroTel
International, Inc. and Francis John Gorry dated June 28,
1996.(8)
-28-
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.24 Amended Agreement of Settlement and Mutual Release between
MicroTel International, Inc. and Francis John Gorry dated
November 30, 1996.(8)
10.25 Promissory Note between MicroTel International, Inc. and Jack
Talan dated February, 1997.(8)
10.26 Lease Agreement between SCI Limited Partnership-I and CXR
Telcom Corporation, Dated July 28, 1997.(9)
10.27 Share Exchange Agreement among CXR Telcom Corporation,
MicroTel International, Inc. and Eric P. Bergstrom, Steve T.
Robbins and Mike B. Peterson, Dated October 17, 1997.(10)
10.28 Indemnity Escrow Agreement among CXR Telcom Corporation,
MicroTel International, Inc., Eric P. Bergstrom, Steve T.
Robbins and Mike B. Peterson and Gallagher, Briody & Butler,
Dated October 17, 1997.(10)
10.29 Form of Contingent Stock Agreement among CXR Telcom
Corporation, MicroTel International, Inc., Critical
Communications Incorporated, Mike B. Peterson, Eric P.
Bergstrom and Steve T. Robbins, Dated October 17, 1997.(10)
10.30 Form of Severance Agreement among CXR Telcom Corporation,
Critical Communications Incorporated, Mike B. Peterson, Eric
P. Bergstrom and Steve T. Robbins, Dated October 17, 1997.(10)
10.31 Asset Purchase Agreement, among Arnold Circuits, Inc, BNZ
Incorporated, Robert Bertrand, XCEL Arnold Circuits, Inc., XIT
Corporation and Mantalica & Treadwell (without exhibits),
Dated January 9, 1998.(10)
10.32 Addendum No. 1 to Asset Purchase Agreement, among Arnold
Circuits, Inc, BNZ Incorporated, Robert Bertrand, XCEL Arnold
Circuits, Inc., XIT Corporation and Mantalica & Treadwell,
Dated March 31, 1998.(10)
10.33 Bill of Sale and Assignment and Assumption Agreement between
XCEL Arnold Circuits, Inc. and Arnold Circuits, Inc., Dated
March 31, 1998.(10)
10.34 Warrant to Purchase Common Stock of MicroTel International,
Inc. issued to BNZ Incorporated.(10)
10.35 Guaranty of Robert Bertrand in favor of XCEL Arnold Circuits,
Inc., Dated March 31, 1998.(10)
10.36 Guaranty of BNZ Incorporated in favor of XCEL Arnold Circuits,
Inc., Dated March 31, 1998.(10)
-29-
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.37 Pledge and Escrow Agreement between BNZ Incorporated and XCEL
Arnold Circuits, Inc., Dated March 31, 1998. (10)
10.38 Promissory Note between Arnold Circuits, Inc. and XCEL Arnold
Circuits, Inc. Dated March 31, 1998. (10)
10.39 Promissory Note between XIT Corporation and Arnold Circuits,
Inc. Dated March 31, 1998. (10)
10.40 Security Agreement between Arnold Circuits, Inc and XCEL
Arnold Circuits, Inc. Dated March 31, 1998. (10)
10.41 Joint Marketing and Supply Agreement between Arnold Circuits,
Inc and XCEL Etch Tek, Dated March 31, 1998. (10)
10.42 Loan and Security Agreement between Congress Financial
Corporation (Western) and MicroTel International, Inc., XIT
Corporation, CXR Telcom Corporation and HyComp, Inc. dated
June 23, 1998. (11)
10.43 Security Agreement between Congress Financial Corporation
(Western) and XIT Corporation dated June 23, 1998. (11)
10.44 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Fortune
Fund Limited Seeker III. (11)
10.45 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Rana
General Holding, Ltd. (11)
10.46 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Resonace
Ltd. (11)
10.47 Form of Warrant to purchase the Common Stock of MicroTel
International, Inc. issued in connection with the sale of
Series A Convertible Preferred Stock. (11)
10.48 Employment Agreement between MicroTel International, Inc. and
James P. Butler dated May 1, 1998. (11)
10.49 Asset Purchase Agreement between Hycomp, Inc. and HyComp
Acquisition Corp., c/o SatCon Technology Corporation dated
March 31, 1999. (13)
10.50 Lease agreement between MicroTel International Inc. and
Property Reserve Inc. dated September 9, 1999. (14)
-30-
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.51 Lease agreement between XIT, Inc. and Rancho Cucamonga
Development Company dated August 30, 1999. (14)
21.1 List of Subsidiaries of MicroTel International, Inc.(#)
23.1 Consent of Independent Certified Public Accountants (#)
27 Financial Data Schedule. (#)
- -----------------------------
(#) Filed herewith.
(1) Incorporated by reference to MicroTel International, Inc.
report on Form 8-K filed as Exhibit 1 to Item 2 of the Report
on January 21, 1997 (File No. 1-10346).
(2) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December 31,
1995 (File No. 1-10346).
(3) Incorporated by reference to CXR Corporation Registration
Statement on Form S-4 No. 33-30818.
(4) Incorporated by reference to CXR Corporation annual report on
Form 10-K for the year ended June 30, 1994 (File No. 1-10346).
(5) Incorporated by reference to CXR Telecom Corporation annual
report on Form 10-K for the year ended June 30, 1993 (File No.
1-10346).
(6) Incorporated by reference to CXR Corporation Registration
Statement on Form S-8 No. 33-77926.
(7) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December 31,
1996 (File No. 1-10346).
(8) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K/A for the year ended December 31,
1996 (File No. 1-10346).
(9) Incorporated by reference to MicroTel International, Inc.
Registration Statement on Form S-8 No. 333-29925.
(10) Incorporated by reference to MicroTel International, Inc.
annual report on Form 10-K for the year ended December 31,
1997 (File No. 1-10346).
(11) Incorporated by reference to MicroTel International, Inc.
interim report on Form 10-Q for the six months ended June 30,
1998 (File No. 1-10346).
(12) Incorporated by reference to Microtel International, Inc.
Registration Statement on Form S-1 No. 333 - 64695
(13) Incorporated by reference to MicroTel International, Inc.
interim report on Form 10-Q for the six months ended June 30,
1999 (File No. 1-10346).
(14) Incorporated by reference to MicroTel International, Inc.
interim report on Form 10-Q for the nine months ended
September 30, 1999 (File No. 1-10346).
-31-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
Consolidated Financial Statement Schedule II - Valuation and Qualifying Accounts F-35
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
MicroTel International, Inc.
We have audited the accompanying consolidated balance sheets of
MicroTel International, Inc. as of December 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1999. We have also
audited the information for each of the years in the three-year period ended
December 31, 1999 in the financial statement schedule listed in the accompanying
index. These financial statements and the financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
statement schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial statement schedule. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial
statements and financial statement schedule. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MicroTel
International, Inc. at December 31, 1999 and 1998, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
Also, in our opinion, the financial statement schedule referred to
above presents fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
16 to the consolidated financial statements, the Company has suffered recurring
losses from operations and is in default of a certain covenant of its domestic
credit facility agreement, the effects of which raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 16. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/S/ BDO Seidman, LLP
Orange County, California
March 3, 2000
F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 1998
---- ----
ASSETS (NOTES 7 AND 8)
Current assets:
Cash and cash equivalents $ 481 $ 572
Accounts receivable, net of allowance for doubtful accounts of
$202 and $275 6,519 7,337
Current portion of notes receivable (Notes 3 and 6) -- 291
Inventories (Note 4) 4,181 6,426
Prepaid and other current assets 578 926
--------------- ---------------
Total current assets 11,759 15,552
Property, plant and equipment, net (Note 5) 1,393 1,939
Goodwill, net of accumulated amortization of $433 and $239 (Notes 2
and 3) 1,507 1,701
Notes receivable, less current portion (Note 3) - 533
Investment in affiliates (Notes 3 and 6) 1,240 150
Other assets 722 1,367
--------------- ---------------
$ 16,621 $ 21,242
=============== ===============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 7) $ 2,107 $ 3,379
Current portion of long-term debt (Note 8) 1,422 805
Accounts payable 4,771 4,269
Accrued expenses 2,985 3,312
--------------- ---------------
Total current liabilities 11,285 11,765
Long-term debt, less current portion (Note 8) 165 1,430
Other liabilities 782 954
Minority interest (Note 3) -- 95
--------------- ---------------
Total liabilities 12,232 14,244
Convertible redeemable preferred stock, $10,000 unit value.
Authorized 200 shares; issued and outstanding 59.5 shares in
1999 and 161 shares in 1998 (aggregate liquidation preference of
$595 and $1,610, respectively) (Note 9) 588 1,516
Commitment and contingencies (Notes 10, 14 and 16)
Subsequent event (Note 3)
Stockholders' equity (Notes 2, 3, 9, 10 and 14):
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
no shares issued and outstanding -- --
Common stock, $.0033 par value. Authorized 25,000,000 shares;
issued and outstanding 18,152,000 and 12,622,000 shares 60 42
Additional paid-in capital 23,726 20,463
Accumulated deficit (19,759) (15,122)
Accumulated other comprehensive income (loss) (226) 99
--------------- ---------------
Total stockholders' equity 3,801 5,482
--------------- ---------------
$ 16,621 $ 21,242
=============== ===============
See accompanying notes to consolidated financial statements.
F-3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997
---- ---- ----
Net sales (Note 15) $ 28,301 $ 37,261 $ 43,098
Cost of sales 19,659 23,871 32,670
--------------- --------------- ---------------
Gross profit 8,642 13,390 10,428
Operating expenses:
Selling, general and administrative 10,795 11,826 11,361
Engineering and product development 1,873 2,454 2,046
Write-down of goodwill (Note 11) -- -- 5,693
--------------- --------------- ---------------
Loss from operations (4,026) (890) (8,672)
Other income (expense):
Interest expense (411) (675) (895)
Gain on sale of subsidiary/investment,
net (Notes 3 and 6) 359 580 --
Other, net (Note 3) (390) (99) (29)
--------------- --------------- ---------------
Loss before income taxes (4,468) (1,084) (9,596)
Income taxes (Note 12) 128 101 97
--------------- --------------- ---------------
Net loss $ (4,596) $ (1,185) $ (9,693)
--------------- --------------- ---------------
Other comprehensive income (loss)
Foreign currency translation adjustment (325) 206 (260)
--------------- --------------- ---------------
Total comprehensive income (loss) $ (4,921) $ (979) $ (9,953)
=============== =============== ===============
Basic and diluted loss per share (Note 13) $ (.28) $ (.10) $ (.96)
=============== =============== ===============
See accompanying notes to consolidated financial statements.
F-4
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
Accumulated
Common Stock Additional Other
------------ Paid-in Accumulated Comprehensive
Shares Amount Capital Deficit Income (Loss) Total
--------- -------- ------------ -------------- -------------- -----------
Balance at December 31, 1996 6,064 $ 20 $ 8,998 $ (4,124) 153 $ 5,047
Stock issued in connection with reverse
acquisition (Note 2) 3,186 10 5,235 -- -- 5,245
Stock issued in connection with private
placement (Note 10) 2,000 7 4,251 -- -- 4,258
Stock issued in connection with
acquisition (Note 3) 500 2 1,123 -- -- 1,125
Stock issued for debt conversion (Note 10) 55 -- 44 -- -- 44
Stock issued upon exercise of stock options 30 -- 97 -- -- 97
Stock issued in connection with settlement
of dispute (Note 10) 80 -- 190 -- -- 190
Stock issued as compensation and under
stock purchase plan 11 -- 22 -- -- 22
Foreign currency translation adjustment -- -- -- -- (260) (260)
Accretion of preferred stock -- -- -- (60) -- (60)
Net loss -- -- -- (9,693) -- (9,693)
--------- -------- ------------ -------------- ---------------- -----------
Balance at December 31, 1997 11,926 39 19,960 (13,877) (107) 6,015
Stock issued upon conversion of preferred
stock (Note 9) 770 3 364 -- -- 367
Repurchase of stock issued in connection
with settlement of dispute (Note 10) (80) -- (168) -- -- (168)
Stock issued under stock purchase plan 7 -- 7 -- -- 7
Warrants issued in connection with
issuance of preferred stock (Note 9) -- -- 163 -- -- 163
Warrants issued for services -- -- 85 -- -- 85
Repricing of warrants issued in connection
with issuance of preferred stock (Note 9) -- -- 52 -- -- 52
Foreign currency translation adjustment -- -- -- -- 206 206
Accretion of preferred stock -- -- -- (60) -- (60)
Net loss -- -- -- (1,185) -- (1,185)
--------- -------- ------------ -------------- ---------------- -----------
Balance at December 31, 1998 12,622 42 20,463 (15,122) 99 5,482
Stock issued upon conversion of preferred
stock (Note 9) 2,659 9 960 -- -- 969
Stock issued in connection with
acquisition (Note 3) 1,000 3 997 -- -- 1,000
Stock issued as compensation 1,716 6 1,077 -- -- 1,083
Stock and warrants issued in connection
with settlement of dispute (Note 14) 150 -- 73 -- -- 73
Stock issued under stock purchase plan 5 -- 2 -- -- 2
Warrants issued for services -- -- 63 -- -- 63
Repricing of warrants issued in connection
with issuance of preferred stock (Note 9) -- -- 91 -- -- 91
Foreign currency translation adjustment -- -- -- -- (325) (325)
Accretion of preferred stock -- -- -- (41) -- (41)
Net loss -- -- -- (4,596) -- (4,596)
--------- -------- ------------ -------------- ---------------- -----------
Balance at December 31, 1999 18,152 $ 60 $ 23,726 $ (19,759) $ (226) $ 3,801
========= ======== ============ ============== ================ ===========
See accompanying notes to consolidated financial statements.
F-5
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,596) $ (1,185) $ (9,693)
Adjustments to reconcile net loss to cash provided
by (used in) operating activities:
Depreciation and amortization 393 409 923
Amortization of intangible assets 540 449 358
Provision for doubtful accounts and notes
receivable 488 97 251
Provision for inventory obsolescence 1,145 885 3,134
Write-down of goodwill -- -- 5,693
Provision for impairment of investment 419 -- --
Equity in earnings of unconsolidated
investments (653) (24) 21
Gain on the sale of subsidiary/investment (359) (580) --
Stock and warrants issued for services 1,146 85 22
Repricing of warrants 91 52 --
Minority interest (33) 7 20
Changes in operating assets and liabilities:
Accounts receivable 782 (1,101) (554)
Inventories 741 (1,017) (1,011)
Prepaids and other assets 672 (411) 413
Accounts payable 621 (339) (755)
Accrued expenses and other liabilities (231) (460) (490)
--------------- --------------- ---------------
Cash provided by (used in) operating activities 1,166 (3,133) (1,668)
--------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (124) (182) (424)
Cash received on sale of subsidiary/investment 868 1,350 --
Cash acquired in acquisition/merger -- -- 273
Cash collected on notes receivable 9 451 125
--------------- --------------- ---------------
Cash provided by (used in) investing activities 753 1,619 (26)
--------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of notes payable (1,272) (251) (3)
Proceeds from long-term debt -- 1,542 163
Repayments of long-term debt (415) (2,916) (1,606)
Preferred stock dividends paid -- -- (140)
Proceeds from sale of preferred stock -- 2,000 --
Payment of preferred stock and debt issuance costs -- (423) --
Proceeds from sale of common stock 2 7 4,258
--------------- --------------- ---------------
Cash provided by (used in) financing activities (1,685) (41) 2,672
--------------- --------------- ---------------
Effect of exchange rate changes on cash (325) 206 57
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (91) (1,349) 1,035
Cash and cash equivalents at beginning of year 572 1,921 886
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 481 $ 572 $ 1,921
=============== =============== ===============
See accompanying notes to consolidated financial statements.
F-6
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 443 $ 652 $ 827
=============== =============== ===============
Income taxes $ 124 $ 138 $ 58
=============== =============== ===============
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Note receivable received upon sale of subsidiary $ -- $ 650 $ --
=============== =============== ===============
Warrants issued in connection with issuance of
preferred stock $ -- $ 163 $ --
=============== =============== ===============
Common stock issued upon conversion of preferred
stock $ 969 $ 367 $ --
=============== =============== ===============
Accretion of preferred stock $ 41 $ 60 $ 60
=============== =============== ===============
Issuance of common stock and warrants in
connection with settlement of dispute $ 73 $ -- $ 190
=============== =============== ===============
Repurchase of common stock issued in connection
with settlement of dispute in exchange for
payable $ -- $ 168 $ --
=============== =============== ===============
Issuance of common stock in connection with
acquisitions $ 1,000 $ -- $ 6,370
=============== =============== ===============
Issuance of common stock upon exercise of stock
options $ -- $ -- $ 97
=============== =============== ===============
Issuance of common stock upon conversion of debt
to equity $ -- $ -- $ 44
=============== =============== ===============
See accompanying notes to consolidated financial statements.
F-7
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(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 XIT Corporation
("XIT"). CXR Telcom Corporation and CXR, S.A. (collectively "CXR") design,
manufacture and market electronic telecommunication test equipment and data
communications equipment. XIT designs, manufactures and markets information
technology products, including displays and input components, subsystem
assemblies, power supplies and various printed circuits. The Company conducts
its operations out of various facilities in the U. S., France, England and Japan
and organizes itself in three product line sectors: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits.
BASIS OF PRESENTATION
As discussed more fully in Note 2, the Company merged with XIT on March
26, 1997. The merger was accounted for as a purchase of the Company by XIT in a
"reverse acquisition" because the existing stockholders of the Company prior to
the merger did not have voting control of the combined entity after the merger.
In a reverse acquisition, the accounting treatment differs from the legal form
of the transaction, as the continuing legal parent company is not assumed to be
the acquirer and the financial statements of the combined entity are those of
the accounting acquirer (XIT), including any comparative prior year financial
statements presented by the combined entity after the business combination.
Consequently, the consolidated financial statements include the accounts of XIT
and its wholly and majority-owned subsidiaries, and beginning March 26, 1997,
include the Company and its other subsidiaries, CXR Telcom Corporation and CXR,
S.A. (the "Former Company").
In connection with the reverse acquisition, the Company assumed the
number of authorized common shares of 25,000,000 and $.0033 par value per share
of the Former Company. Furthermore, the former stockholders of XIT were issued
approximately 6,199,000 shares of common stock, which resulted in a common share
exchange ratio of 1.451478. Accordingly, all references to the number of shares
and to the per share information in the accompanying consolidated financial
statements have been adjusted to reflect these changes on a retroactive basis.
The Company's minority investment in the common stock of Digital
Transmission Systems, Inc. (Note 3) and its 50% investment in a real estate
partnership (Note 6) are accounted for using the equity method.
All significant intercompany balances and transactions have been
eliminated in consolidation.
REVENUE RECOGNITION
Revenues are recorded when products are shipped.
F-8
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with
an original maturity of three months or less when purchased.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation and amortization are computed
principally using the straight-line method over the useful lives of the assets
(or lease term, if shorter) as follows:
Buildings 50 years
Machinery, equipment and fixtures 3-7 years
Leasehold improvements 5 years
Maintenance and repairs are expensed as incurred while renewals and
betterments are capitalized.
GOODWILL
Goodwill represents the excess of purchase price over the fair value of
net assets acquired through business combinations accounted for as purchases and
is amortized on a straight-line basis over its estimated useful life. During
1997, the Company wrote-down the value of goodwill by approximately $5.7 million
and reduced the estimated useful lives from 15 - 20 years to 10 years (see Note
11).
SOFTWARE DEVELOPMENT COSTS
Software development costs, including purchased technology, are
capitalized beginning when technological feasibility has been established or
when purchased from third parties and continues through the date of commercial
release. Amortization commences upon commercial release of the product and is
calculated using the greater of the straight-line method over three years or the
ratio of the products' current revenues divided by the anticipated total product
revenues. The carrying value of capitalized software development costs
aggregates $66,000 and $412,000 (net of accumulated amortization of $763,000 and
$417,000) at December 31, 1999 and 1998, respectively, and is included in other
assets in the accompanying consolidated balance sheets. Amortization relating to
the capitalized software of $346,000, $169,000 and $248,000 was charged to cost
of sales during 1999, 1998 and 1997, respectively.
F-9
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEBT ISSUANCE COSTS
The costs related to the issuance of debt and the redeemable preferred
stock are capitalized and amortized over the life of the instrument.
LONG-LIVED ASSETS
The Company reviews the carrying amount of its long-lived assets and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.
PRODUCT WARRANTIES
The Company provides warranties for certain of its products for periods
of generally one year. Estimated warranty costs are recognized at the time of
the sale.
INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred income taxes are recognized based on the differences
between financial statement and income tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the year and the change during the
year in deferred tax assets and liabilities.
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for its employee stock option plans, unless the exercise price of options
granted is less than fair market value on the date of grant. The Company has
adopted the disclosure provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation."
F-10
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated according to Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Basic earnings
(loss) per share includes no dilution and is computed by dividing income (loss)
available to common shareholders by the weighted average number of shares
outstanding during the year. Diluted earnings (loss) per share reflects the
potential dilution of securities that could share in the earnings of an entity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires all entities to disclose the fair
value of financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. This statement defines fair value of a financial instrument as the amount
at which the instrument could be exchanged in a current transaction between
willing parties. As of December 31, 1999 and 1998, the fair value of all
financial instruments approximated carrying value.
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses are reasonable estimates of their fair
value because of the short maturity of these items. The Company believes the
carrying amounts of its notes payable and long-term debt approximate fair value
because the interest rates on these instruments are subject to change with, or
approximate, market interest rates.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentration of credit risk, consist primarily of cash and accounts receivable.
The Company places its cash with high quality financial institutions. At times,
cash balances may be in excess of the amounts insured by the Federal Deposit
Insurance Corporation.
The Company's accounts receivable results from sales to a broad
customer base. The Company extends credit to its customers based upon an
evaluation of the customer's financial condition and credit history and
generally does not require collateral. Credit losses are provided for in the
financial statements and consistently have been within management's
expectations.
F-11
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The accounts of foreign subsidiaries have been translated using the
local currency as the functional currency. Accordingly, foreign currency
denominated assets and liabilities have been translated to U.S. dollars at the
current rate of exchange on the balance sheet date. The effects of translation
are recorded as a separate component of stockholders' equity in accumulated
other comprehensive income (loss). Exchange gains and losses arising from
transactions denominated in foreign currencies are translated at average
exchange rates and included in operations. Such amounts are not material to the
accompanying consolidated financial statements.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income (loss) and its components in a full set of general-purpose financial
statements. All prior period data presented have been restated to conform to the
provisions of SFAS 130.
REPORTABLE SEGMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 requires public business enterprises
to report certain information about operating segments in complete sets of
financial statements and in condensed financial statements of interim periods
issued to shareholders. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. All prior period
data presented has been restated to conform to the provisions of SFAS 131. The
Company has determined that it operates in three reportable segments:
Instrumentation and Test Equipment, Components and Subsystem Assemblies, and
Circuits.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to be consistent with the 1999 presentation.
(2) MERGER WITH XIT CORPORATION
On March 26, 1997, privately held XIT merged with a wholly-owned, newly
formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant
to the transaction, the former stockholders of XIT were issued approximately
6,119,000 shares of common stock of the Company, or approximately 66% of the
issued and outstanding common stock. In addition, holders of XIT stock options
and warrants at the date of the merger collectively had the right to acquire an
additional 2,153,000 shares of common stock. Collectively, the former XIT
stockholders owned, or had the right to acquire, approximately 65% of the common
stock of the Company on a fully-diluted basis as of the date of the transaction.
F-12
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(2) MERGER WITH XIT CORPORATION (CONTINUED)
As described in Note 1, the merger has been accounted for as a purchase
of the Company by XIT. Accordingly, the purchase price, consisting of the value
of the common stock outstanding of the Company at the date of the merger of
$5,011,000 plus the direct costs of the acquisition of $730,000, and the
acquired assets and liabilities of MicroTel were recorded at their estimated
fair values at the date of the merger. The excess of $4,998,000 of the purchase
price over the fair value of the net assets acquired was recorded as goodwill
and thereafter was amortized on a straight-line basis over 15 years.
In September 1997, the Company wrote-down the goodwill associated with
the merger to $998,000. Thereafter, the remaining goodwill is being amortized on
a straight-line basis over ten years (see Note 11).
The following represents the unaudited pro forma results of operations
as if the merger had occurred at the beginning of the year ended December 31,
1997.
1997
----
Net sales $ 46,094,000
=================
Net loss $ (12,097,000)
=================
Basic and diluted loss per share $ (1.12)
=================
The pro forma results of operations above do not purport to be
indicative of the results that would have occurred had the merger taken place at
the beginning of the respective period presented or of results which may occur
in the future.
(3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES
CRITICAL COMMUNICATIONS
On October 17, 1997, the Company's CXR Telcom subsidiary acquired all
the capital stock of Critical Communications Incorporated ("Critical") of St.
Charles, Illinois in exchange for 500,000 shares of the Company's common stock.
Founded in 1991, Critical is a provider of sophisticated, state-of-the-art,
portable telephone test instruments used by both long-distance carriers and
local telephone service providers as well as by corporate and government
telecommunications end users. The acquisition of Critical has been accounted for
as a purchase, and accordingly, the results of operations of Critical since the
date of the acquisition are included in the Company's consolidated statements of
operations. The 500,000 shares of common stock were valued at $1,125,000 based
on the fair value of the common stock on the acquisition date. The Company
acquired $9,000 in cash in the acquisition and the cost in excess of net assets
acquired was $1,123,000 which is being amortized on a straight-line basis over
ten years. The pro forma effect of this acquisition was not material to the
results of operations for 1997.
F-13
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (CONTINUED)
HYCOMP
On July 6, 1994, the Company acquired 84.6% of the common shares
outstanding of HyComp, Inc. ("HyComp"), a public company, by means of an
exchange of the Company's common stock for HyComp common stock held by Metraplex
Corporation and various other officers and directors of HyComp. HyComp is a
manufacturer of thin film hybrid circuits for industrial, medical and military
customers. In May 1996, the Company acquired additional common shares of HyComp,
which increased the Company's ownership percentage to 90.7%. Also in May 1996,
the Company acquired 96.1% of the preferred shares outstanding of HyComp. Each
of these transactions was an exchange of the Company's common stock for the
respective HyComp stock at recorded amounts that approximate fair value. As the
result of the exercise of certain HyComp stock options in 1997, the Company's
ownership of the common shares outstanding of HyComp was reduced to 88.5%.
For financial reporting purposes, HyComp's assets, liabilities and
earnings are consolidated with those of the Company. Ownership interest in
HyComp, other than that of the Company's, is included in the accompanying
consolidated financial statements as minority interest, and includes amounts
applicable to HyComp's preferred stock of $6,000 at December 31, 1998 and 1997.
Dividends on the preferred stock are cumulative at 8% per year, and minority
interest at December 31, 1998 and 1997 includes cumulative dividends in arrears
of $8,000.
On March 31, 1999, the Company sold substantially all of the assets and
liabilities of its HyComp, Inc. subsidiary in exchange for $750,000 in cash and
a royalty on 1999 revenues generated from HyComp's existing customer base in
excess of a specified amount. The transaction resulted in a gain of $331,000.
Summarized below is the unaudited pro forma financial information of the Company
as though the assets had been sold at the beginning of the year ended December
31, 1998.
1999 1998
---- ----
Net sales $ 27,845,000 $ 34,435,000
============== ==============
Net loss $ (4,306,000) $ (1,469,000)
============== ==============
Basic and diluted loss per share $ (.26) $ (.13)
============== ==============
Total assets $ 16,621,000 $ 19,125,000
============== ==============
In October 1999, the Company sold its interest in the outstanding
common and preferred stock of HyComp in exchange for $118,000. A gain in the
same amount was recorded in 1999 as HyComp, subsequent to the asset sale noted
above, was essentially a shell company with no significant assets or
liabilities.
F-14
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (CONTINUED)
XCEL ARNOLD CIRCUITS
On January 9, 1998, the Company entered into a definitive agreement to
sell certain of the assets of its Xcel Arnold Circuits, Inc. subsidiary
("XACI"), a manufacturer of multi-layer bare printed circuit boards. On April 9,
1998, the Company completed the sale and received $1,350,000 in cash and a note
receivable aggregating $650,000, which was payable over three years. The sale
resulted in a gain of $580,000. The balance due under the note receivable was
$650,000 at December 31, 1998 of which $144,000 is included in current portion
of notes receivable in the accompanying 1998 consolidated balance sheet.
Summarized below is the unaudited pro forma financial information of the Company
as though the assets had been sold at the beginning of the year ended December
31, 1997.
1998 1997
---- ----
Net sales $ 35,752,000 $ 34,068,000
============== ==============
Net loss $ (715,000) (7,327,000)
============== ==============
Basic and diluted loss per share $ (.06) (.73)
=============== ==============
Total assets $ 21,242,000 $ 21,021,000
=============== ==============
During 1999, the buyer of XACI defaulted under the terms of the note
receivable. The Company offset the balance outstanding pursuant to a note
payable due to the buyer (Note 7) against the note receivable and then wrote-off
the net unpaid balance of $452,000. Such amount has been included in the net
amount of other expense in the accompanying 1999 consolidated statement of
operations.
DIGITAL TRANSMISSION SYSTEMS
On January 31, 1999, the Company exercised an option to purchase
1,738,159 shares or 41% of the outstanding common stock of Digital Transmission
Systems, Inc. ("DTS") from a private company in exchange for 1,000,000 shares of
common stock of the Company. The Company's shares exchanged were valued at
$1,000,000 based on the fair value of the common stock on the transaction date,
excluding $33,000 of transaction-related costs. This option was granted to the
Company on December 31, 1998 in exchange for warrants (with a fair value of
approximately $55,000) to purchase 152,381 shares of the Company's common stock
at $0.66 per share for five years. DTS was founded in 1990 and is a publicly
traded company with its headquarters near Atlanta, Georgia. It designs,
manufactures and markets electronic products used to build, access and monitor
high-speed telecommunications networks worldwide. DTS's primary customers
include domestic and international wireless service providers, telephone service
providers and private wireless network users. During 1999, the Company accounted
for its investment in DTS using the equity method of accounting and recognized
$626,000 of income from its 41% interest in DTS. This amount is included in the
net amount of other income in the accompanying 1999 statement of operations.
F-15
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES (CONTINUED)
On January 7, 2000, the Company sold all of its interest in the common
stock in DTS to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in
exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a
publicly traded company on the Toronto Exchange. The Wi-LAN common stock had a
market value of $720,000 on the date of the transaction. Accordingly, as of
December 31, 1999, the Company wrote-down the carrying value of its investment
in the common stock of DTS to the value of the consideration received in January
2000. The write-down of $419,000 is included in other income (expense) in the
accompanying statement of operations for the year ended December 31, 1999. The
Company is restricted from selling the Wi-LAN stock until July 7, 2000 due to
Toronto exchange rules that restrict sales of stock obtained in an acquisition
related transaction.
(4) INVENTORIES
Inventories are summarized as follows:
1999 1998
---- ----
Raw materials $ 1,728,000 $ 2,926,000
Work-in-process 1,199,000 2,375,000
Finished goods 1,254,000 1,125,000
-------------- --------------
$ 4,181,000 $ 6,426,000
============== ==============
Included in the amounts above is an allowance for inventory
obsolescence of $1,388,000 and $1,766,000 at December 31, 1999 and 1998,
respectively.
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
1999 1998
---- ----
Land and buildings $ 306,000 $ 348,000
Machinery, equipment and fixtures 3,805,000 3,971,000
Leasehold improvements 479,000 1,022,000
-------------- --------------
4,590,000 5,341,000
Accumulated depreciation and amortization (3,197,000) (3,402,000)
-------------- --------------
$ 1,393,000 $ 1,939,000
============== ==============
F-16
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(6) INVESTMENT IN PARTNERSHIP
On December 19, 1996, the Company's XIT subsidiary invested $100,000
and formed an equal partnership with P&S Development, a California general
partnership. The partnership, "Capital Source Partners, A Real Estate
Partnership," obtained ownership rights to a 93,000 square foot facility in,
Ontario, California. The Company occupied 63,000 square feet of this facility as
a corporate headquarters and as an administrative and factory facility for XIT's
Digitran Division under a long-term lease from the partnership. Immediately
following the formation of the partnership, XIT obtained a loan from a bank for
$750,000 (Note 8), and in turn, loaned such funds to the partnership under a
note receivable with the same terms and conditions. Such funds were utilized to
reduce the existing debt secured by the real estate. XIT's original investment
in the partnership is adjusted for the income (loss) attributable to XIT's
portion of the partnership's results of operations. The investment in the
partnership of $150,000 was included in investment in affiliates in the
accompanying 1998 consolidated balance sheet. The balance due under the note
receivable was $124,000 at December 31, 1998 and was included in current portion
of notes receivable in the accompanying 1998 consolidated balance sheet.
In August 1999, the Company sold its interest in the partnership and
the note receivable to an unrelated party in exchange for $75,000. In connection
with this agreement, all associated liabilities were assumed by the purchaser
and all of the Company's unpaid rent in the amount of approximately $152,000 was
forgiven. Additionally, the Company's obligation under the long-term lease was
terminated. In connection with the sale of its investment in partnership, the
Company recognized a loss of $90,000.
(7) NOTES PAYABLE
A summary of notes payable is as follows:
1999 1998
---- ----
Line of credit with a commercial lender $ 2,014,000 $ 2,485,000
Foreign subsidiary line of credit with a bank -- 77,000
Foreign subsidiary line of credit with a bank 93,000 317,000
Other notes payable -- 500,000
-------------- --------------
$ 2,107,000 $ 3,379,000
============== ==============
On July 8, 1998, the Company entered into a $10.5 million credit
facility (the "Domestic Facility") with a commercial lender for a term of two
years which provided (i) a term loan of approximately $1.5 million; (ii) a
revolving line of credit of up to $8 million based upon assets available from
either existing or future-acquired operations; and (iii) a capital equipment
expenditure credit line of up to $1 million. This credit facility replaced the
existing credit facilities of the Company's domestic operating companies that
were paid in full at the closing.
F-17
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(7) NOTES PAYABLE (CONTINUED)
Borrowings under the revolving line of credit provision of the Domestic
Facility totaled $2,014,000 and $2,485,000 at December 31, 1999 and 1998,
respectively. The credit line is collateralized by substantially all assets of
the Company's domestic subsidiaries, bears interest at the lender's prime rate
(8.5% at December 31, 1999) plus 1% and is payable on demand. No additional
borrowings were available under the line at December 31, 1999. No borrowings
were outstanding under the $1 million of the capital equipment expenditure
credit line at December 31, 1999 or 1998. The lines of credit expire on June 23,
2000. The Domestic Facility agreement requires compliance with certain covenants
and conditions. The Company was in compliance with, or had obtained waivers for,
all such covenants as of December 31, 1999, except for the adjusted net worth
covenant.
The Company's French subsidiary has a bank line of credit with $0 and
$77,000 outstanding at December 31, 1999 and 1998, respectively. Borrowings
under the related agreement bear interest at 4.2% to 4.6% at December 31, 1999
and are based on eligible accounts receivable. Approximately $380,000 of
borrowings were available under the line at December 31, 1999.
The Company's UK subsidiary has a bank line of credit with $93,000 and
$317,000 outstanding at December 31, 1999 and 1998, respectively. Borrowings
under the related agreement bear interest at the bank's base rate (5.5% at
December 31, 1999) plus 2.5% and are based on eligible accounts receivable.
Approximately $350,000 of additional borrowings were available under the line at
December 31, 1999.
The Company borrowed $250,000 from a third party on a short-term basis
on December 31, 1998. This loan bore interest at 10% and was repaid in 1999. In
addition, the Company had an outstanding note with a balance of $250,000 at
December 31, 1998 in connection with the sale of its XCEL Arnold Circuits, Inc.
subsidiary (Note 3). This loan bore no interest and was payable on demand.
During 1999, the balance of the outstanding note payable was offset against the
note receivable received in connection with the sale of XCEL Arnold Circuits
(Note 3).
(8) LONG-TERM DEBT
A summary of long-term debt follows:
1999 1998
---- ----
Term notes payable to commercial lender (a) $ 954,000 $ 1,526,000
Term note payable to bank (b) -- 135,000
Term notes payable to foreign banks (c) 108,000 101,000
Capitalized lease obligations (d) 258,000 380,000
Other promissory notes 267,000 93,000
-------------- --------------
1,587,000 2,235,000
Current portion (1,422,000) (805,000)
-------------- --------------
$ 165,000 $ 1,430,000
============== ==============
F-18
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(8) LONG-TERM DEBT (CONTINUED)
(a) Three term notes payable to a commercial lender bearing
interest at the lender's prime rate (8.5% at December 31,
1999) plus 1.25%. The notes are collateralized by machinery
and equipment and are payable in total monthly principal
installments (aggregating $28,000 at December 31, 1999), plus
interest through final maturity dates in fiscal 2003. As a
result of the Company's non-compliance with the adjusted net
worth covenant of the Domestic Facility (Note 7), the Company
has classified the entire balance of these term notes as a
current liability at December 31, 1999.
(b) Term note payable to a bank which bore interest at the
lender's prime rate plus 1.25%. The note was repaid during
1999.
(c) The Company has agreements with several foreign banks which
include term borrowings which mature at various dates through
2001. Interest rates on the borrowings bear interest at rates
ranging from 2.0% to 2.8% and are payable in monthly
installments. Included in the other term notes is a $101,000
note, which is guaranteed by Tokyo Credit Guarantee
Corporation on behalf of the Company's Japanese subsidiary.
The term borrowings are collateralized by the assets of the
respective subsidiary.
(d) Capital lease agreements are calculated using interest rates
appropriate at the inception of the lease and range from 12%
to 22%. Lease liabilities are amortized over the lease term
using the effective interest method. The leases all contain
bargain purchase options and expire through 2002.
Principal maturities related to long-term debt as of December 31, 1999
are as follows:
Year Ending December 31, Amount
- ------------------------ ------
2000 $ 1,422,000
2001 157,000
2002 8,000
---------------
$ 1,587,000
===============
(9) REDEEMABLE PREFERRED STOCK
SERIES A AND SERIES B REDEEMABLE PREFERRED STOCK
In connection with the Arnold Circuits, Inc. acquisition in 1995, XCEL
Arnold Circuits, Inc. issued 1,000 shares each of Series A redeemable preferred
stock (Series A) and Series B redeemable preferred stock (Series B). In
preference to common shares of stock, each Series A and Series B share was
entitled to a cumulative cash dividend of $120 and $160 per year, respectively,
commencing in June 1996. The Series A and B shares had a liquidation preference
of and were subject to mandatory redemption by the Company on December 15, 1999
at a value of $30 and $40 per share, respectively, plus all accrued and unpaid
dividends, whether or not declared, to the date of redemption. The redeemable
preferred stock was recorded at fair value on the date of issuance using an
imputed market rate dividend of 9.5%. The excess of the redemption value over
the carrying value was being accreted by periodic charges to retained earnings
over the original life of the issue.
F-19
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(9) REDEEMABLE PREFERRED STOCK (CONTINUED)
The Series A and Series B redeemable preferred stock was retired as
part of the sale of the XCEL Arnold Circuits subsidiary in March 1998 (see Note
3).
The following table reflects the Series A and Series B redeemable
preferred stock activity:
Series A Redeemable Series B Redeemable
Preferred Stock Preferred Stock
---------------------------------- ----------------------------------
Number Number
of Shares Amount of Shares Amount
--------- ------ --------- ------
Balance at December 31, 1996 1,000 $ 340,000 1,000 $ 454,000
Accretion of preferred stock -- 26,000 -- 34,000
Preferred stock dividends paid -- (60,000) -- (80,000)
-------------- --------------- --------------- --------------
Balance at December 31, 1997 1,000 306,000 1,000 408,000
Accretion of preferred stock -- 7,000 -- 7,000
Cancellation of stock upon sale of
of subsidiary (1,000) (313,000) (1,000) (415,000)
-------------- --------------- --------------- --------------
Balance at December 31, 1998 and 1999 -- $ -- -- $ --
============== =============== =============== ==============
CONVERTIBLE REDEEMABLE PREFERRED STOCK
In June 1998, the Company sold 50 shares of convertible preferred stock
(the "New Preferred Shares") at $10,000 per share to one institutional investor.
In July 1998, the Company sold an additional 150 New Preferred Shares at the
same per share price to two other institutional investors. Included with the
sale of such New Preferred Shares were a total of one million warrants to
purchase the Company's common stock exercisable at $1.25 per share and expiring
May 22, 2001. The Company has ascribed an estimated fair value to these warrants
aggregating $163,000 and accordingly has reduced the convertible redeemable
preferred stock balance as of the date of issuance.
The Company received net proceeds totaling approximately $1,843,000
after deduction of commissions and transaction-related expenses. The New
Preferred Shares were originally convertible into the common stock of the
Company at the option of the holder thereof at any time after the ninetieth
(90th) day of issuance thereof at the conversion price per share of New
Preferred Share equal to $10,000 divided by the lesser of (x) $1.25 and (y) One
Hundred Percent (100%) of the arithmetic average of the three lowest closing bid
prices over the forty (40) trading days prior to the exercise date of any such
conversion. No more than 20% of the aggregate number of New Preferred Shares
originally purchased and owned by any single entity may be converted in any
thirty (30) day period after the ninetieth (90th) day from issuance. In the
event of any liquidation, dissolution or winding up of the Company, the holders
of shares of New Preferred Shares are entitled to receive, prior and in
preference to any distribution of any assets of the Company to the
F-20
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(9) REDEEMABLE PREFERRED STOCK (CONTINUED)
holders of the Company's common stock, an amount per share equal to $10,000 for
each outstanding New Preferred Share. Any unconverted New Preferred Shares may
be redeemed at the option of the Company for cash at a per share price equal to
$11,500 per New Preferred Share and any New Preferred Shares which remain
outstanding as of May 22, 2003 are subject to mandatory redemption by the
Company at the same per-share redemption price. The excess of the redeemable
value over the carrying value is being accreted by periodic charges to retained
earnings over the original life of the issue.
In November 1998, the holders of the New Preferred Shares agreed to
modify the conversion rate to $10,000 divided by $0.50 in exchange for a
reduction in the exercise price of the Warrants to $0.75 per share. In
connection with the repricing of the warrants, the Company recognized $52,000 of
non-cash expense in 1998. This expense represents the excess of the fair value
of the warrants after repricing over the fair value of the warrants immediately
before the repricing.
In August 1999, the agreement previously reached with the holders of
the New Preferred Shares which limited the conversion rate of such stock to
$0.50 per common share so long as the Company's common stock continued to be
listed on NASDAQ was terminated as a result of the delisting (Note 10). The
conversion rate for the New Preferred Shares reverted to the terms of the
original subscription agreement which provided that conversion would occur at
the lower of $1.25 per common share or the arithmetic average of the three
lowest closing bid prices during the forty (40) days immediately prior to
conversion.
In December 1999, two institutional investors sold all of their
outstanding New Preferred Shares and the prorated portion of warrants applicable
to the then outstanding New Preferred Shares. The purchasers of such New
Preferred Shares and prorated warrants included an executive officer of the
Company and certain related parties. Also in December 1999, the holders of the
59.5 outstanding shares of the New Preferred Shares agreed to modify the
conversion ratio to a fixed factor whereby each share of the New Preferred
Shares is convertible into 50,530 shares of common stock (the fair value of the
underlying shares of common stock) in exchange for a reduction in the exercise
price of the warrants to $.25 per share and an extension of the expiration date
of the warrants to December 2002. In connection with the repricing of the
warrants, the Company recognized $91,000 of non-cash expense in 1999. This
expense represents the excess of the fair value of the warrants after repricing
over the value of the warrants immediately before the repricing.
The following table reflects the convertible redeemable preferred stock
activity:
Number
of Shares Amount
--------- ------
Balance at December 31, 1997 -- $ --
Preferred stock issued 200 1,837,000
Conversion to common stock (39) (367,000)
Accretion of preferred stock -- 46,000
-------------- --------------
Balance at December 31, 1998 161 1,516,000
Conversion to common stock (101.5) (969,000)
Accretion of preferred stock -- 41,000
-------------- --------------
Balance at December 31, 1999 59.5 $ 588,000
============== ==============
F-21
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(10) STOCKHOLDERS' EQUITY
In April 1997, the Company sold 2,000,000 investment units at $2.50 per
unit. The units consist of one share of common stock and one quarter of a
warrant to purchase one share of common stock. The warrants have an exercise
price of $3.45. The proceeds to the Company were $4,258,000 (net of $600,000 of
commissions and $142,000 for other expenses). In connection with this
transaction, 200,000 warrants were issued to the placement agents at an exercise
price of $2.66.
STOCK OPTIONS AND WARRANTS
The Company has the ability to issue options to purchase its common
stock under the following arrangements:
o Employee Stock and Stock Option Plan, effective July 1, 1994, providing for
non-qualified stock options as well as restricted and non-restricted stock
awards to both employees and outside consultants. Up to 520,000 shares may
be granted or optioned under this plan. Terms of related grants under the
plan are at the discretion of the Board of Directors.
o Stock Option Plan adopted in 1993, providing for the granting of up to
300,000 incentive stock options to purchase stock at not less than the
current market value on the date of grant. Options granted under this plan
vest ratably over three years and expire 10 years after date of grant.
o The MicroTel International Inc. 1997 Stock Incentive Plan (the "1997 Plan")
provides that options granted may be either qualified or nonqualified stock
options and are required to be granted at fair market value on the date of
grant. Subject to termination of employment, options may expire up to ten
years from the date of grant and are nontransferable other than in the
event of death, disability or certain other transfers that the committee of
the Board of Directors administering the 1997 Plan may permit. Up to
1,600,000 stock options may be granted under the 1997 Plan. All outstanding
options of former optionholders under the XIT 1987 Employee Stock Option
Plan were converted to options under the 1997 Plan as of the date of the
merger between the Company and XIT at the exchange rate of 1.451478 (see
Note 2).
The Company accounts for stock-based compensation under the "intrinsic
value" method. Under this method, no compensation expense is recorded for these
plans and arrangements for current employees whose grants provide for exercise
prices at or above the market price on the date of grant. Compensation or other
expense is recorded based on intrinsic value (excess of market price over
exercise price on date of grant) for employees, and fair value of the option
awards for others.
F-22
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(10) STOCKHOLDERS' EQUITY (CONTINUED)
The following table shows activity in the outstanding options for the
years ended December 31, 1999, 1998 and 1997:
Weighted
Average
1999 Exercise 1998 1997
Shares Price Shares Shares
------ ----- ------ ------
Outstanding at beginning of year 2,047,000 $ 2.13 1,999,000 842,000
Granted 430,000 0.20 200,000 96,000
XIT/Micro Tel merger -- -- -- 1,146,000
Exercised -- -- -- (30,000)
Canceled (897,000) 2.39 (152,000) (55,000)
--------------- --------------- --------------- ---------------
Outstanding at end of year 1,580,000 $ 1.46 2,047,000 1,999,000
=============== =============== =============== ===============
The following table summarizes information with respect to stock
options at December 31, 1999:
Options Outstanding Options Exercisable
---------------------------------------- ----------------------------------------
Weighted Avg.
Number Remaining Number
Range of Exercise Outstanding Contractual Life Weighted Avg. Exercisable Weighted Avg.
Price December 31, 1999 (Years) Price December 31, 1999 Price
- -------------------- ------------------ --------------------- ------------------ ------------------ ---------------------
$.20 to $1.00 430,000 9.9 $ 0.20 215,000 $ 0.20
$1.01 to $2.00 964,000 6.1 $ 1.71 964,000 $ 1.71
$2.01 to $3.00 56,000 6.2 $ 2.71 56,000 $ 2.71
$3.01 to $4.00 130,000 4.4 $ 3.16 130,000 $ 3.16
------------------ ------------------
$.20 to $4.00 1,580,000 7.0 $ 1.46 1,365,000 $ 1.65
================== ==================
Options exercisable as of December 31, 1999, 1998 and 1997 are as
follows:
1999 1998 1997
---- ---- ----
Exercisable 1,365,000 1,892,000 1,843,000
Weighted Average Exercise Price $ 1.65 $ 2.26 $ 2.32
Weighted average exercise prices for 1999 are calculated at prices
effective as of December 31, 1999. The fair value of options granted during 1999
was $63,000, at a weighted average value of $0.15 per share. Exercise prices for
options outstanding as of December 31, 1999 generally ranged from $0.20 to $3.45
per share and the weighted average remaining contractual life for these options
was 7 years. The fair value of options granted during the years ended December
31, 1998 and 1997 were $112,000 and $132,000, at weighted average prices of
$0.56 and $1.37 per share, respectively.
F-23
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(10) STOCKHOLDERS' EQUITY (CONTINUED)
If the Company had instead elected the fair value method of accounting
for stock-based compensation, compensation cost would be accrued at the
estimated fair value of all stock option grants over the service period,
regardless of later changes in stock prices and price volatility. The fair value
at date of grant for options granted in 1999, 1998 and 1997 has been estimated
based on a modified Black-Scholes pricing model with the following assumptions:
no dividend yield; expected volatility of 85% in 1999, 25% to 57% in 1998 and
73% in 1997, based on historical results; risk-free interest rate of 5.1% to
6.0%; and average expected lives of approximately seven to ten years.
The following table sets forth the net loss, net loss available for
common stockholders and loss per share amounts for the periods presented as if
the Company had elected the fair value method of accounting for stock options.
(in thousands, except per share amounts)
1999 1998 1997
---- ---- ----
NET LOSS
As reported $ (4,596) $ (1,185) $ (9,693)
Pro forma $ (4,628) $ (1,297) $ (9,825)
NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS
As reported $ (4,637) $ (1,245) $ (9,753)
Pro forma $ (4,669) $ (1,357) $ (9,885)
BASIC AND DILUTED LOSS PER SHARE
As reported $ (.28) $ (.10) $ (.96)
Pro forma $ (.28) $ (.11) $ (.98)
Additional incremental compensation expense includes the excess of fair
values of options granted during the year over any compensation amounts recorded
for options whose exercise prices were less than market value at date of grant,
and for any expense recorded for non-employee grants. Additional incremental
compensation expense also includes the excess of the fair value at modification
date of options repriced or extended over the value of the old options
immediately before modification. All such incremental compensation is amortized
over the related vesting period, or expensed immediately if fully vested. The
above calculations include the effects of all grants in the years presented.
Because options often vest over several years and additional awards are made
each year, the results shown above may not be representative of the effects on
net income (loss) in future years.
F-24
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(10) STOCKHOLDERS' EQUITY (CONTINUED)
The Board of Directors has also authorized the issuance of common stock
purchase warrants to certain officers, directors, stockholders, key employees
and other parties as follows:
Warrant Price
Number -------------
of Shares Per Share Total
--------- --------- -----
Balance outstanding, December 31, 1996 1,198,000 $ 1.21 to 3.79 $ 3,431,000
Warrant - MicroTel merger 122,000 2.50 305,000
Warrants issued 1,170,000 2.13 to 3.45 3,410,000
--------------- --------------- -------------
Balance outstanding, December 31, 1997 2,490,000 1.21 to 3.79 7,146,000
Warrants issued 2,802,000 0.66 to 1.25 2,838,000
Warrants cancelled (1,000,000) 1.25 (1,250,000)
--------------- --------------- -------------
Balance outstanding, December 31, 1998 4,292,000 0.66 to 3.79 8,734,000
Warrants issued 2,865,000 0.25 to 1.38 2,199,000
Warrants expired/cancelled (1,925,000) 0.60 to 2.50 (2,015,000)
--------------- --------------- -------------
Balance outstanding at December 31, 1999 5,232,000 $ 0.25 to 3.79 $ 8,918,000
=============== =============== =============
The Company has an Employee Stock Purchase Plan at its CXR subsidiary
allowing eligible subsidiary employees to purchase shares of the Company's
common stock at 85% of market value. During 1999, 1998 and 1997, 5,000, 7,000
and 6,000 shares, respectively, had been issued pursuant to the plan with 27,000
shares reserved for future issuance.
As of December 31, 1999, the Company has 18,152,000 shares of common
stock outstanding and potentially 9,846,000 shares of common stock issuable
pursuant to the exercise of outstanding stock options and warrants and
conversion of convertible redeemable preferred stock. In accordance with its
articles of incorporation, the Company is authorized to issue 25,000,000 shares
of common stock. Accordingly, the Company may be unable to issue the common
shares pursuant to its outstanding stock options, warrants and convertible
redeemable preferred stock until such time as the Company's articles of
incorporation are amended or until the terms of the related stock options,
warrants and/or convertible redeemable preferred stock are modified.
DEBT TO EQUITY CONVERSION
In March 1997, the Company converted $44,000 in various promissory
notes to 55,000 shares of common stock.
SETTLEMENT OF DISPUTE
During 1997, the Company entered into an amendment to an agreement with
a former officer in settlement of a claim made by such officer for certain
amounts purportedly owed to him by the Company. In connection with the amended
agreement, the Company issued the former officer 80,000 shares of its common
stock valued at $190,000, the fair market value of the common stock on the date
of issuance. In November 1998, the Company entered into a further amended
agreement pursuant to which the former officer returned the 80,000 shares
previously issued in exchange for the Company's agreement to pay $168,000 over
the next two years. The Company cancelled the returned shares.
F-25
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(10) STOCKHOLDERS' EQUITY (CONTINUED)
NASDAQ DELISTING
In May 1999, the listing of the Company's common stock on the NASDAQ
SmallCap Market ("NASDAQ") was discontinued and thereafter, the Company's common
stock has been traded on the OTC Bulletin Board.
(11) NON-RECURRING CHARGES; IMPAIRMENT OF GOODWILL
The Company assesses the recoverability of its goodwill whenever
adverse events or changes in circumstances or business climate indicate that
expected future cash flows (undiscounted and without interest charges) for
individual business units may not be sufficient to support recorded goodwill.
During the third quarter ended September 30, 1997 the Company, due to declines
in profit margins and continuing operating losses, wrote-off the carrying value
of goodwill originating with certain acquisitions. The Company also wrote-down
the carrying value of goodwill originating from the reverse acquisition with XIT
(see Note 2) to its net realizable value. These write-downs totaled $5,693,000
and were charged to operations.
(12) INCOME TAXES
The Company files a consolidated U.S. federal income tax return. This
return includes all domestic companies 80% or more owned by the Company. State
tax returns are filed on a consolidated, combined or separate basis depending on
the applicable laws relating to the Company and its domestic subsidiaries.
Income (loss) before income taxes was taxed under the following
jurisdictions:
1999 1998 1997
---- ---- ----
Domestic $ (3,954,000) $ (1,090,000) $ (9,721,000)
Foreign (514,000) 6,000 125,000
-------------- -------------- --------------
Total $ (4,468,000) $ (1,084,000) $ (9,596,000)
============== ============== ==============
Income tax expense consists of the following:
1999 1998 1997
---- ---- ----
Current:
Federal $ -- $ -- $ --
State 30,000 8,000 17,000
Foreign 98,000 93,000 80,000
-------------- -------------- --------------
$ 128,000 $ 101,000 $ 97,000
============== ============== ==============
F-26
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(12) INCOME TAXES (CONTINUED)
Income tax expense (benefit) differs from the amount obtained by
applying the statutory federal income tax rate of 34% to loss before income
taxes as follows:
1999 1998 1997
---- ---- ----
Tax at U.S. federal statutory rate $ (1,519,000) $ (368,000) $ (3,263,000)
State taxes, net of federal income tax benefit 30,000 8,000 17,000
Foreign income taxes 98,000 93,000 80,000
Write-down of goodwill -- -- 1,936,000
Losses with no current benefit 1,449,000 270,000 1,096,000
Permanent differences 70,000 98,000 157,000
Other -- -- 74,000
--------------- --------------- ---------------
$ 128,000 $ 101,000 $ 97,000
=============== =============== ===============
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities are as follows:
1999 1998
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 37,000 $ 90,000
Inventory reserves and uniform capitalization 254,000 387,000
Other accrued liabilities 140,000 279,000
Deferred compensation 326,000 537,000
Research credit carryforwards 256,000 256,000
Alternative Minimum Tax credit carryforwards 134,000 134,000
Net operating loss carryforwards 17,436,000 15,423,000
--------------- ---------------
Total deferred tax assets 18,583,000 17,106,000
Valuation allowance for deferred tax assets (18,335,000) (16,591,000)
--------------- ---------------
Net deferred tax assets 248,000 515,000
--------------- ---------------
Deferred tax liabilities:
Depreciation (166,000) (515,000)
Gain on sale of investment (82,000) --
--------------- ---------------
Total deferred tax liabilities (248,000) (515,000)
--------------- ---------------
Net deferred taxes $ -- $ --
=============== ===============
F-27
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(12) INCOME TAXES (CONTINUED)
As of December 31, 1999, the Company has a federal net operating loss
carryforward of approximately $50,000,000 which expires at various dates between
2001 and 2019 and a state net operating loss carryforward of approximately
$5,000,000 which expires at various dates through 2004.
As a result of the merger with XIT (Note 2), the Company experienced a
more than 50% ownership change for federal income tax purposes. As a result, an
annual limitation will be placed upon the Company's ability to realize the
benefit of its net operating loss and credit carryforwards. The amount of this
annual limitation, as well as the impact of the application of other possible
limitations under the consolidated return regulations, has not been definitively
determined at this time. Management believes sufficient uncertainty exists
regarding the realizability of the deferred tax asset items and that a valuation
allowance, equal to the net deferred tax asset amount, is required.
(13) LOSS PER SHARE
The following table illustrates the computation of basic and diluted
loss per share:
1999 1998 1997
---- ---- ----
NUMERATOR:
Net loss $ (4,596,000) $ (1,185,000) $ (9,693,000)
Less: accretion of the excess of the
redemption value over the carrying value
of redeemable preferred stock 41,000 60,000 60,000
--------------- --------------- ---------------
Income available for common stockholders $ (4,637,000) $ (1,245,000) $ (9,753,000)
=============== =============== ===============
DENOMINATOR:
Weighted average number of common shares
outstanding during the year 16,638,000 11,952,000 10,137,000
--------------- --------------- ---------------
Basic and diluted loss per share $ (.28) $ (.10) $ (.96)
=============== =============== ===============
The computation of diluted loss per share excludes the effect of
incremental common shares attributable to the exercise of outstanding common
stock options and warrants because their effect was antidilutive due to losses
incurred by the Company. See summary of outstanding stock options and warrants
in Note 10.
(14) COMMITMENTS AND CONTINGENCIES
LEASES
The Company conducts most of its operations from leased facilities
under operating leases which expire at various dates through 2003. The leases
generally require the Company to pay all maintenance, insurance and property tax
costs and contain provisions for rent increases. Total rent expense for 1999,
1998 and 1997, was $1,711,000, $2,091,000 and $2,477,000, respectively.
F-28
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The future minimum rental payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year are
as follows:
Year Ending December 31, Amount
- ------------------------ ------
2000 $ 1,215,000
2001 897,000
2002 626,000
2003 122,000
2004 84,000
---------------
$ 2,944,000
===============
LITIGATION
The Company and its subsidiaries are, from time to time, involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
cannot presently be determined because of considerable uncertainties that exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a material
adverse affect on the Company's consolidated financial position, results of
operations or cash flows.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
In October 1996, David Scheinfeld brought an action in the Supreme
Court of the State of New York, County of New York, to recover monetary damages
in the amount of $300,000 allegedly sustained by the failure of the Company, its
stock transfer agent and its counsel to timely deliver and register 40,000
shares of Common Stock purchased by Mr. Scheinfeld. The Company was informed by
Mr. Scheinfeld that in order to settle his claims, the Company would have to
issue him unrestricted shares of common stock. Since, in the absence of
registrations, the Company could not issue unrestricted shares, the Company
answered Mr. Scheinfeld's motion and sought to compel him to serve a complaint
upon the defendants. On June 30, 1997, the complaint was served, and the Company
has subsequently answered, denying the material allegations of the complaint.
During the third quarter of 1999, the Company entered into a settlement
agreement with David Scheinfeld. The Company agreed to pay $75,000 payable in an
initial payment of $6,250 and eleven monthly payments of $6,250 thereafter
without interest. The unpaid amount due as of December 31, 1999, aggregating
$50,000, is presented in other promissory notes (Note 8).
F-29
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(14) COMMITMENTS AND CONTINGENCIES (CONTINUED)
DANIEL DROR & ELK INTERNATIONAL, INC. V. MICROTEL INTERNATIONAL, INC.
In November 1996, the Company entered into an agreement (the
"Agreement") with the former Chairman of the Company, which involved certain
mutual obligations. In December 1997, the former Chairman defaulted on the
repayment of the first installment of a debt obligation which was an obligation
set forth in the Agreement. Also in December 1997, the former Chairman of the
Company, filed suit in the District Court for Galveston County, Texas alleging
the Company had breached an alleged oral modification of the Agreement. In
January 1998, the Company answered the complaint denying the allegation and
litigation commenced in Texas.
In April 1998, the Company brought an action in California against the
former Chairman for breach of the Agreement and sought recovery of all stock,
warrants and debt due the Company. The Company obtained a judgement against the
former Chairman in this litigation.
In December 1997, Elk International Corporation Limited ("Elk"), a
stockholder of the Company, brought an action in Texas against the Company's
current Chairman and an unrelated party, alleging certain misrepresentations
during the merger discussions between XIT and the Company. In February 1999, Elk
filed suit against the Company, the current Chairman and the Company's general
counsel in connection with a stop transfer placed by the Company on certain
common shares held by Elk.
In March 1999, the parties entered into a settlement agreement which
terminated all of the aforementioned actions. The agreement calls for the
Company to issue to Elk, Dror and other parties $60,000 and 150,000 shares of
the Company's common stock with a fair market value of approximately $56,000. In
addition, the Company issued 1,000,000 warrants to purchase the Company's common
stock at an exercise price of $1.37 per share for two years in exchange for the
returning 750,000 options and returning 90,000 warrants all to purchase the
Company's common stock at an exercise price of $2.50 per share for 2.8 years.
The fair value of the warrants granted over the options and warrants returned on
the date of the settlement was approximately $17,000. The Company accrued for
this settlement in the accompanying 1998 consolidated financial statements.
EMPLOYEE BENEFIT PLANS
Though September 30, 1998, the Company sponsored several defined
contribution plans ("401(k) Plans") covering the majority of its U.S. domestic
employees. Effective October 1, 1998, these plans were terminated and a new plan
was instituted covering the same employees. Participants may make voluntary
pretax contributions to such plans up to the limit as permitted by law. Annual
contributions to any plan by the Company is discretionary. The Company made
contributions of $31,000, $22,000 and $43,000 to the 401(k) Plans for the
calendar years ended December 31, 1999, 1998 and 1997, respectively.
F-30
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(15) SEGMENT AND MAJOR CUSTOMER INFORMATION
The Company has three reportable segments: Instrumentation and Test
Equipment, Components and Subsystem Assemblies, and Circuits. The
Instrumentation and Test Equipment segment operates principally in the U.S. and
European markets and designs, manufactures and distributes telecommunications
test instruments and voice and data transmission and networking equipment. The
Components and Subsystems Assemblies segment operates in the U.S., European and
Asian markets and designs, manufactures and markets information technology
products, including input and display components, subsystem assemblies, and
power supplies. The Circuits Sector operates principally in the U.S. market and
designs, manufactures and markets various circuit products.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. 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 and
manufacturing and marketing strategies. Selected financial data for each of the
Company's operating segments is shown below.
1999 1998 1997
---- ---- ----
SALES FROM EXTERNAL CUSTOMERS:
Instruments $ 15,666,000 $ 17,532,000 $ 15,054,000
Components 10,080,000 12,412,000 12,197,000
Circuits 2,555,000 7,317,000 15,847,000
--------------- --------------- ---------------
$ 28,301,000 $ 37,261,000 $ 43,098,000
=============== =============== ===============
INTERSEGMENT SALES:
Instruments $ -- $ 17,000 $ 133,000
Components 279,000 635,000 957,000
Circuits 433,000 699,000 819,000
--------------- --------------- --------------
$ 712,000 $ 1,351,000 $ 1,909,000
=============== =============== ==============
INTEREST EXPENSE:
Instruments $ 110,000 $ 79,000 $ 109,000
Components 75,000 323,000 396,000
Circuits 114,000 168,000 346,000
--------------- --------------- --------------
$ 299,000 $ 570,000 $ 851,000
=============== =============== ==============
DEPRECIATION AND AMORTIZATION:
Instruments $ 490,000 $ 265,000 $ 164,000
Components 101,000 91,000 284,000
Circuits 136,000 312,000 607,000
--------------- --------------- --------------
$ 727,000 $ 668,000 $ 1,055,000
=============== =============== ==============
F-31
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(15) SEGMENT AND MAJOR CUSTOMER INFORMATION
(CONTINUED)
1999 1998 1997
---- ---- ----
SEGMENT PROFITS (LOSSES):
Instruments $ (1,828,000) $ 367,000 $ 536,000
Components 1,341,000 2,473,000 794,000
Circuits (1,043,000) (786,000) (1,055,000)
--------------- --------------- ---------------
$ (1,530,000) $ 2,054,000 $ 275,000
=============== =============== ===============
SEGMENT ASSETS:
Instruments $ 7,960,000 $ 10,234,000 $ 9,691,000
Components 5,213,000 7,193,000 6,946,000
Circuits 1,379,000 2,737,000 7,966,000
--------------- --------------- ---------------
$ 14,552,000 $ 20,164,000 $ 24,603,000
=============== =============== ===============
The following is a reconciliation of the reportable segment revenues,
profit or loss and assets to the Company's consolidated totals.
1999 1998 1997
---- ---- ----
Net Sales
- ---------
Total sales for reportable segments $ 29,013,000 $ 38,612,000 $ 45,007,000
Elimination of intersegment sales (712,000) (1,351,000) (1,909,000)
--------------- --------------- ---------------
Total consolidated revenues $ 28,301,000 $ 37,261,000 $ 43,098,000
=============== =============== ===============
Profit (loss) before income taxes
- ---------------------------------
Total profit (loss) for reportable segments $ (1,530,000) $ 2,054,000 $ 275,000
Write-down of goodwill -- -- (5,693,000)
Unallocated amounts:
General corporate expenses (2,938,000) (3,138,000) (4,178,000)
--------------- --------------- ---------------
Consolidated loss before income taxes $ (4,468,000) $ (1,084,000) $ (9,596,000)
=============== =============== ===============
Assets
- ------
Total assets for reportable segments $ 14,552,000 $ 20,164,000 $ 24,603,000
Other assets 2,069,000 1,078,000 837,000
--------------- --------------- ---------------
Total consolidated assets $ 16,621,000 $ 21,242,000 $ 25,440,000
=============== =============== ===============
Interest Expense
- ----------------
Interest expense for reportable segments $ 299,000 $ 570,000 $ 851,000
Other interest expense 112,000 105,000 44,000
--------------- --------------- ---------------
Total interest expense $ 411,000 $ 675,000 $ 895,000
=============== =============== ===============
F-32
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(15) SEGMENT AND MAJOR CUSTOMER INFORMATION (CONTINUED)
1999 1998 1997
---- ---- ----
Depreciation and Amortization
- -----------------------------
Depreciation and amortization expense
for reportable segments $ 727,000 $ 668,000 $ 1,055,000
Other depreciation and amortization expense 206,000 190,000 226,000
--------------- --------------- ---------------
Total depreciation and amortization $ 933,000 $ 858,000 $ 1,281,000
=============== =============== ===============
A summary of the Company's net sales, operating income (loss) and
identifiable assets by geographical area follows:
1999 1998 1997
---- ---- ----
Net sales:
United States $ 11,878,000 $ 19,965,000 $ 28,098,000
Japan 658,000 706,000 857,000
France 10,958,000 11,118,000 8,450,000
United Kingdom 4,807,000 5,472,000 5,693,000
--------------- --------------- ---------------
$ 28,301,000 $ 37,261,000 $ 43,098,000
=============== =============== ===============
Long-lived assets:
United States $ 2,533,000 $ 3,656,000 $ 6,631,000
Japan 16,000 13,000 12,000
France 257,000 458,000 807,000
United Kingdom 190,000 133,000 296,000
--------------- --------------- ---------------
$ 2,996,000 $ 4,260,000 $ 7,746,000
=============== =============== ===============
Sales and purchases between geographic areas have been accounted for on
the basis of prices set between the geographic areas, generally at cost plus 5%.
Identifiable assets by geographic area are those assets that are used in the
Company's operations in each location. Net sales by geographic area have been
determined based upon the country from which the product was shipped.
The Company had sales to one customer which accounted for approximately
14% of net sales in 1997. No one customer accounted for more than 10% of net
sales in 1998 or 1999.
F-33
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(16) GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. During the years ended
December 31, 1999, 1998 and 1997, the Company experienced significant operating
losses. Additionally, the Company is in default of the Domestic Credit Facility
agreement (Note 7) as the Company is not in compliance with an adjusted net
worth covenant contained therein. These factors raise substantial doubt about
the Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty. The Company's foreign subsidiaries in the United Kingdom,
France and Japan have separate borrowing arrangements. Although management has
been successful in obtaining working capital to fund operations to date, there
can be no assurance that the Company will be able to generate additional capital
in the future.
During 1999, the Company took certain actions in an effort to become
profitable and improve cash flow from operations in the future. As a result of
the current and future anticipated operating losses at the Company's HyComp
subsidiary, the Company sold substantially all the assets of this subsidiary in
the first quarter of 1999. Additionally, during the second half of 1999, the
Company embarked on a cost reduction program, which included a significant
reduction in personnel at the Company's domestic subsidiaries and the relocation
and downsizing of the corporate headquarters and certain subsidiaries'
manufacturing and office facilities. Furthermore, the Company terminated its
lease obligation related to its corporate headquarters and one manufacturing
facility in connection with the sale of its investment in a partnership (Note 6)
and also subleased a portion of another subsidiary's facility. In addition,
subsequent to year end, the Company sold its investment in the common stock of
Digital Transmission Systems, Inc. for which the Company received cash proceeds
of $520,000 and common shares of a foreign publicly-traded company, with a then
current market value of approximately $720,000 (Note 3).
The Company is implementing a corporate finance program designed to
improve its working capital structure by considering certain alternatives to its
existing domestic credit facilities. The Company is actively searching for
alternative financing to replace the current domestic credit facility. Although
no replacement lender has been selected, the Company has identified several
prospective lenders, one of whom has submitted a proposal to the Company. The
finance program also involves the potential private placement of certain debt or
equity securities. Additionally, management is exploring the potential to
further leverage its common stock held in Wi-LAN, Inc. (Note 3) which has a fair
market value of approximately $1,600,000 as of February 29, 2000. The Company's
domestic credit facilities lender has provided an additional $400,000 of
borrowing capacity against this asset. In addition, the Company is in
negotiations with a foreign financial institution to leverage the Company's
existing United Kingdom subsidiary to provide additional working capital for
operations and acquisitions. Finally, management has developed and continues to
implement plans to reduce existing cost structures, improve operating
efficiencies, and strengthen the Company's operating infrastructure.
F-34
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONS
BALANCE AT CHARGED TO DEDUCTIONS
BEGINNING OF COSTS AND WRITE-OFFS OF BALANCE AT
DESCRIPTION YEAR EXPENSES ACCOUNTS END OF YEAR
---------------- ----------------- ------------------ ---------------
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 275,000 36,000 (109,000) 202,000
Year ended December 31, 1998 241,000 97,000 (63,000) 275,000
Year ended December 31, 1997 63,000 251,000 (73,000) 241,000
================ ================= ================== ===============
Allowance for inventory obsolescence:
Year ended December 31, 1999 $ 1,766,000 1,145,000 (1,523,000) 1,388,000
Year ended December 31, 1998 1,856,000 885,000 (975,000) 1,766,000
Year ended December 31, 1997 685,000 3,134,000 (1,963,000) 1,856,000
================ ================= ================== ===============
F-35