FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION STATEMENT NO. 333-63024
MICROTEL INTERNATIONAL, INC.
PROSPECTUS SUPPLEMENT DATED AUGUST 31, 2001
TO PROSPECTUS DATED JULY 30, 2001
The prospectus of MicroTel International, Inc. dated July 30, 2001 is
supplemented to include information from the quarterly report on Form 10-Q for
the quarter ended June 30, 2001 filed with the Securities and Exchange
Commission on August 14, 2001 and to include other updated information. Our
condensed consolidated financial statements and related notes for the three and
six months ended June 30, 2001 are included at pages F-1 to F-7 of this
supplement.
THE FOLLOWING RISK FACTORS ARE UPDATED:
---------------------------------------
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE
FUTURE AND WHICH MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.
We incurred significant net operating losses in each of the years ended
December 31, 1999 and 1998 and incurred a net operating profit in the year ended
December 31, 2000 and the six months ended June 30, 2001. We realized a net loss
of approximately $4.6 million for the twelve months ended December 31, 1999, as
compared to incurring a net loss of approximately $1.2 million for the twelve
months ended December 31, 1998. For the twelve months ended December 31, 2000,
we recorded net income of $1.0 million. For the six months ended June 30, 2001,
we recorded net income of $161,000. Our accumulated deficit and accumulated
other comprehensive loss through June 30, 2001 were approximately $18,620,000
and $1,057,000, respectively, and as of that date we had a total stockholders'
equity of approximately $5,646,000. Although we recently reported profitable
operations, there is no assurance that we will continue to maintain profitable
operations in the future. If we are unable to do so, there may be a material
adverse effect on our cash flows, which could cause us to violate covenants
under our credit facility and could impede our ability to raise capital through
debt or equity financing to the extent we may need it for our continued
operations or for planned expansion. Consequently, future losses may have a
material adverse effect on our business, prospects, financial condition, results
of operations and cash flows.
FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT
FOREIGN CURRENCY THAT MUST BE CONVERTED INTO UNITED STATES DOLLARS FOR INCLUSION
IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT, EXCHANGE RATE
FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF OPERATIONS.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
1
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries. Sales
of our products and services to customers located outside of the United States
accounted for approximately 53% of our net sales for the year ended December 31,
2000 and approximately 50% of our net sales for the six months ended June 30,
2001. We currently anticipate that foreign sales will account for a similar
proportion of our net sales for the year ended December 31, 2001. However,
because historically the majority of our currency exposure has related to
financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT OUR
BUSINESS IF DEMAND IS REDUCED.
During the year ended December 31, 2000 and the six months ended June
30, 2001, the sale of telecommunications equipment and related services
accounted for approximately 56% and 55%, respectively, of our total sales, and
the sale of electronic components accounted for approximately 44% and 45%,
respectively, of our total sales. In many cases we have long-term contracts with
our telecommunications and electronic components customers that cover the
general terms and conditions of our relationships with them but that do not
include long-term purchase orders or commitments. Rather, our customers issue
purchase orders requesting the quantities of telecommunications equipment they
desire to purchase from us, and if we are able and willing to fill those orders,
then we fill them under the terms of the contracts. Accordingly, we cannot rely
on long-term purchase orders or commitments to protect us from the negative
financial effects of a reduced demand for our products that could result from a
general economic downturn, from changes in the telecommunications and electronic
components industries, including the entry of new competitors into the market,
from the introduction by others of new or improved technology, from an
unanticipated shift in the needs of our customers, or from other causes.
WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
Our success is highly dependent upon the continued services of key
members of our management, including our Chairman of the Board, President and
Chief Executive Officer, Carmine T. Oliva, and our Executive Vice President,
Graham Jefferies. Mr. Oliva co-founded XET Corporation and has developed
personal contacts and other skills that we rely upon in connection with our
financing, acquisition and general business strategies. Mr. Jefferies is a
long-time employee of MicroTel who we have relied upon in connection with our
United Kingdom acquisitions and who fulfills significant operational
responsibilities in connection with our foreign operations. Consequently, the
loss of Mr. Oliva, Mr. Jefferies or one or more other key members of management
could have a material adverse effect on us. We maintain key-man life insurance
on Mr. Oliva and Mr. Jefferies. However, we cannot assure you that we will be
able to maintain this insurance in effect or that the coverage will be
sufficient to compensate us for the loss of the services of Mr. Oliva or Mr.
Jefferies.
2
RISKS RELATED TO THIS OFFERING
SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC SALE COULD
ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO RAISE
ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES.
As of August 10, 2001, we had outstanding 20,570,703 shares of common
stock, all of which shares were either unrestricted, registered for resale under
the Securities Act of 1933, or eligible for resale without registration under
Rule 144 of the Securities Act of 1933. As of August 10, 2001, we also had
outstanding options, warrants and preferred stock that were exercisable for or
convertible into 6,643,930 shares of common stock. Of these, 1,673,924 shares of
common stock underlying options, 1,712,305 shares of common stock underlying
warrants and 2,763,250 shares of common stock underlying preferred stock were
registered for resale. Sales of a substantial number of shares of our common
stock in the public market, or the perception that sales could occur, could
adversely affect the market price for our common stock. Any adverse effect on
the market price for our common stock could make it difficult for us to sell
equity securities at a time and at a price that we deem appropriate.
THE CAPITALIZATION TABLE IS REPLACED WITH THE FOLLOWING:
--------------------------------------------------------
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2001.
You should read this information together with our consolidated financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus.
JUNE 30, 2001
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE DATA)
Long-term debt, less current portion.................................. $ 805
----------
Convertible redeemable preferred stock, $10,000 unit value.
Authorized 200 shares; issued and outstanding 25 shares
(aggregate liquidation preference of $250).......................... 264
Stockholders' equity:
Preferred Stock, $0.01 par value. Authorized 10,000,000 shares.
Convertible Series B Preferred Stock, $0.01 par value, 150,000
shares authorized, 150,000 shares issued and outstanding
(aggregate liquidation preference of $960) 938
Common Stock, $0.0033 par value. Authorized 50,000,000 shares;
issued and outstanding, 20,570,000................................ 68
Additional paid-in capital............................................ 24,317
Accumulated deficit................................................... (18,620)
Accumulated other comprehensive loss.................................. (1,057)
-----------
Total stockholders' equity.......................................... 5,646
-----------
Total capitalization................................................ $ 6,715
===========
3
THE SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA TABLE IS REPLACED WITH THE
FOLLOWING:
--------------------------------------------------------------------------------
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected consolidated historical financial data should be
read in conjunction with the consolidated financial statements and the notes to
those statements and the section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
prospectus. The consolidated statements of operations and comprehensive income
data with respect to the years ended December 31, 1998, 1999 and 2000 and the
consolidated balance sheet data at December 31, 1999 and 2000 are derived from,
and are qualified by reference to, the consolidated audited financial statements
included elsewhere in this prospectus. The consolidated statements of operations
and comprehensive income data set forth below with respect to the six month
periods ended June 30, 2000 and 2001 and the consolidated balance sheet data as
of June 30, 2001 are derived from unaudited financial statements included
elsewhere in the prospectus which, in the opinion of our management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial data for these periods. The historical results are
not necessarily indicative of results to be expected for any future periods.
THREE
YEAR MONTHS SIX MONTHS ENDED
ENDED ENDED YEARS ENDED DECEMBER 31, JUNE 30,
STATEMENTS OF OPERATIONS AND SEPT. 30, DEC. 31, ------------------------------------------ -------------------
COMPREHENSIVE INCOME DATA: 1996 1996 1997 1998 1999 2000 2000 2001
--------- --------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
Net sales ........................... $ 14,270 $ 3,100 $ 27,251 $ 30,100 $ 25,913 $ 28,050 $ 12,688 $ 14,548
Cost of sales ....................... 9,442 2,332 18,069 17,353 17,066 15,529 7,566 8,082
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit ........................ 4,828 768 9,182 12,747 8,847 12,521 5,122 6,466
Selling, general and administrative
expenses .......................... 3,426 1,045 8,608 10,202 10,584 9,827 4,395 5,486
Engineering and product development
expenses .......................... -- -- 1,797 2,202 1,841 1,167 496 662
Write-down of goodwill .............. -- -- 5,693 -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations ....... 1,402 (277) (6,916) 343 (3,578) 1,527 231 318
Total other income (expense) ........ 304 49 (627) (804) (492) 207 10 (148)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes .... 1,706 (228) (7,543) (461) (4,070) 1,734 241 170
Income tax expense .................. 20 30 97 101 128 31 11 9
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from continuing
operations .......................... 1,686 (258) (7,640) (562) (4,198) 1,703 230 161
Discontinued operations:
Loss from operations of
discontinued segment ........... (603) (647) (2,053) (1,203) (847) (212) (151) --
Gain (loss) on disposal of
discontinued segment including
provision for phase out period of
$158 in 2000 .................... -- -- -- 580 449 (487) -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss) 1,083 (905) (9,693) (1,185) (4,596) 1,004 79 161
Foreign currency translation
adjustment ....................... (89) 126 (260) 206 (325) (505) (218) (326)
--------- --------- --------- --------- --------- --------- --------- ---------
Total comprehensive income (loss) ... $ 994 $ (799) $ (9,953) $ (979) $ (4,921) $ 499 $ (61) $ (165)
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share from
continuing operations ............. $ 0.27 $ (0.05) $ (0.76) $ (0.05) $ (0.26) $ 0.09 $ 0.01 $ 0.01
========= ========= ========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share
from continuing operations ........ $ 0.27 $ (0.05) $ (0.76) $ (0.05) $ (0.26) $ 0.07 $ 0.01 $ 0.01
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share from
discontinued operations ........... $ (0.10) $ (0.10) $ (0.20) $ (0.05) $ (0.02) $ (0.04) $ (0.01) $ --
========= ========= ========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share
from discontinued operations ...... $ (0.10) $ (0.10) $ (0.20) $ (0.05) $ (0.02) $ (0.03) $ (0.01) $ --
========= ========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share ..... $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ 0.05 $ (0.00) $ 0.01
========= ========= ========= ========= ========= ========= ========= =========
Diluted earnings (loss) per share ... $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ 0.04 $ (0.00) $ 0.01
========= ========= ========= ========= ========= ========= ========= =========
Weighted average shares outstanding,
basic ............................ 5,841 6,064 10,137 11,952 16,638 19,504 18,443 20,570
Weighted average shares outstanding,
diluted .......................... 5,841 6,064 10,137 11,952 16,638 23,027 20,693 23,847
YEARS ENDED DECEMBER 31
SEPTEMBER 30,------------------------------------------------ JUNE 30,
1996 1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- ------- -------- --------
BALANCE SHEET DATA: (UNAUDITED)
Cash and cash equivalents .... $ 492 $ 574 $ 1,571 $ 450 $ 450 $ 756 $ 532
Working capital .............. 3,911 3,554 4,625 4,999 1,080 2,780 3,288
Total assets ................. 12,870 12,316 20,129 20,352 16,489 19,484 19,314
Long-term debt, net of current
portion ................... 1,755 2,019 2,012 1,175 143 282 805
Stockholders' equity ......... 5,486 4,753 6,011 5,482 3,801 5,807 5,646
Convertible redeemable
preferred stock ........... -- -- 1 1,516 588 259 264
No cash dividends on our common stock were declared during any of the
periods presented above. Shares outstanding and earnings (loss) per share have
been restated to give effect to the recapitalization of XET Corporation (the
accounting acquirer) in the reverse acquisition of MicroTel International, Inc.
by XET Corporation on March 26, 1997.
The historical financial data above for periods prior to the merger is
that of XET Corporation. In conjunction with the reverse acquisition accounting
treatment, XET Corporation changed its fiscal year end from September 30 to
December 31 to adopt the fiscal year end of MicroTel International, Inc. The
three-month period ended December 31, 1996 represents the "transition" period
between XET Corporation's fiscal year ended September 30, 1996 and the beginning
of its new fiscal year on January 1, 1997.
In October 2000, we decided to discontinue our circuits segment's
operations. Accordingly, all current and prior financial information related to
the circuits segment operations have been presented as discontinued operations
in historical financial data above.
5
THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SECTION IS REPLACED WITH THE FOLLOWING:
--------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES AND THE INFORMATION
INCLUDED UNDER THE CAPTION "RISK FACTORS" INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We previously organized our operations in three business segments:
o Instrumentation and Test Equipment;
o Components and Subsystem Assemblies; and
o Circuits.
In an effort to focus our attention and working capital on our
telecommunications test instruments and our transmission and network access
products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc.
in April 1998 and sold substantially all of the assets of HyComp, Inc., a
manufacturer of hybrid circuits, in April 1999.
In October 2000, we decided to discontinue our circuits segment. On
November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material
circuit board business and was a division of our wholly-owned subsidiary, XET
Corporation. We intend to retain our Monrovia, California circuit board
manufacturing facility as a small captive supplier of circuit boards to XET
Corporation's Digitran Division in our electronic components segment.
Effective August 1, 2000, we acquired the assets and business
operations of T-Com, LLC, or T-Com, a telecommunications test instruments
manufacturer located in Sunnyvale, California. T-Com produced central office
equipment, which is equipment that is typically employed in switching centers
and network operating centers.
Through our three direct wholly-owned operating subsidiaries, XET
Corporation, CXR Telcom Corporation, or CXR Telcom, and CXR, S.A., and through
the divisions and subsidiaries of our subsidiaries, we presently design,
manufacture, assemble, and market products and services in the following two
material business segments:
o Telecommunications
-- Telecommunications Test Instruments (analog and digital
test instruments used in the installation, maintenance,
management and optimization of public and private
communication networks)
-- Transmission and Network Access Products (range of products
for accessing public and private networks for the
transmission of data, voice and video)
o Electronic Components (digital switches and electronic power
supplies)
6
Our sales are primarily in North America, Europe and Asia. In the first
two quarters of 2001, approximately 55% of our sales were to customers in the
telecommunications industry, and the remainder of our sales were to industrial,
aerospace and military contractor customers.
Revenues are recorded when products are shipped if shipped FOB shipping
point or when received by the customer if shipped FOB destination.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2000
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of total net sales.
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
Net sales ............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................................ 57.7 65.9 55.4 59.1 52.7
-------- -------- -------- -------- --------
Gross profit ......................................... 42.3 34.1 44.6 40.9 47.3
Selling, general and administrative expenses ......... 33.9 40.8 35.0 32.9 41.0
Engineering and product development expenses ......... 7.3 7.1 4.2 3.7 4.3
-------- -------- -------- -------- --------
Operating income (loss) .............................. 1.1 (13.8) 5.4 4.3 2.0
Interest expense ..................................... (2.2) (1.6) (1.5) (1.4) (1.5)
Other income (expense) ............................... (0.4) (0.3) 2.3 1.6 0.3
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
income taxes ...................................... (1.5) (15.7) 6.2 4.5 0.8
Income taxes ......................................... 0.4 0.5 0.1 0.1 0.0
-------- -------- -------- -------- --------
Income (loss) from continuing operations ............. (1.9) (16.2) 6.1 4.4 0.8
Loss from discontinued operations .................... (4.0) (3.2) (0.8) (1.4) --
Gain (loss) on disposal of discontinued segment ...... 1.9 1.7 (1.7) -- --
-------- -------- -------- -------- --------
Net income (loss) .................................... (3.9)% (17.7)% 3.6% 3.0% 0.8%
======== ======== ======== ======== ========
CONTINUING OPERATIONS
NET SALES. Net sales for the three months ended June 30, 2001 increased
by $255,000 (3.7%) to $7,083,000, as compared to $6,828,000 for the three months
ended June 30, 2000.
Net sales of our telecommunications products for the three months ended
June 30, 2001 increased by $556,000 (15.3%) to $4,196,000, as compared to
$3,640,000 for the comparable period in 2000. Net sales of our U.S.-based
telecom operation of CXR Telcom for the three months ended June 30, 2001
increased by $886,000 (63.7%) to $2,277,000, as compared to $1,391,000 for the
comparable period in 2000. This increase was partially due to the addition of
$384,000 of net sales of T-Com, LLC products and an increase in sales of our CXR
HALCYON test equipment. CXR Telcom sales excluding sales of T-Com, LLC products
increased by 36.0% in the current quarter as compared to the quarter ended June
30, 2000. Net sales of our French subsidiary, CXR, S.A., for the three months
ended June 30, 2001 decreased by $330,000 (14.7%) to $1,918,000, as compared to
$2,248,000 for the comparable prior year period. This decrease would have been
5% if not for the decline in the value of the French Franc in relation to the
value of the U.S. dollar in the quarter ended June 30, 2001 as compared to their
relative values for the quarter ended June 30, 2000. The majority of the decline
in sales of CXR, S.A. is due to the closure of the Networking Division, which
had sales of $327,000 in the three months ended June 30, 2000. Transmission
sales in Europe increased $341,000 in the current quarter as compared to the
quarter ended June 30, 2000, which increase was offset with a $343,000 decline
in the resale of original equipment manufactured instruments in Europe.
7
Net sales of electronic components for the three months ended June 30,
2001 decreased by $301,000 (9.4%) to $2,887,000, as compared to $3,188,000 for
the comparable period in 2000. The decrease was primarily due to a decline in
sales of power supplies of our U.K. subsidiary, XCEL Corporation, Ltd., or XCL,
as measured in U.S. dollars. The volume of sales was only down 2.9% as measured
in XCL's functional currency, the British pound sterling, but because the
British pound sterling has declined against the value of the U.S. dollar, the
sales volume of XCL in the U.K. declined by $218,000 (14.6%) to $1,274,000 for
the quarter ended June 30, 2001, as compared to $1,492,000 in the quarter ended
June 30, 2000.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 47.3% for the three months ended June 30, 2001, as compared to 40.9% for the
comparable period in 2000. In dollar terms, total gross profit increased by
$555,000 (19.8%) to $3,351,000 for the three months ended June 30, 2001, as
compared to $2,796,000 for the comparable period in 2000.
Gross profit for our telecommunications segment increased in dollar
terms by $598,000 (40.2%) to $2,088,000 for the three months ended June 30,
2001, as compared to $1,490,000 for the comparable period in 2000, and increased
as a percentage of net sales from 40.9% in 2000 to 49.8% in 2001. The increase
in gross profit as a percentage of net sales was due primarily to the increased
sales volume of the CXR HALCYON test instruments, which reduced per unit costs.
Gross profit for our electronic components segment decreased in dollar
terms by $45,000 (3.4%) to $1,261,000 for the three months ended June 30, 2001,
as compared to $1,306,000 for the comparable period in 2000, and increased as a
percentage of related net sales from 41.0% in 2000 to 43.7% in 2001. This
percentage increase was primarily the result of improved gross margins at XCL in
the U.K. as a result of an increase in sales of custom military power supplies,
or PSUs, in relation to the PSUs sold in the commercial market. For the quarter
ended June 30, 2001, custom PSU sales increased to 69.06% of the total PSUs
sold, as compared to 39.6% in the three month period ended June 30, 2000. The
custom military PSUs carry higher margins than the commercial PSUs. Also, the
costs of integrating the acquisition of the Belix Ltd. companies reduced the
gross margin in the prior year period. As a result of these matters, XCL's gross
margin improved from 15.4% of net sales in the second quarter of 2000 to 32.5%
of net sales in the current three-month period. The improvement in XCL's gross
margins was partially offset with a decline in gross margins of digital switch
products manufactured in Rancho Cucamonga, California at our XET Corporation
subsidiary. These gross margins fell from 66.5% of net sales for the prior year
period to 53.7% of net sales for the three-month period ended June 30, 2001.
This reduction was primarily due to the lower volume caused by the completion of
the BAE Systems, Canada contract during the first quarter of 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $657,000 (29.2%) to $2,905,000 for the
three-month period ended June 30, 2001, as compared to $2,248,000 for the
comparable period in 2000. This increase was primarily due to increases of
$307,000 in legal and accounting fees, $161,000 of compensation expenses and
$171,000 of administrative expenses at CXR Telcom due to the initial
consolidation of the business acquired with the acquisition of T-Com, LLC. These
increases were partially offset with a reduction in administrative costs of
$208,000 at XPS due to the completion of the integration of the Belix Ltd.
companies that were acquired in April 2000. The legal and accounting fees in the
three-month period ended June 30, 2001 include $312,000 incurred in connection
with non-routine Securities and Exchange Commission filings.
8
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses increased by
$50,000 (19.8%) to $303,000 for the three months ended June 30, 2001, as
compared to $253,000 for the comparable prior year period. The increase
primarily was due to the addition of engineering staff and related costs at CXR
Telcom.
OTHER INCOME AND EXPENSE. Interest expense increased slightly to
$105,000 for the three months ended June 30, 2001, from $98,000 in the
comparable period in 2000. Other income of $22,000 in the second quarter of 2001
declined from $108,000 in the second quarter of 2000 primarily due to a $137,000
reduction in a warranty reserve in the second quarter of 2000.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $95,000 for the three months ended June 30, 2000. Net sales, gross profit and
selling, general and administrative expenses for our circuits business for the
three months ended June 30, 2000 were $683,000, $17,000 and $57,000,
respectively.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
The following table sets forth, for the periods indicated, selected
statement of operations data expressed as a percentage of total net sales.
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------- ------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
Net sales ............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales ........................................ 57.7 65.9 55.4 59.6 55.6
-------- -------- -------- -------- --------
Gross profit ......................................... 42.3 34.1 44.6 40.4 44.4
Selling, general and administrative expenses ......... 33.9 40.8 35.0 34.6 37.7
Engineering and product development expenses ......... 7.3 7.1 4.2 4.0 4.5
-------- -------- -------- -------- --------
Operating income (loss) .............................. 1.1 (13.8) 5.4 1.8 2.2
Interest expense ..................................... (2.2) (1.6) (1.5) (1.5) (1.4)
Other income (expense) ............................... (0.4) (0.3) 2.3 1.6 0.4
-------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes ............................................. (1.5) (15.7) 6.2 1.9 1.2
Income taxes ......................................... 0.4 0.5 0.1 0.1 0.1
-------- -------- -------- -------- --------
Income (loss) from continuing operations ............. (1.9) (16.2) 6.1 1.8 1.1
Loss from discontinued operations .................... (4.0) (3.2) (0.8) (1.2) --
Gain (loss) on disposal of discontinued segment ...... 1.9 1.7 (1.7) -- --
-------- -------- -------- -------- --------
Net income (loss) .................................... (3.9)% (17.7)% 3.6% 0.6% 1.1%
======== ======== ======== ======== ========
CONTINUING OPERATIONS
NET SALES. Net sales for the six months ended June 30, 2001 increased
by $1,860,000 (14.7%) to $14,548,000, as compared to $12,688,000 for the six
months ended June 30, 2000.
Net sales of our telecommunications products for the six months ended
June 30, 2001 increased by $775,000 (10.8%) to $7,968,000, as compared to
$7,193,000 for the comparable period in 2000. Net sales of our U.S.-based
telecom operation of CXR Telcom for the six months ended June 30, 2001 increased
by $1,033,000 (38.1%) to $3,741,000, as compared to $2,708,000 for the
comparable period in 2000. This increase was mainly due to the addition of
$815,000 of net sales of T-Com products that were acquired effective August 2000
9
with the acquisition of T-Com, LLC. Excluding sales of T-Com, LLC products, CXR
Telcom sales increased by 8.0% in the first half of 2001 as compared to the
comparable prior year period. Net sales of our transmission and original
equipment manufactured test instruments by our French subsidiary, CXR, S.A., for
the six months ended June 30, 2001 decreased by $258,000 (5.8%) to $4,227,000,
as compared to $4,485,000 for the comparable prior year period. This decrease
would have been 4.3% if not for the decline in the value of the French Franc in
relation to the value of the U.S. dollar in the six months ended June 30, 2001
as compared to their relative values for the six months ended June 30, 2000. The
major reason for the decrease in sales of CXR, S.A. was the closure of the
Networking Division, which had sales of $699,000 in the first six months of 2000
and negligible sales in the first six months of 2001. This decrease more than
offset sales increases of transmission products and telecommunications test
instruments, which increased by $455,000 (12.1%) in the first six months of 2001
to $4,202,000, as compared to $3,747,000 in the first six months of 2000.
Net sales of our electronic components for the six months ended June
30, 2001 increased by $1,085,000 (19.7%) to $6,580,000, as compared to
$5,495,000 for the comparable period in 2000, primarily due to a $655,000
increase in sales of XCL. This increase in net sales was primarily due to an
increase in deliveries of outstanding contracts. Also contributing to the
increase in sales of our electronic components segment was XET Corporation's
Digitran Division in Rancho Cucamonga, California, which increased its sales in
the six months ended June 30, 2001 by $411,000 (16.0%) to $2,985,000, as
compared to $2,574,000 for the comparable prior year period. This increase was
mainly due to shipments of digital switches under its contract with BAE Systems,
Canada. Although shipments under this contract ended during the first quarter of
2001, we anticipate that higher revenues from our power conversion products will
offset the reduction in sales caused by the completion of our contract with BAE
Systems, Canada.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 44.4% for the six months ended June 30, 2001, as compared to 40.4% for the
comparable period in 2000. In dollar terms, total gross profit increased by
$1,344,000 (26.2%) to $6,466,000 for the six months ended June 30, 2001, as
compared to $5,122,000 for the comparable period in 2000.
Gross profit for our telecommunications segment increased in dollar
terms by $636,000 (22.3%) to $3,477,000 for the six months ended June 30, 2001,
as compared to $2,841,000 for the comparable period in 2000, and increased as a
percentage of net sales from 39.5% in 2000 to 43.6% in 2001. The increase in
gross profit as a percentage of net sales was due primarily to the increased
volume and efficiencies at CXR Telcom in Fremont, California and sales of higher
margin products at CXR, S.A. in France.
Gross profit for our electronic components segment increased in dollar
terms by $708,000 (31.0%) to $2,989,000 for the six months ended June 30, 2001,
as compared to $2,281,000 for the comparable period in 2000, and increased as a
percentage of related net sales from 41.5% in 2000 to 45.4% in 2001. This
increase was primarily the result of improved profit margins in connection with
higher production volumes and a higher margin product mix at XCL in the U.K.,
which contributed $461,000 of the increase in gross profit. XIT's Digitran
Division contributed $260,000 to the increase in gross profit primarily due to
sales of higher margin products sold under the BAE Systems, Canada contract.
10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1,091,000 (24.8%) to $5,486,000 for the
six-month period ended June 30, 2001, as compared to $4,395,000 for the
comparable period in 2000. The increase was due to increases of $460,000 in
legal and accounting fees, $325,000 of compensation expenses and $330,000 of
administrative expenses at CXR Telcom due to the consolidation of the business
acquired with the acquisition of T-Com, LLC. This increase was partially offset
with a reduction in administrative costs of $165,000 at XCL due to the
completion of the integration of the Belix Ltd. companies that were acquired in
April 2000. The legal and accounting fees in the first half of 2001 include
$452,000 incurred in connection with non-routine Securities and Exchange
Commission filings.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses increased by
$166,000 (33.5%) to $662,000 for the six months ended June 30, 2001, as compared
to $496,000 for the comparable prior year period, reflecting new product
development activities. This increase primarily was due to the addition of
engineering staff.
OTHER INCOME AND EXPENSE. Interest expense increased slightly to
$198,000 for the six months ended June 30, 2001 from $195,000 in the comparable
period in 2000. Other income of $50,000 in the first half of 2001 declined from
$205,000 in the first half of 2000 primarily due to a $137,000 reduction in a
warranty reserve in the second quarter of 2000.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits subsidiary in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $151,000 for the six months ended June 30, 2000. Net sales, gross profit and
selling, general and administrative expenses for our circuits business for the
six months ended June 30, 2000 were $1,310,000, $64,000 and $215,000,
respectively.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999
CONTINUING OPERATIONS
NET SALES. Net sales for the year ended December 31, 2000 increased by
$2,137,000 (8.2%) to $28,050,000 as compared to $25,913,000 for the year ended
December 31, 1999.
Net sales of our telecommunications products and services during 2000
declined slightly to $15,658,000 from $15,666,000 during 1999. Test equipment
sales during 2000 increased by $2,923,000 (58.7%) to $7,906,000 as compared to
$4,983,000 for 1999. This increase in sales of test equipment was primarily due
to the positive market acceptance of our CXR HALCYON 704 series product line
which accounted for $1,125,000 of the increase. The remaining $1,798,000 of this
increase was substantially attributable to additional test equipment sales as a
result of our acquisition of the business of T-Com in August 2000. This increase
in net sales of test equipment was offset by a reduction in sales of
transmission and networking equipment that are produced at our French
subsidiary, CXR S. A., of $2,931,000 (37.8%) from $10,683,000 during 1999 to
$7,752,000 for 2000. The decline in the net sales of these products was
primarily due to the conversion of sales amounts from French Francs to the U.S.
Dollars. The average U.S. Dollar value of the French Franc has declined
approximately 15% from 1999 to 2000. In addition, budget delays and reductions
within the French public sector also contributed to the reduction of
transmission equipment sales.
11
Net sales of electronic components for 2000 increased by $2,145,000
(20.9%) to $12,392,000 as compared to $10,247,000 for 1999. This increase was
primarily due to an increase in digital switch sales of XET Corporation's
Digitran Division of $2,905,000 (63%) for 2000 to $7,508,000 from $4,603,000 for
1999. Contributing to this increase was a large order for switches placed by BAE
Systems of Canada, which accounted for $1,656,000 of net sales in 2000. Sales
under our contract with BAE Systems Canada, Inc. ended during the first quarter
of 2001. This increase was offset by the termination of our subsystem assembly
business that accounted for $670,000 of sales in 1999.
GROSS PROFIT. Gross profit as a percentage of net sales increased to
44.6% for 2000 as compared to 34.1% for 1999. In dollar terms, gross profit
increased by $3,674,000 (41.5%) to $12,521,000 for 2000 as compared to
$8,847,000 for 1999. For 2000 and 1999, cost of sales included provisions for
inventory obsolescence of $893,000 and $1,144,000, respectively. Provisions for
inventory obsolescence are recorded as necessary to reduce obsolete inventory to
estimated net realizable value or to specifically reserve for obsolete inventory
that we intend to dispose of. Upon disposal of obsolete inventory, the inventory
is written off and the allowance for inventory obsolescence is reduced.
Gross profit for our telecommunications segment increased in dollar
terms by $1,292,000 (24.8%) to $6,508,000 for 2000 as compared to $5,216,000 for
1999 and increased as a percentage of related net sales from 33.4% in 1999 to
41.5% in 2000. This increase in gross profit was primarily due to a larger
portion of telecommunications segment sales consisting of higher margin test
equipment in 2000 which included the new CXR HALCYON 704 series test equipment
and our T-Com test equipment. These products, each of which contributed a
greater proportion of sales to this segment in 2000 than in 1999, generate a
higher gross profit margin than the older model test equipment and generally
contribute a higher margin than the transmission products.
Gross profit of our electronic components segment increased in total
dollar terms by $2,382,000 (65.6%) to $6,013,000 for 2000 from $3,631,000 in
1999 and increased as a percentage of related net sales from 35.2% in 1999 to
48.5% in 2000. The increase in gross profit margin in 2000 as compared to 1999
was primarily due to improved profit margins in connection with sales made by
XET Corporation which resulted from manufacturing efficiencies, reduced overhead
in connection with the move from the Ontario facility to our Rancho Cucamonga
facility, higher production volumes and a larger percentage of higher margin
night vision switches. These increases were slightly offset by a decline in
profit margin of sales of our U. K. subsidiary due to lower sales volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $757,000 (7.2%) to $9,827,000 for 2000 as
compared to $10,584,000 for 1999 and decreased as a percentage of net sales from
40.8% in 1999 to 35.0% in 2000. This decrease is attributable to a reduction in
selling expenses of $291,000 and reduction in general and administrative
expenses of $466,000. The decrease in general and administrative expenses was
primarily due to continued cost cutting efforts and due to certain expenses
incurred in 1999 that were not incurred in 2000. These expenses include a
$452,000 expense related to the establishment of a reserve for a note
receivable, a $522,000 charge related to our investor relations efforts and a
$193,000 charge related to a contingent stock agreement. Alternatively, there
were general and administrative expenses incurred in 2000 that were not incurred
in 1999 including approximately $200,000 of legal and accounting fees related to
the filing of a registration statement and other filings with the Securities and
Exchange Commission.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our telecommunications segment. These expenses decreased by
$674,000 (36.6%) to $1,167,000 for 2000 as compared to $1,841,000 for 1999. The
majority of this reduction is due to eliminating CXR Telcom's engineering
function in Fremont, California for test instruments and concentrating our
engineering efforts in only one location, our St. Charles, Illinois facility,
and the transfer of transmission and network access product engineering to CXR
S. A. in France with no additional staffing added there.
12
OTHER INCOME AND EXPENSE. Interest expense increased slightly to
$424,000 for 2000 as compared to $411,000 for 1999. Other income was $631,000
for 2000 as compared to an expense of $81,000 for 1999. Other income in 2000
included $197,000 of gain on the sale of common stock of Wi-LAN, Inc., $137,000
reduction in a warranty reserve, $90,000 for reductions in accruals for
settlements related to leased equipment and gain on foreign currency exchange of
$94,000.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes and U.S. alternative minimum tax as we are in
a loss carryforward position for federal income tax purposes. At December 31,
2000 we had total net deferred income tax assets of approximately $16,321,000.
These potential income tax benefits, a significant portion of which relates to
net operating loss carryforwards, have been subjected to a 100% valuation
allowance since realization of these assets is not more likely than not in light
of our recurring losses from operations.
DISCONTINUED OPERATIONS
As a result of our decision in October 2000 to discontinue our last
remaining material circuits business, which operated as the XCEL Etch Tek
Division of our XET Corporation subsidiary, our circuits segment has been
accounted for as discontinued operations. We reported a net loss from
discontinued operations of $699,000 for 2000 as compared to a net loss of
$398,000 for 1999. The 2000 net loss included a loss of $487,000 from the
disposal of our discontinued operations, including $122,000 for phase out
period, as compared to a gain of $449,000 for 1999 relating to the sale of
HyComp, Inc., a subsidiary in our circuits segment, and the separate sale of its
corporate shell.
Net sales for our circuits business for 2000 decreased by $131,000
(5.5%) to $2,257,000 as compared to $2,388,000 for 1999 primarily due to the
sale of our circuits segment facility in November 2000, which resulted in 10 1/2
months of circuit segment sales during 2000.
Selling, general and administrative expenses related to our
discontinued operations declined by $288,000 (43.4%) to $375,000 for 2000 as
compared to $663,000 for 1999 primarily due to the sale of HyComp, Inc. in 1999
and cost reductions of Etch-Tek.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
CONTINUING OPERATIONS
NET SALES. Net sales for the year ended December 31, 1999 decreased by
$4,187,000 (13.9%) to $25,913,000 as compared to $30,100,000 for the year ended
December 31, 1998.
Net sales of our telecommunications products and services decreased by
$1,866,000 (10.6%) to $15,666,000 for 1999, as compared to $17,532,000 for 1998.
This decrease was primarily due to reduced sales of our older CXR 5200 series of
telecommunications test sets which we were in the process of replacing with our
new CXR HALCYON 700 series of equipment because the older models were not
computer compatible and were larger and heavier than the newer models. Sales of
our older models, which totaled $15,000 during 1999, declined at a faster rate
than the increase in sales of our new models, which sales totaled $1,940,000
during 1999. The decrease in net sales attributable to the decline in sales of
our older model test equipment was partially offset by a $937,000 increase in
U.S. sales of our transmission products. An increase in sales by CXR, S.A. was
not fully recognized by us as a result of a 18.4% decline in the value of the
French Franc in relation to the U.S. dollar. The net sales of CXR, S.A. in its
functional currency of French Francs were 16.9% greater in 1999 than in 1998.
However, because of the decline in the value of the French Franc in relation to
the U.S. dollar, CXR, S.A. net sales in U.S. dollars were 15% less in 1999 than
in 1998.
13
Net sales of electronic components decreased by $2,321,000 (18.5%) to
$10,247,000 for 1999 as compared to $12,568,000 for 1998 primarily due to the
discontinuance of our XCEL-Lite products, which represented no sales in 1999 as
compared to sales of $576,000 in 1998, the discontinuance of low margin
subsystem assembly business, which represented sales of $670,000 in 1999 as
compared to $1,069,000 in 1998, a $1,199,000 decline in sales of our digital
switches. We believe that the reduction in digital switch sales in 1999 as
compared to 1998 was at least partially due to a preannounced price increase
effective in early 1999 that caused some customers to purchase switches in 1998
rather than in 1999 in order to avoid the 1999 price increase.
GROSS PROFIT. Gross profit as a percentage of total net sales decreased
to 34.1% for 1999 as compared to 42.3% for 1998. In dollar terms, total gross
profit decreased by $3,900,000 (30.6%) to $8,847,000 for 1999 as compared to
$12,747,000 for 1998. For the years ended December 31, 1999 and 1998, cost of
sales included provisions for inventory obsolescence of $1,144,000 and $879,000,
respectively. Provisions for inventory obsolescence are recorded as necessary to
reduce obsolete inventory to estimated net realizable value or to specifically
reserve for obsolete inventory that we intend to dispose of. Upon disposal of
obsolete inventory, the inventory is written off and the allowance for inventory
obsolescence is reduced.
Gross profit for our telecommunications segment decreased in dollar
terms by $2,836,000 (35.2%) to $5,216,000 for 1999 as compared to $8,052,000 for
1998 and decreased as a percentage of related net sales from 45.9% in 1998 to
33.3% in 1999 due largely to a 48% reduction in sales of our older test
equipment that had a higher margin than early initial production runs of our
newer products and due to a 77% increase in sales of our lower margin
transmission products. Our gross profit in this segment was also negatively
affected by the total reduction in sales that caused a lower absorption of fixed
costs. In addition, because of our cash flow constraints, we were unable to pay
many of our suppliers in a timely fashion. As a result, we were forced to use
higher cost suppliers for some of our parts. However, margins on the new test
instruments are expected to meet or exceed the margins of older products as
production lot sizes increase and other efficiencies are achieved as the new
products mature. As of April 2000, all lower margin transmission products had
been transferred from California to France, where those products are more
efficiently produced, thus achieving a higher margin on the same products now
being exported from France for resale in the U.S.
Gross profit for our electronic components segment decreased in total
dollar terms by $1,064,000 (22.7%) to $3,631,000 for 1999 as compared to
$4,695,000 for 1998 and decreased as a percentage of related net sales from
37.3% in 1998 to 34.1% in 1999 primarily due to additional costs incurred in
connection with the move from the Ontario facility to our Rancho Cucamonga
facility.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $382,000 (3.7%) to $10,584,000 for 1999 as
compared to $10,202,000 for 1998. Our general and administrative expenses
increased by $400,000 (7.0%) to $6,094,000 for 1999 as compared to $5,694,000
for 1998 primarily due to the non-cash expense of $522,000 in shares of our
common stock and warrants to purchase our common stock to our investor relations
firms in connection with our plan to increase our visibility within the
investment community. Offsetting increases in general and administrative
expenses were reductions in expenses due to the transfer of the administrative
functions of CXR Telcom to our corporate office.
14
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses, which consist primarily of research and product
development activities of our telecommunications segment, decreased by $361,000
(16.4%) to $1,841,000 in 1999 as compared to $2,202,000 for 1998. This reduction
was primarily due to elimination of the CXR engineering function in Fremont,
California in May 1999, which reduced engineering expenses by $294,000. The
engineering staff for our United States-based test equipment products is now
housed only in our St. Charles, Illinois facility. We believe that engineering
and product development are important to our future profitability. All
engineering for our transmission products has been consolidated in France at our
CXR, S.A. facility.
OTHER INCOME AND EXPENSE. Interest expense was $411,000 in 1999 as
compared to interest expense of $675,000 in 1998. This decrease in interest
expense was primarily a result in decreased average borrowings during 1999.
INCOME TAXES. Income taxes, while nominal in both respective periods,
consist primarily of foreign taxes as we are in a loss carryforward position for
federal income tax purposes. At December 31, 1999, we had total net deferred
income tax assets of approximately $18,335,000. These potential income tax
benefits, a significant portion of which relates to net operating loss
carryforwards, have been subjected to a 100% valuation allowance since
realization of these assets is not more likely than not in light of our
recurring losses from operations.
DISCONTINUED OPERATIONS
As a result of our decision to discontinue our last remaining material
circuits operation in October 2000, our circuits segment has been accounted for
as discontinued operations. We reported a net loss from discontinued operations
of $398,000 for 1999 as compared to a net loss of $623,000 for 1998.
Net sales for our circuits business for 1999 decreased by $4,773,000
(66.7%) to $2,388,000 as compared to $7,161,000 for 1998 primarily due to the
sale of HyComp, Inc. on March 31, 1999 and the sale of XCEL Arnold Circuits,
Inc. on March 31, 1998, which accounted for $3,880,000 of the reduction, as well
as a lack of working capital to acquire materials necessary to support customer
delivery requirements in the remaining XCEL Etch Tek Division because available
working capital was dedicated to higher margin components and telecommunications
products.
Gross profit for our circuits business decreased in total dollar terms
by $848,000 (131.9%) to gross loss of $(205,000) in 1999 as compared to gross
profit of $643,000 in 1998 and decreased as a percentage of related net sales
from 9.0% in 1998 to 8.6% in 1999 primarily due to the sale of HyComp, Inc. in
1999, which accounted for $1,292,000 of the reduction, and the booking of a
reserve in the amount of $250,000 to cover potential warranty claims associated
with products sold by HyComp, Inc. prior to its sale.
During the six months ended June 30, 2001, we funded our operations
primarily through revenue generated from our operations and through our line of
credit with Wells Fargo Business Credit, Inc. During the latter part of 1999, we
embarked on a cost reduction program in an effort to improve our cash flow
position and profitability. This program included a significant reduction in
personnel, the downsizing and relocation of our corporate headquarters and the
sale of investments we had in other companies. As described below, these cost
measures, together with our line of credit, have had a positive impact on
MicroTel.
As of December 31, 2000, we had working capital of $2,780,000 and an
accumulated deficit of $18,775,000. As of that date, we had $756,000 in cash and
cash equivalents and $7,440,000 of accounts receivable. As of June 30, 2001, we
had working capital of $3,288,000, an accumulated deficit of $18,620,000 and an
accumulated other comprehensive loss of $1,057,000. As of that date, we had
$532,000 in cash and cash equivalents and $7,327,000 of accounts receivable.
15
Cash provided by our operating activities totaled $165,000 for the six
months ended June 30, 2001. Cash used by operations for the six months ended
June 30, 2000 was $759,000. This increase in cash provided by operations during
the six months ended June 30, 2001 resulted primarily from increased
profitability in operations and a reduction in the pay down of accounts payable,
partially offset by the reduction of cash collected from accounts receivable and
the purchase of additional inventories.
Cash used in our investing activities totaled $73,000 for the six
months ended June 30, 2001 as compared to cash used in investing activities of
$38,000 for the six months ended June 30, 2000. Included in the 2000 results is
$520,000 from the sale of shares of common stock we held in Digital Transmission
Systems, Inc. and a usage of $592,000 for the purchase of the Belix Ltd.
companies in the U.K.
Cash provided by financing activities totaled $102,000 for the six
months ended June 30, 2001, as compared to cash provided by financing activities
of $925,000 for the six months ended June 30, 2000, primarily due to the
increase in notes payable and long-term debt that was mainly incurred due to the
acquisition of the Belix Ltd. companies in April 2000.
On June 23, 2000, our credit facility with our previous lender,
Congress Financial Corporation, or Congress Financial, expired while we were out
of compliance with the adjusted net worth covenant of this facility. Congress
Financial extended this facility through August 14, 2000. On August 16, 2000,
our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting
as guarantor, obtained a credit facility from Wells Fargo Business Credit, Inc.
This facility provides for a revolving loan of up to $3,000,000 secured by our
inventory and accounts receivable and a term loan in the amount of $687,000
secured by our machinery and equipment. As a condition of extending this credit
facility to our subsidiaries, Wells Fargo Business Credit, Inc. required our
President and Chief Executive Officer, Carmine Oliva, to personally guaranty a
portion of our indebtedness under the facility. On January 26, 2001, Mr. Oliva
was released from this guaranty. The initial annual interest rate on both
portions of the credit facility was the prime rate plus 2%. The facility
contains a performance-based interest reduction feature. Based upon our 2000
financial performance, we obtained a reduction in the interest rate to the prime
rate plus 1% effective April 1, 2001. The balance outstanding under this credit
facility was $1,753,000 on June 30, 2001. There was $361,000 of additional
borrowings available as of June 30, 2001. The credit facility expires on August
16, 2003. Our foreign subsidiaries have obtained credit facilities with Lloyds
Bank in England, Banc National du Paris, Societe General and Banque Hervet in
France and Johan Tokyo Credit Bank in Japan. The balances outstanding under our
U.K. and France credit facilities were $1,236,000 and $508,000, respectively, on
June 30, 2001. During the quarter ended June 30, 2001, our U.K. subsidiary
converted $705,000 of its credit facility to a five-year term loan with a
variable interest rate of the bank's base rate plus 2.5% and monthly payments of
principal plus interest.
We believe that current and future available capital resources,
revenues generated from operations, and other existing sources of liquidity,
including our credit facility with Wells Fargo Business Credit, Inc., will be
adequate to meet our anticipated working capital and capital expenditure
requirements for at least the next twelve months. If, however, our capital
requirements or cash flow vary materially from our current projections or if
unforeseen circumstances occur, we may require additional financing. Failure to
raise such necessary capital could restrict our growth, limit our development of
new products or hinder our ability to compete.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against us.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either us or our operating
subsidiaries.
16
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 141, or SFAS 141, "Business
Combinations," which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. We do not expect SFAS 141 to have a material
impact on our financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, or SFAS 142, "Goodwill and Intangible Assets," which revises
the accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be amortized
and will be tested for impairment annually. SFAS 142 is effective for fiscal
years beginning after December 15, 2001, with earlier adoption permitted. We do
not expect SFAS 142 to have a material impact on our financial position or
results of operations.
EURO CONVERSION
Our operating subsidiaries located in France and the United Kingdom
have combined net sales from operations approximating 50% of our total net sales
for the six months ended June 30, 2001. Net sales from the French subsidiary
participating in the Euro conversion were 29% of our net sales for the six
months ended June 30, 2001. We continue to review the impact of the Euro
conversion on our operations.
In 1998, our European operations took steps to ensure their capability
of entering into Euro transactions as of January 1, 1999. No material changes to
information technology and other systems were necessary to accommodate these
transactions because such systems already were capable of using multiple
currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on our European operations, at this time we do not foresee any
material impediments to our ability to compete for orders from customers
requesting pricing using the new exchange rate. Since we have no significant
direct sales between our United States and European operations, we regard
exchange rate as nominal.
17
SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth selected quarterly financial data. This
quarterly information is unaudited, has been prepared on the same basis as our
annual financial statements, and, in our opinion, reflects all adjustments,
consisting only of normal recurring accruals, necessary for a fair presentation
of the information for periods presented. Operating results for any quarter are
not necessarily indicative of results for any future period.
CONSOLIDATED STATEMENTS
OF OPERATIONS AND
COMPREHENSIVE INCOME
DATA:
QUARTER ENDED
------------------------------------------------------------------------------------------------
JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30,
1999 1999 1999 2000 2000 2000 2000 2001 2001
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net sales ................ $ 6,319 $ 6,448 $ 6,469 $ 5,860 $ 6,828 $ 6,871 $ 8,491 $ 7,465 $ 7,083
Cost of sales ............ 3,938 4,203 4,798 3,534 4,032 3,080 4,883 4,350 3,732
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit ............. 2,381 2,245 1,671 2,326 2,796 3,791 3,608 3,115 3,351
Selling, general and
administrative
expenses .............. 2,687 2,385 2,104 2,147 2,248 2,431 3,001 2,581 2,905
Engineering and product
development expenses .. 477 459 379 243 253 277 394 359 303
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations ............ (783) (599) (812) (64) 295 1,083 213 175 143
Other income (expenses),
net ................... 164 (150) (885) -- 10 51 146 (65) (83)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes ... (619) (749) (1,697) (64) 305 1,134 359 110 60
Income tax expense ....... 5 12 103 7 4 2 18 3 6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations . (624) (761) (1,800) (71) 301 1,132 341 107 54
Discontinued operations:
Income (loss) from
operations of
discontinued segment .. (290) (273) 9 (56) (95) (68) 7 -- --
Gain (loss) on disposal
of discontinued
segment ............... -- -- 118 -- -- (634) 147 -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) ........ $ (914) $(1,034) $(1,673) $ (127) $ 206 $ 430 $ 495 $ 107 $ 54
Other comprehensive gain
(loss), net ........... (161) 244 (145) 296 (436) (295) (70) (222) (104)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive gain
(loss) ................ $(1,075) $ (790) $(1,818) $ 169 $ (230) $ 135 $ 425 $ 115 $ (50)
======== ======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per
share from continuing
operations ............ $ (0.04) $ (0.05) $ (0.10) $ (0.01) $ 0.02 $ 0.06 $ 0.02 $ 0.01 $ 0.01
======== ======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share from
continuing operations . $ (0.04) $ (0.05) $ (0.10) $ (0.01) $ 0.02 $ 0.05 $ 0.01 $ 0.00 $ 0.01
======== ======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per
share from discontinued
operations ............ $ (0.02) $ (0.01) $ 0.01 $ (0.00) $ (0.01) $ (0.04) $ 0.01 $ -- $ (0.01)
======== ======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share from
discontinued
operations ............ $ (0.02) $ (0.01) $ 0.01 $ (0.00) $ (0.01) $ (0.03) $ 0.01 $ -- $ (0.01)
======== ======== ======== ======== ======== ======== ======== ======== ========
Basic earnings (loss)
per share ............. $ (0.06) $ (0.06) $ (0.09) $ (0.01) $ 0.01 $ 0.02 $ 0.03 $ 0.01 $ 0.00
======== ======== ======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss)
per share ............. $ (0.06) $ (0.06) $ (0.09) $ (0.01) $ 0.01 $ 0.02 $ 0.02 $ 0.00 $ 0.00
======== ======== ======== ======== ======== ======== ======== ======== ========
18
The following table sets forth a portion of the above unaudited
information as a percentage of net sales.
QUARTER ENDED
CONSOLIDATED STATEMENTS OF ------------------------------------------------------------------------------
OPERATIONS AND JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30,
COMPREHENSIVE INCOME DATA: 1999 1999 1999 2000 2000 2000 2000 2001 2001
------ ------ ------ ------ ------ ------ ------ ------ ------
Net sales ................. 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of sales ............. 62 65 74 60 59 45 58 58 53
------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit .............. 38 35 26 40 41 55 42 42 47
Selling, general and
administrative expenses 43 37 33 37 33 35 35 35 41
Engineering and product
development expenses ... 7 7 6 4 4 4 5 5 4
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations ............. (12) (9) (13) (1) 4 16 2 2 2
Other income (expenses),
net .................... 2 (3) (13) -- -- 1 2 (1) (1)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
continuing
operations before
income taxes ........... (10) (12) (26) (1) 4 17 4 2 1
Income tax expense ........ -- -- 2 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
continuing
operations ............. (10) (12) (28) (1) 4 17 4 2 1
Discontinued operations:
Loss from operations of
discontinued segment ... (5) (4) -- (1) (1) (2) -- -- --
Gain (loss) on disposal of
discontinued segment ... -- -- 2 -- -- (9) 2 -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ......... (15) (16) (26) (2) 3 6 6 2 1
Other comprehensive
gain (loss), net ....... (2) 4 (2) 5 (6) (4) (1) (3) (1)
------ ------ ------ ------ ------ ------ ------ ------ ------
Total comprehensive
gain (loss) ............ (17)% (12)% (28)% 3% (3)% 2% 5% (2)% 0%
====== ====== ====== ====== ====== ====== ====== ====== ======
Our operating results have fluctuated from quarter to quarter due to a
variety of reasons. We note below some of the larger changes in various line
items in the table above.
Net sales from continuing operations for the quarter ended June 30,
1999 declined by $1,205,000 (16.0%) to $6,319,000 from $7,524,000 for the
quarter ended June 30, 1998. Gross margins declined slightly to 37.7% for the
quarter ended June 30, 1999 from 41.3% for the quarter ended June 30, 1998. The
decrease in net sales was due to declines in sales in both the
telecommunications segment and the electronic components segment.
Net sales from continuing operations for the quarter ended September
30, 1999 declined $1,404,000 (17.9%) to $6,448,000 from $7,852,000 for the
quarter ended September 30, 1998. The primary reason for the reduction in net
sales was the reduced sales of our older CXR 5200 series telecommunications test
sets that we were in the process of replacing with our new CXR HALCYON 700
series of equipment because the older models were not computer compatible and
were larger and heavier than the new models. Sales of our older models, which
declined to $13,000 during the quarter ended September 30, 1999, declined at a
faster rate than the increase in sales of our new models, which sales totaled $
758,000 during the quarter ended September 30, 1999. A loss of $761,000 from
continuing operations was incurred in the third quarter of 1999.
Net sales of continuing operations for the quarter ended December 31,
1999 declined by $1,540,000 (19.2%) to $6,469,000 from $8,009,000 in the fourth
quarter of 1998. The primary reason for the decline was lower sales for our
telecommunications segment, which lower sales mainly resulted from reduced sales
of our older CXR 5200 series telecommunications test sets that we were in the
process of replacing with our new CXR HALCYON 700 series of equipment. We wrote
down the carrying value of our Digital Transmission System, Inc. stock by
$419,000 to the value received in consideration for the sale of the stock in
January 2000. This amount was included in other expense and contributed to the
loss from continuing operations after tax of $1,800,000 for the quarter ended
December 31, 1999.
19
Net sales from continuing operations for the quarter ended March 31,
2000 declined by $817,000 (12.2%) to $5,860,000 from $6,677,000 for the quarter
ended March 31, 1999. The primary cause of the sales reduction was the decline
in sales of our electronic components segment of $654,000 during the quarter
ended March 31, 2000. The majority of the decline in the electronic components
segment net sales resulted from short-term delays in production releases of some
contracts at our U. K. facility that manufactures power supplies. However, due
to a reduction in administrative expenses, we were able to limit our loss from
continuing operations to only $71,000 despite a considerable reduction in sales
in the first quarter of 2000 as compared to the first quarter of 1999.
Administrative expense in the quarter ended March 31, 1999 included $522,000 of
expenses related to our investor relations efforts.
Net sales from continuing operations for the quarter ended June 30,
2000 increased by $509,000 (8.1%) to $6,828,000 from $6,319,000 for the quarter
ended June 30, 1999. This increase was primarily the result of the acquisition
of Belix Ltd., or Belix, a power supply manufacturer based in the U. K. The
Belix acquisition was effective March 31, 2000 and contributed $658,000 of
revenue in the second quarter of 2000. Income from continuing operations in the
quarter ended June 30, 2000 was $301,000 as compared to a loss from continuing
operations of $624,000 in the quarter ended June 30, 1999. The primary
contributor to the improved profit was an overall increase in gross margins in
both our telecommunications and electronic components segments resulting in a
gross margin of 41.0% for the quarter ended June 30, 2000 as compared to a gross
margin of 37.7% for the quarter ended June 30, 1999. Gross margins were improved
by moving our U. S. electronic components segment manufacturing operation to a
smaller facility and improving the efficiency of manufacturing the new CXR
HALCYON test sets in our telecommunications segment.
Net sales from continuing operations for the quarter ended September
30, 2000 increased by $423,000 (6.6%) to $6,871,000 from $6,448,000 for the
quarter ended September 30, 1999. Our electronic components segment provided an
increase of $858,000 primarily due to a large order for digital switches from
BAE Systems, Canada which accounted for $504,000 of this increase. The increase
in sales of our electronic component segment was offset by a $435,000 decrease
in sales of our telecommunications segment mainly due to lower sales reported by
our facility in France which resulted from late approvals of the capital budgets
of some of its customers. Gross margins improved to 55% in the third quarter of
2000 from 34.8% in the third quarter of 1999. Contributing to the gross profit
increase was the high gross profit generated by the assets of T-Com that were
newly acquired for our telecommunications segment. In addition, efficiencies due
to the relocation of our Digitran Division of XET Corporation improved overall
margins in our electronic components segment. These improvements in operating
performance contributed to income from continuing operations of $1,132,000 for
the quarter ended September 30, 2000 as compared to a loss from continuing
operations of $761,000 for the quarter ended September 30, 1999. The $1,132,000
income for the quarter ended September 30, 2000 includes $197,000 from the sale
of Wi-LAN, Inc. stock and $237,000 income contributed by T-Com, which was
acquired as of August 2000.
During the quarter ended September 30, 2000 we sold XCEL Etch Tek, the
last of our former circuits segment operations, and we reported the $634,000
loss on the sale of XCEL Etch Tek and the $68,000 operating losses of XCEL Etch
Tek as losses from discontinued operations.
Net sales from continuing operations for the three month period ended
December 31, 2000 increased $2,022,000 (31.3%) to $8,491,000 as compared to
$6,469,000 for the quarter ended December 31, 1999. The primary reasons for this
increase were $717,000 of sales due to the acquisition of T-Com and a $1,097,000
increase in digital switch sales. Gross profit, as a percentage of net sales,
increased from 25.8% for the quarter ended December 31, 1999 to 42.5% for the
quarter ended December 31, 2000 primarily due to higher volumes, reduced
overhead in connection with the move from the Ontario facility to the Rancho
20
Cucamonga facility and a larger percentage of higher margin night vision
switches. Gross margins declined to 42% in the fourth quarter of 2000 from 55%
in the third quarter of 2000. This reduction in gross margins was primarily due
to lower margins for our U.S.-based telecommunications equipment resulting from
our use of more costly contract manufactured circuit boards rather than circuit
boards that we previously assembled in-house. In addition to increased circuit
board costs, the cost of lost demo inventory and obsolete inventory contributed
to reduced gross margins. Also, the reduction in sales of U.S.
telecommunications test equipment from $2,086,000 during the third quarter to
$1,746,000 during the fourth quarter adversely affected gross margins due to
overhead expenses being applied to less units. Costs associated with the
integration of the T-Com acquisition and associated manufacturing consolidation
temporarily reduced efficiency and also was a factor in reducing gross margins
during the fourth quarter. Operating expenses increased to $3,001,000 during the
quarter ended December 31, 2001 as compared to $2,104,000 for the quarter ended
December 31, 1999 primarily due to higher legal and accounting fees and higher
expenses associated with the T-Com acquisition.
Net sales for the quarter ended March 31, 2001 declined $1,026,000
(12.1%) to $7,465,000 as compared to $8,491,000 for the three months ended
December 31, 2000. The majority of the reduction in sales was attributable to a
slowdown in sales for our U.S. produced telecommunication test equipment.
Management believes that the cause of this slowdown was primarily due to the
late release of capital budgets of our telecommunications customers. Gross
profit as a percentage of net sales declined slightly to 41.7% in the quarter
ended March 31, 2001 as compared to 42.5% in the quarter ended December 31,
2001. Gross profit in dollar terms declined $493,000 to $3,115,000 in the
quarter ended March 31, 2001 as compared to $3,608,000 in the quarter ended
December 31, 2000 primarily due to lower sales. Operating expenses declined
$455,000 (13.4%) in the quarter ended March 31, 2001 to $2,940,000 as compared
to $3,395,000 in the quarter ended March 31, 2000 primarily due to lower selling
expenses and legal accounting fees.
Net sales for the quarter ended June 30, 2001 decreased $382,000 (5.1%)
to $7,083,000 as compared to $7,465,000 for the quarter ended March 31, 2001.
The decrease in net sales primarily resulted from a reduction in sales of power
supplies and digital switches of our electronic components segment. Such sales
declined by $805,000 (21.8%) from $3,693,000 for the quarter ended March 31,
2001 to $2,888,000 for the quarter ended June 30, 2001. The decline primarily
resulted from the completion of a major contract for digital switches and delays
in shipment of our power supplies. This impact was partially offset by a
$424,000 (11.2%) increase in sales of our telecommunications segment from
$3,772,000 for the quarter ended March 31, 2001 to $4,196,000 for the quarter
ended June 30, 2001. Gross profit as a percentage of net sales increased to
47.3% in the second quarter of 2001 as compared to 41.7% in the previous
quarter. This increase was primarily due to increased unit margins on
telecommunications test equipment as a result of improved efficiencies and
sales volume. General and administrative expenses increased by $324,000 (12.6%)
to $2,905,000 for the three months ended June 30, 2001 as compared to $2,581,000
for the previous three-month period. This increase was primarily caused by an
increase in legal and accounting fees of $257,000 related to non-routine
Securities and Exchange Commission filings.
21
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates. The following table provides information about our debt
obligations that are sensitive to changes in interest rates. All dollars are in
thousands. The symbol "P" represents the prime rate. The symbol "B" represents
lender's base rate. Balances are as of December 31, 2000.
FAIR
VALUE
LIABILITIES 2001 2002 2003 2004 2005 THEREAFTER TOTAL 12/31/00
----------- ---- ---- ---- ---- ---- ---------- ----- --------
Line of Credit $1,798 $1,798 $1,798
(domestic)
Average Interest P+ 1%
Rate
Line of Credit $1,377 $1,377 $1,377
(Foreign)
Average Interest B+ 2.5%
Rate
Term Loan $137 $137 $83 $8 $5 $370 $370
Average Interest P+ 2% P+ 2% P+ 2% P+ 2% P+ 2%
Rate
22
THE MANAGEMENT SECTION IS REVISED TO REFLECT THE FOLLOWING:
-----------------------------------------------------------
MANAGEMENT
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
CARMINE T. OLIVA
Under an employment agreement dated January 1, 1996, Carmine T. Oliva
was employed as Chairman, President and Chief Executive Officer of XET
Corporation for a term of five years at an annual salary of $250,000. In July
1996, Mr. Oliva voluntarily agreed to abate a portion of his annual salary in
connection with XET Corporation's salary abatement program then in effect. On
May 6, 1997, our board of directors voted to assume the obligations of XET
Corporation under this agreement in light of the appointment of Mr. Oliva to the
positions of Chairman of the Board, President and Chief Executive Officer of
MicroTel on March 26, 1997.
On October 15, 1997, we entered into a replacement agreement with Mr.
Oliva on substantially the same terms and conditions as the prior agreement. The
replacement agreement was subject to automatic renewal for three successive
two-year terms beginning on October 15, 2002, unless, during the required notice
periods (which run from August 15 to October 15 of the year preceding the year
in which a two-year renewal period is to begin), either party gives written
notice of its desire not to renew. The agreement provides that Mr. Oliva's
salary was to continue at the abated amount of $198,865 per annum until we have
reported two consecutive profitable quarters during the term of the agreement or
any renewals thereof, at which time his salary was to increase to its
pre-abatement level of $250,000 per annum. Based on our unaudited quarterly
financial statements, this increase to $250,000 occurred effective as of
November 1, 2000.
As of January 1, 2001, we entered into a new employment agreement with
Mr. Oliva. The agreement is subject to automatic renewal for consecutive
two-year terms beginning on January 1, 2006, unless, during the required notice
periods (which run from September 1 to November 1 of the second year preceding
the year in which a two-year renewal period is to begin), either party gives
written notice of its desire not to renew. The agreement provides for a base
salary of $250,000 per year and states that Mr. Oliva is eligible to receive
merit or promotional increases and to participate in other benefit and incentive
programs we may offer.
If the board of directors makes a substantial addition to or reduction
of Mr. Oliva's duties, Mr. Oliva may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Oliva
the value of three years of his annual salary or the value of his annual salary
that would have been due through January 1, 2006, whichever is greater.
If we terminate Mr. Oliva for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of termination. If we terminate Mr. Oliva without cause
(including by ceasing our operations due to bankruptcy or by our general
inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. If the termination without cause occurs prior to
the expiration of the initial term of the agreement on December 31, 2005, Mr.
Oliva will be entitled to be paid his annual salary for three years following
the termination or until December 31, 2005, whichever is the longer period. If
the termination occurs during a renewal period, Mr. Oliva will be entitled to be
paid his annual salary through the expiration of the particular renewal period
or for two years, whichever is the longer period, and to be paid all other
amounts payable under the agreement.
23
We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Oliva is terminated
without cause within two years following a change of control, then:
o If the termination occurs prior to the expiration of the initial
term of the agreement on December 31, 2005, Mr. Oliva will be
entitled to be paid his annual salary and all other amounts
payable under the agreement for three years following the
termination or until December 31, 2005, whichever is the longer
period, which amounts shall be payable at his election in a lump
sum within 30 days after the termination or in installments;
o if the termination occurs during a renewal period, Mr. Oliva will
be entitled to be paid his annual salary through the period ending
two years after the expiration of the particular renewal period,
and to be paid all other amounts payable under the agreement;
o Mr. Oliva will be entitled to receive the average of his annual
executive bonuses awarded to him in the three years preceding his
termination, over the same time span and under the same conditions
as his annual salary;
o Mr. Oliva will be entitled to receive any executive bonus awarded
but not yet paid;
o Mr. Oliva will be entitled to receive a gross up of all
compensatory payments listed above so that he receives those
payments substantially free of federal and state income taxes; and
o Mr. Oliva will continue to receive coverage in all benefit
programs in which he was participating on the date of his
termination until the earlier of the end of the initial term or
renewal term in which the termination occurred and the date he
receives equivalent coverage and benefits under plans and programs
of a subsequent employer.
If Mr. Oliva dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Oliva will continue to be
payable to Mr. Oliva's designee or legal representatives for two years following
his death. If Mr. Oliva is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Oliva following the 180th
day of disability. However, we must continue to pay amounts payable under the
agreement to or for the benefit of Mr. Oliva for two years following the
effective date of the termination.
If the agreement is terminated for any reason and unless otherwise
agreed to by Mr. Oliva and us, then in addition to any other severance payments
to which Mr. Oliva is entitled, we must continue to pay Mr. Oliva's annual
salary until:
o all obligations incurred by Mr. Oliva on our behalf, including any
lease obligations signed by Mr. Oliva related to the performance
of his duties under the agreement, have been voided or fully
assumed by us or our successor;
o all loan collateral pledged by Mr. Oliva has been returned to Mr.
Oliva; and
o all personal guarantees given by Mr. Oliva or his family on our
behalf are voided.
24
The agreement provides that we will furnish a life insurance policy on
Mr. Oliva's life, in the amount of $1 million, payable to Mr. Oliva's estate in
the event of his death during the term of the agreement and any renewals of the
agreement. This benefit is in return for, and is intended to protect Mr. Oliva's
estate from financial loss arising from any and all personal guarantees that Mr.
Oliva provided in favor of us, as required by various corporate lenders. This
benefit is also intended to enable Mr. Oliva's estate to exercise all warrants
and options to purchase shares of our common stock.
The agreement contains non-competition provisions that prohibit Mr.
Oliva from engaging or participating in a competitive business or soliciting our
customers or employees during the initial term and any renewal terms and for two
years afterward if termination is for cause or for one year afterward if
termination is without cause or following a change of control. The agreement
also contains provisions that restrict disclosure by Mr. Oliva of our
confidential information and assign ownership to us of inventions created by Mr.
Oliva in connection with his employment.
RANDOLPH D. FOOTE
On July 2, 2001, we entered into an employment agreement with Randolph
D. Foote at an initial annual salary of $130,000 that is subject to automatic
renewal for two successive one-year terms beginning on July 2, 2004, unless,
during the required notice periods (which run from May 2 to July 2 of the year
preceding the year in which the renewal period is to begin), either party gives
written notice of its desire not to renew. Mr. Foote is to act as Senior Vice
President and Chief Financial Officer and is to perform additional services as
may be approved by our board of directors.
If the board of directors makes a substantial addition to or reduction
of Mr. Foote's duties, Mr. Foote may resign upon written notice given within 30
days of the change in duties. Within 30 days after the effective date of a
resignation under these circumstances, we will be obligated to pay to Mr. Foote
the value of one year of his annual salary or the value of his salary through
July 1, 2004, whichever is greater, within 30 days after the effective date of
the resignation.
If we terminate Mr. Foote for cause, our obligation to pay any further
compensation, severance allowance, or other amounts payable under the agreement
terminates on the date of termination. If we terminate Mr. Foote without cause
(including by ceasing our operations due to bankruptcy or by our general
inability to meet our obligations as they become due), we must provide him with
60 days' prior written notice. Mr. Foote will be entitled to be paid his annual
salary for one year following termination or through July 2, 2004, whichever is
longer, if termination occurs during the initial term, or otherwise to be paid
his annual salary through the expiration of the current renewal period, and to
be paid all other amounts payable under the agreement.
We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Foote is terminated
without cause within two years following a change of control, then:
o Mr. Foote will be entitled to be paid in installments or, at his
election in a lump sum within 30 days after termination, his
annual salary and other amounts payable under the agreement for
1-1/2 years following termination or until July 2, 2004, whichever
is longer, if termination occurs during the initial term, or
otherwise to be paid through the expiration of the current renewal
period plus one additional year;
25
o Mr. Foote will be entitled to receive the average of his annual
executive bonuses awarded to him in the three years preceding his
termination, over the same time span and under the same conditions
as his annual salary;
o Mr. Foote will be entitled to receive any executive bonus awarded
but not yet paid; and
o Mr. Foote will continue to receive coverage in all benefit
programs in which he was participating on the date of his
termination until the earlier of the end of the initial or current
renewal term and the date he receives equivalent coverage and
benefits under plans and programs of a subsequent employer.
If Mr. Foote dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Foote will continue to be
payable to Mr. Foote' designee or legal representatives for one year following
his death. If Mr. Foote is unable to substantially perform his duties under the
agreement for an aggregate of 180 days in any 18-month period, we may terminate
the agreement by ten days' prior written notice to Mr. Foote following the 180th
day of disability; provided, however, that we must continue to pay amounts
payable under the agreement to or for the benefit of Mr. Foote for one year
following the effective date of the termination.
The agreement contains non-competition provisions that prohibit Mr.
Foote from engaging or participating in a competitive business or soliciting our
customers or employees during the initial term and any renewal terms and for one
year afterward. The agreement also contains provisions that restrict disclosure
by Mr. Foote of our confidential information and assign ownership to us of
inventions created by Mr. Foote in connection with his employment.
GRAHAM JEFFERIES
On July 2, 2001, we entered into an employment agreement with Graham
Jefferies at an initial annual salary of 100,000 British pounds (approximately
$141,000 at the then current exchange rates) that is subject to automatic
renewal for two successive one-year terms beginning on July 2, 2004, unless,
during the required notice periods (which run from May 2 to July 2 of the year
preceding the year in which the renewal period is to begin), either party gives
written notice of its desire not to renew. Mr. Jefferies is to act as Managing
Director of XCEL Corporation, Ltd. and as Executive Vice President and Chief
Operating Officer of our Telecom Group and is to perform additional services as
may be approved by our board of directors. This agreement replaces a
substantially similar agreement that had been effective since May 1, 1998.
If the board of directors makes a substantial addition to or reduction
of Mr. Jefferies' duties, Mr. Jefferies may resign upon written notice given
within 30 days of the change in duties. Within 30 days after the effective date
of a resignation under these circumstances, we will be obligated to pay to Mr.
Jefferies the value of one year of his annual salary or the value of his salary
through July 1, 2004, whichever is greater, within 30 days after the effective
date of the resignation.
If we terminate Mr. Jefferies for cause, our obligation to pay any
further compensation, severance allowance, or other amounts payable under the
agreement terminates on the date of termination. If we terminate Mr. Jefferies
without cause (including by ceasing our operations due to bankruptcy or by our
general inability to meet our obligations as they become due), we must provide
him with 60 days' prior written notice. Mr. Jefferies will be entitled to be
paid his annual salary for one year following termination or through July 2,
2004, whichever is longer, if termination occurs during the initial term, or
otherwise to be paid his annual salary through the expiration of the current
renewal period plus one additional year, and to be paid all other amounts
payable under the agreement.
26
We may terminate the agreement upon 30 days' written notice in the
event of a merger or reorganization in which our stockholders immediately prior
to the merger or reorganization receive less than 50% of the outstanding voting
shares of the successor corporation and in the event of a sale of all or
substantially all of our assets or a sale, exchange or other disposition of
two-thirds or more of our outstanding capital stock. If Mr. Jefferies is
terminated without cause within two years following a change of control, then:
o Mr. Jefferies will be entitled to be paid in installments or, at
his election in a lump sum within 30 days after termination, his
annual salary and other amounts payable under the agreement for
1-1/2 years following termination or until July 2, 2004, whichever
is longer, if termination occurs during the initial term, or
otherwise to be paid through the expiration of the current renewal
period plus one additional year;
o Mr. Jefferies will be entitled to receive the average of his
annual executive bonuses awarded to him in the three years
preceding his termination, over the same time span and under the
same conditions as his annual salary;
o Mr. Jefferies will be entitled to receive any executive bonus
awarded but not yet paid; and
o Mr. Jefferies will continue to receive coverage in all benefit
programs in which he was participating on the date of his
termination until the earlier of the end of the initial or current
renewal term and the date he receives equivalent coverage and
benefits under plans and programs of a subsequent employer.
If Mr. Jefferies dies during the term of the agreement, amounts payable
under the agreement to or for the benefit of Mr. Jefferies will continue to be
payable to Mr. Jefferies' designee or legal representatives for one year
following his death. If Mr. Jefferies is unable to substantially perform his
duties under the agreement for an aggregate of 180 days in any 18-month period,
we may terminate the agreement by ten days' prior written notice to Mr.
Jefferies following the 180th day of disability; provided, however, that we must
continue to pay amounts payable under the agreement to or for the benefit of Mr.
Jefferies for one year following the effective date of the termination.
The agreement contains non-competition provisions that prohibit Mr.
Jefferies from engaging or participating in a competitive business or soliciting
our customers or employees during the initial term and any renewal terms and for
two years afterward if termination is for cause or for one year afterward if
termination is without cause or following a change of control. The agreement
also contains provisions that restrict disclosure by Mr. Jefferies of our
confidential information and assign ownership to us of inventions created by Mr.
Jefferies in connection with his employment.
STOCK OPTION PLANS
Our 2000 Stock Option Plan, which was adopted by our board of directors
in November 2000 and approved by our stockholders on January 16, 2001, was
amended and restated by our board of directors effective as of August 3, 2001.
The Amended and Restated 2000 Stock Option Plan provides that options under that
plan may be granted only to our employees, officers and directors and to
consultants that do business with us. Under Section 4 of the 2000 Stock Option
Plan and applicable law, stockholder approval for the amendment and restatement
of that plan was not required.
27
OUR FINANCIAL STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND
2000 ARE REPLACED WITH THE FOLLOWING:
--------------------------------------------------------------------------------
Financial Statements as of and for the Three and Six Months ended June 30, 2001
and 2000
--------------------------------------------------------------------------------
Consolidated Condensed Balance Sheets as of June 30, 2001 (unaudited) and
December 31, 2000........................................................F-1
Consolidated Condensed Statements of Operations and Comprehensive Income for
the three and six months ended June 30, 2001 and 2000 (unaudited) ... ...F-2
Consolidated Condensed Statements of Cash Flows for the six months ended
June 30, 2001 and 2000 (unaudited).......................................F-3
Notes to Consolidated Condensed Financial Statements (unaudited).............F-4
28
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31,
2001 2000
--------- ---------
ASSETS (unaudited)
Cash and cash equivalents $ 532 $ 756
Accounts receivable - net 7,327 7,440
Notes receivable 80 130
Inventories 6,931 6,298
Other current assets 604 750
--------- ---------
Total current assets 15,474 15,374
Property, plant and equipment-net 728 809
Goodwill-net 2,622 2,737
Other assets 490 564
--------- ---------
$ 19,314 $ 19,484
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 3,196 $ 3,661
Current portion of long-term debt 658 614
Accounts payable 5,136 5,222
Accrued expenses 3,196 3,082
Net liability of discontinued operations -- 15
--------- ---------
Total current liabilities 12,186 12,594
Long-term debt, less current portion 805 282
Other liabilities 413 542
--------- ---------
Total liabilities 13,404 13,418
Convertible redeemable preferred stock,
$10,000 unit value. Authorized 200 shares;
issued and outstanding 25 shares (aggregate
liquidation preference of $250) 264 259
Stockholders' equity:
Convertible Series B Preferred stock, $0.01 par
value. Authorized 10,000,000 shares; 150,000
shares issued and outstanding (aggregate
liquidation preference of $960) 938 938
Common stock, $.0033 par value
Authorized 50,000,000 shares; 20,570,000
shares issued and outstanding 68 68
Additional paid-in capital 24,317 24,307
Accumulated deficit (18,620) (18,775)
Accumulated other comprehensive loss (1,057) (731)
--------- ---------
Total stockholders' equity 5,646 5,807
--------- ---------
$ 19,314 $ 19,484
========= =========
See accompanying notes to consolidated condensed financial statements.
F-1
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(in thousands, except per share amounts)
Net sales $ 7,083 6,828 $ 14,548 $ 12,688
Cost of sales 3,732 4,032 8,082 7,566
--------- --------- --------- ---------
Gross profit 3,351 2,796 6,466 5,122
Operating expenses:
Selling, general and administrative 2,905 2,248 5,486 4,395
Engineering and product development 303 253 662 496
--------- --------- --------- ---------
Income from operations 143 295 318 231
Other income (expense):
Interest expense (105) (98) (198) (195)
Other income 22 108 50 205
--------- --------- --------- ---------
Income from continuing operations
before income taxes 60 305 170 241
Income tax expense 6 4 9 11
--------- --------- --------- ---------
Income from continuing operations 54 301 161 230
--------- --------- --------- ---------
Discontinued operations:
Loss from operations of discontinued segment -- (95) -- (151)
--------- --------- --------- ---------
Net income 54 206 161 79
--------- --------- --------- ---------
Other comprehensive loss:
Changes in unrealized gain in marketable
securities -- (383) -- 78
Foreign currency translation adjustment (104) (53) (326) (218)
--------- --------- --------- ---------
Total comprehensive loss $ (50) $ (230) $ (165) $ (61)
========= ========= ========= =========
Earnings (loss) per share:
Continuing operations:
Basic $ 0.00 $ 0.02 $ 0.01 $ 0.01
========= ========= ========= =========
Diluted $ 0.00 $ 0.02 $ 0.01 $ 0.01
========= ========= ========= =========
Discontinued operations:
Basic $ -- $ (0.01) $ -- (0.01)
========= ========= ========= =========
Diluted $ -- $ (0.01) $ -- (0.01)
========= ========= ========= =========
Net income:
Basic $ 0.00 $ 0.01 $ 0.01 $ 0.00
========= ========= ========= =========
Diluted $ 0.00 $ 0.01 $ 0.01 $ 0.00
========= ========= ========= =========
See accompanying notes to consolidated condensed financial statements.
F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
June 30,
-------------------
2001 2000
-------- --------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 161 $ 79
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation and amortization 168 206
Amortization of intangibles 195 130
Stock and warrants issued as compensation 10 110
Gain on sale of fixed assets -- (43)
Other noncash items -- 221
Net change in operating assets of discontinued operations
Changes in operating assets and liabilities:
Accounts receivable 121 987
Inventories (591) (19)
Other assets 219 (185)
Accounts payable and accrued expenses (118) (2,245)
-------- --------
Cash provided by (used in) operating activities 165 (759)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from note receivable 50 --
Net purchases of property, plant and equipment (123) (9)
Cash received for sale of DTS stock -- 520
Proceeds from sale of fixed assets -- 43
Investment in Belix Ltd. companies -- (592)
-------- --------
Cash used in investing activities (73) (38)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable and long-term debt 102 852
Proceeds from exercise of employee stock options -- 73
-------- --------
Cash provided by financing activities 102 925
-------- --------
Effect Of Exchange Rate Changes (418) (218)
-------- --------
Net Decrease In Cash and Cash Equivalents (224) (90)
-------- --------
Cash and Cash Equivalents At Beginning Of Period 756 481
-------- --------
Cash and Cash Equivalents At End Of Period $ 532 $ 391
======== ========
Cash paid for:
Income taxes 34 11
======== ========
Interest 186 219
======== ========
See accompanying notes to consolidated condensed financial statements.
F-3
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the "Company") operates through three
wholly-owned subsidiaries: CXR Telcom Corporation, CXR, S.A. and XET
Corporation, formerly XIT Corporation ("XET"). CXR Telcom Corporation and CXR,
S.A. (collectively "CXR") design, manufacture and market electronic
telecommunication test equipment and transmission and network access products.
XET and its subsidiaries design, manufacture and market digital switches and
power supplies. The Company conducts its operations out of various facilities in
the U.S., France, England and Japan and organizes itself in two product line
segments: telecommunications and electronic components.
In October 2000, the Company decided to discontinue its circuits
segment operations. At that time, the circuits segment operations consisted of
XCEL Etch Tek, a wholly-owned subsidiary, and XCEL Circuits Division ("XCD"), a
division of XET. XCEL Etch Tek was offered for sale and sold in November 2000.
XCD, predominantly a captive supplier of printed circuit boards to the
electronic components segment, has been retained and is now included in the
electronic components segment. Accordingly, all prior financial information
related to the circuits segment operations has been presented as discontinued
operations in the accompanying consolidated condensed financial statements.
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all information
and footnotes necessary for a complete presentation of financial position,
results of operations and cash flows in conformity with generally accepted
accounting principles.
The unaudited consolidated condensed financial statements do, however,
reflect all adjustments, consisting of only normal recurring adjustments, which
are, in the opinion of management, necessary to state fairly the financial
position as of June 30, 2001 and December 31, 2000 and the results of operations
and cash flows for the related interim periods ended June 30, 2001 and 2000.
However, these results are not necessarily indicative of results for any other
interim period or for the year. It is suggested that the accompanying
consolidated condensed financial statements be read in conjunction with the
Company's Consolidated Financial Statements included in Amendment No. 2 to its
2000 Annual Report on Form 10-K.
F-4
(2) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
(in thousands, except per share amounts)
NUMERATOR:
Net income $ 54 $ 206 $ 161 $ 79
Less: accretion of the excess of the redemption
value over the carrying value of redeemable
preferred stock 3 23 6 46
-------- -------- -------- --------
Income attributable to common stockholders $ 51 $ 183 $ 155 $ 33
======== ======== ======== ========
DENOMINATOR:
Weighted average number of common shares outstanding
during the period 20,570 18,712 20,570 18,443
Incremental shares from assumed conversions of
warrants, options and preferred stock 3,309 2,076 3,277 2,250
-------- -------- -------- --------
Adjusted weighted average shares 23,879 20,788 23,847 20,693
======== ======== ======== ========
Basic and diluted earnings per share $ 0.00 $ 0.01 $ 0.01 $ 0.00
======== ======== ======== ========
(3) INVENTORIES
Inventories consist of the following.
June 30, 2001 December 31, 2000
------------- -----------------
Raw materials $ 3,130,000 $ 2,777,000
Work-in-process 2,457,000 1,914,000
Finished goods 1,344,000 1,607,000
------------ ------------
$ 6,931,000 $ 6,298,000
============ ============
(4) COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries from time to time become involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate liability
may not be predictable because of considerable uncertainties that may exist.
Therefore, it is possible the outcome of such legal proceedings, claims and
litigation could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a material
adverse affect on the Company's consolidated financial position, results of
operations or cash flows.
F-5
(5) Reportable Segments
The Company has two reportable segments: telecommunications and
electronic components. The telecommunications segment operates principally in
the U.S. and European markets and designs, manufactures and distributes
telecommunications test instruments and voice and data transmission and
networking equipment. The electronic components segment operates in the U.S.,
European and Asian markets and designs, manufactures and markets primarily
digital switches and power supplies.
The Company evaluates performance based upon profit or loss from
operations before income taxes exclusive of nonrecurring gains and losses. The
Company accounts for intersegment sales at prices negotiated between the
individual segments.
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers, design,
manufacturing and marketing strategies.
There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's consolidated financial statements included in Amendment No. 2 to its
2000 Annual Report on Form 10-K. Selected financial data for each of the
Company's operating segments is shown below:
Six months Six months
ended June 30, ended June 30,
2001 2000
------------ ------------
Sales to external customers:
Telecommunications $ 7,968,000 $ 7,193,000
Electronic Components 6,580,000 5,495,000
------------ ------------
$14,548,000 $12,688,000
============ ============
Intersegment sales:
Telecommunications $ -- $ --
Electronic Components -- --
------------ ------------
$ -- $ --
============ ============
Segment pretax profits:
Telecommunications $ 107,000 $ 46,000
Electronic Components 1,613,000 1,095,000
------------ ------------
$ 1,720,000 $ 1,141,000
============ ============
June 30, December 31,
2001 2000
------------ ------------
Segment assets:
Telecommunications $ 8,725,000 $ 9,901,000
Electronic Components 9,811,000 8,876,000
------------ ------------
$18,536,000 $18,777,000
============ ============
F-6
The following is a reconciliation of the reportable segment income and
(loss) from continuing operations and assets to the Company's consolidated
totals:
Six months ended Six months ended
June 30, 2001 June 30, 2000
------------ ------------
Pretax income
Total income for reportable segments $ 1,720,000 $ 1,141,000
Unallocated amounts:
Unallocated general corporate expenses (1,550,000) (900,000)
------------ ------------
Consolidated income before income taxes $ 170,000 $ 241,000
============ ============
June 30, December 31,
2001 2000
------------ ------------
Assets
Total assets for reportable segments $18,536,000 $18,777,000
Other assets 778,000 707,000
------------ ------------
Total consolidated assets $19,314,000 $19,484,000
============ ============
(6) NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," which eliminates the pooling method of accounting for business
combinations initiated after June 30, 2001. In addition, SFAS 141 addresses the
accounting for intangible assets and goodwill acquired in a business
combination. This portion of SFAS 141 is effective for business combinations
completed after June 30, 2001. The Company does not expect SFAS 141 to have a
material impact on the Company's financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Intangible Assets," which revises
the accounting for purchased goodwill and intangible assets. Under SFAS 142,
goodwill and intangible assets with indefinite lives will no longer be amortized
and will be tested for impairment annually. SFAS 142 is effective for fiscal
years beginning after December 15, 2001, with earlier adoption permitted. The
Company does not expect SFAS 142 to have a material impact on the Company's
financial position or results of operations.
F-7