SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 1999 or
------------------
( ) Transition report pursuant to Section l3 or l5(d) of the Securities
Exchange Act of l934
For the transition period N/A
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Commission file Number 1-10346
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MICROTEL INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0226211
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9485 Haven Avenue, Suite 100, Rancho Cucamonga, CA 91730
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (909) 297-2699
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock $.0033 par value None
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Securities registered pursuant to Section 12 (g) of the Act:
None
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Title of Class
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months, (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes /X/ No / /
As of November 8, 1999, there were 18,096,461 shares of common stock
outstanding.
MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Operations
Three and Nine Months Ended September 30, 1999 and l998 4
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1999 and l998 5
Notes to Consolidated Condensed Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
-2-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
ASSETS SEPTEMBER 30, DECEMBER 31,
CURRENT ASSETS 1999 1998
---------------- ----------------
Cash and cash equivalents $ 185 $ 572
Accounts receivable 6,467 7,337
Current portion of notes receivable 22 291
Inventories 4,684 6,426
Other current assets 694 926
--------- --------
Total current assets 12,052 15,552
Property, plant and equipment-net 1,399 1,939
Goodwill-net 1,556 1,701
Notes receivable, less current portion -- 533
Investment in unconsolidated affiliates 1,788 150
Other assets 1,209 1,367
--------- ---------
$ 18,004 $ 21,242
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 2,633 $ 3,379
Current portion of long-term debt 466 805
Accounts payable 3,615 4,269
Accrued expenses 3,126 3,312
--------- ---------
Total current liabilities 9,840 11,765
Long-term debt, less current portion 1,088 1,430
Other liabilities 831 954
Minority interest 128 95
--------- ---------
Total liabilities 11,887 14,244
Convertible redeemable preferred stock 596 1,516
Stockholders' equity:
Common stock 59 42
Additional paid-in capital 23,657 20,463
Accumulated deficit (18,114) (15,122)
Accumulated comprehensive income (loss) (81) 99
---------- ---------
Total stockholders' equity 5,521 5,482
--------- ---------
$ 18,004 $ 21,242
========= =========
See accompanying notes to consolidated condensed financial statements.
-3-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
----------------- ----------------- ---------------- ----------------
(in thousands, except per share amounts)
Net sales $ 6,952 $ 9,112 $ 21,263 $ 27,825
Cost of sales 4,729 5,554 14,043 18,615
---------- ---------- ---------- ----------
Gross profit 2,223 3,558 7,220 9,210
Operating expenses:
Selling, general and administrative 2,488 2,759 9,095 8,673
Engineering and product development 459 640 1,494 1,785
---------- ---------- ---------- ----------
Income (loss) from operations (724) 159 (3,369) (1,248)
Other income (expense)
Interest expense (100) (192) (302) (536)
Gain on sale of subsidiary -- -- 331 580
Equity in earnings of unconsolidated 28 -- 755 --
affiliates
Other (226) (28) (313) 15
----------- ----------- ----------- ----------
Loss before income taxes (1,022) (61) (2,898) (1,189)
Income tax expense 12 5 25 42
---------- ---------- ---------- ----------
Net loss (1,034) (66) (2,923) (1,231)
---------- --------- ---------- ---------
Other comprehensive income (loss):
Foreign currency translation adjustment 244 (118) (180) (123)
---------- ----------- ----------- ----------
Total comprehensive loss $ (790) $ (184) $ (3,103) $ (1354
========== ========== ========== ==========
Basic and diluted loss per share $ (0.06) $ (0.01) $ (0.18) $ (0.11)
========== ========== ========== ==========
See accompanying notes to consolidated condensed financial statements.
-4-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
--------------- --------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,923) $ (1,231)
Adjustments to reconcile net loss to cash used in (provided by)
operating activities:
Depreciation and amortization 393 496
Write-off of note receivable 753
Amortization of intangibles 243 147
Gain on sale of subsidiary (331) (580)
Equity in earnings of unconsolidated entities (755) --
Stock and warrants issued as compensation 1,219 --
Other non cash items 139 (97)
Changes in operating assets and liabilities:
Accounts receivable 848 (528)
Inventories 1,383 (170)
Other assets 171 (279)
Accounts payable and accrued expenses (587) (891)
--------- ---------
Cash provided by (used in) operating activities 553 (3,133)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (130) (387)
Cash received from note receivable 9 --
--
Proceeds from sale of subsidiary 750 1,350
----------- ----------
Cash provided by investing activities 629 963
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of notes payable (746) (113)
Net repayments of long-term debt (645) (1,077)
Private placement of convertible preferred stock -- 1,843
Sale of common stock - employee purchase plan 2 4
--------- ---------
Cash provided by (used in) financing activities (1,389) 657
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (180) 124
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (387) (1,389)
--------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 572 1,921
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 185 $ 532
========= =========
See accompanying notes to consolidated condensed financial statements.
-5-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE
WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE,"
"PROJECT," "INTEND," "SHOULD," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED
TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE
COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND
FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN
NOTES 1, 4 AND 6 HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER
MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MicroTel International, Inc. (the "Company") is a holding
company for its three wholly owned subsidiaries - CXR Telcom
Corporation in Fremont, CA; CXR, S.A. in Paris, France; XIT Corporation
in Ontario, CA; and its 41% owned affiliate company Digital
Transmission Systems, Inc. located near Atlanta, Georgia. CXR Telcom
Corporation, CXR, S.A. and Digital Transmission Systems, Inc. design,
manufacture and market electronic telecommunication test instruments,
wireless and wireline voice, data and video transmission and networking
equipment. XIT Corporation designs, manufactures and markets
information technology products, including input and display
components, subsystem assemblies and power supplies. The Company
operates out of facilities in the U.S., France, England and Japan.
Through March 31, 1999, the Company organized itself in three
product line sectors- Circuits, Components and Subsystem Assemblies,
and Instrumentation and Test Equipment. The sale of substantially all
the assets of the Company's HyComp, Inc. subsidiary effective as of
March 31, 1999 partially completed the Company's planned exit of the
Circuits business. The Company operates two smaller circuits
manufacturing locations that the Company intends to sell.
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.
-6-
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited consolidated condensed financial statements do,
however, reflect all adjustments, consisting of only normal recurring
adjustments, which are, in the opinion of management, necessary to
state fairly the financial position as of September 30, 1999 and
December 31, 1998 and the results of operations and cash flows for the
related interim periods ended September 30, 1999 and 1998. However,
these results are not necessarily indicative of results for any other
interim period or for the year. It is suggested that the accompanying
consolidated condensed financial statements be read in conjunction with
the Company's Consolidated Financial Statements included in its 1998
Annual Report on Form 10-K.
(2) LOSS PER SHARE
The following table illustrates the computation of basic and
diluted loss per share (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
NUMERATOR:
Net loss $ (1,034) $ (66) $ (2,923) $ (1,231)
Less: accretion of the excess of the
redemption value over the carrying value of
redeemable preferred stock 24 24 69 36
----------- ----------- ----------- -----------
Loss attributable to common stockholders
(1,058) (90) (2,992) (1,267)
DENOMINATOR:
Weighted average number of common shares
outstanding during the period 17,200 11,931 16,192 11,929
----------- ----------- ----------- -----------
Basic and diluted loss per share $ (.06) $ (.01) $ (.18) $ (.11)
=========== =========== ============ ===========
The computation of diluted loss per share excludes the effect
of incremental common shares attributable to the exercise of
outstanding common stock options and warrants because their effect was
antidilutive due to losses incurred by the Company or such instruments
had exercise prices greater than the average market price of the common
shares during the periods presented.
-7-
(3) INVENTORIES
Inventories consist of the following.
September 30, 1999 December 31, 1998
---------------------- -------------------
Raw materials $ 2,006,000 $ 2,926,000
Work-in-process 1,320,000 2,375,000
Finished goods 1,358,000 1,125000
---------------------- ------------------
$ 4,684,000 $ 6,426,000
====================== ==================
(4) LITIGATION
The Company and its subsidiaries are, from time to time,
involved in legal proceedings, claims and litigation arising in the
ordinary course of business. While the amounts claimed may be
substantial, the ultimate liability cannot presently be determined
because of considerable uncertainties that exist. Therefore, it is
possible the outcome of such legal proceedings, claims and litigation
could have a material effect on quarterly or annual operating results
or cash flows when resolved in a future period. However, based on facts
currently available, management believes such matters will not have a
material adverse affect on the Company's consolidated financial
position, results of operations or cash flows.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
During the third quarter of 1999, settlement was reached with
respect to the Scheinfeld case. The Company agreed to pay $75,000
payable in an initial payment of $6,250 and eleven monthly payments of
$6,250 thereafter without interest.
(5) ACQUISITION AND DISPOSITION OF BUSINESSES
On April 19, 1999, the Company completed the sale of
substantially all of the assets and liabilities of its HyComp, Inc.
subsidiary ("HyComp"), a manufacturer of hybrid, thin film and
flip-chip assembly circuits to SatCon Technology Corporation, a public
company. The sale was effective as of March 31, 1999 and resulted in a
gain of approximately $331,000 which was included in the results of
operations for the three months ended March 31, 1999. HyComp received
$750,000 in cash and a royalty on certain future sales and was
reimbursed approximately $85,000 for certain expenses paid by HyComp
between March 31, 1999 and the closing date. The proceeds from this
sale were used to partially repay amounts due under certain notes
payable and other current debt.
Summarized below are unaudited pro forma financial results of
operations of the Company as though the assets and liabilities had been
sold at the beginning of 1999.
Net sales $ 20,807,000
Net loss $ (2,8005,000)
Basic and diluted loss per share $ (.18)
-8-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Financial Instruments and Hedging
Activities" ("SFAS 133") issued by the FASB is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133
provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. The Company does
not expect adoption of SFAS 133 to have a material effect on its
financial position or results of operations.
(7) REPORTABLE SEGMENTS
The Company has three reportable segments: Instrumentation and
Test Equipment, Components and Subsystem Assemblies, and Circuits. The
Instrumentation and Test Equipment segment operates principally in the
U.S. and European markets and designs, manufactures and distributes
telecommunications test instruments and voice and data transmission and
networking equipment. The Components and Subsystems Assemblies segment
operates in the U.S., European and Asian markets and designs,
manufactures and markets information technology products, including
input and display components, subsystem assemblies, and power supplies.
The Company has disposed of the majority of its circuits business
operations and has only one such operation that is material.
The Company evaluates performance based upon profit or loss
from operations before income taxes exclusive of nonrecurring gains and
losses. The Company accounts for intersegment sales at prices
negotiated between the individual segments.
The Company's reportable segments are comprised of operating
entities offering the same or similar products to similar customers.
Each segment is managed separately because each business has different
customers, and different design, manufacturing and marketing
strategies.
There were no differences in the basis of segmentation or in
the basis of measurement of segment profit or loss from the amounts
disclosed in the Company's consolidated financial statements included
in its 1998 Annual Report on Form 10-K.
-9-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS (CONTINUED)
Selected financial data for each of the Company's operating
segments is shown below.
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ -------------------
SALES FROM EXTERNAL CUSTOMERS:
Instruments $ 11,279,000 $ 12,625,000
Components 8,018,000 9,347,000
Circuits 1,966,000 5,853,000
--------------- ---------------
$ 21,263,000 $ 27,825,000
=============== ===============
INTERSEGMENT SALES:
Instruments $ -- $ 17,000
Components 217,000 538,000
Circuits 371,000 483,000
--------------- ---------------
$ 588,000 $ 1,038,000
=============== ===============
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ -------------------
SEGMENT PROFITS (LOSSES)
Instruments $ (2,120,000) $ (606,000)
Components 189,000 575,000
Circuits (999,000) (495,000)
---------------- ----------------
$ (2,930,000) $ (526,000)
================ ================
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -------------------
SEGMENT ASSETS
Instruments $ 8,070,000 $ 8,861,000
Components 5,766,000 8,906,000
Circuits 1,331,000 2,602,000
--------------- ---------------
$ 15,167,000 $ 20,369,000
=============== ===============
-10-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS (CONTINUED)
The following is a reconciliation of the reportable segment
loss and assets to the Company's consolidated totals.
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
-------------------- --------------------
INCOME (EXPENSE OR LOSS)
Total loss for reportable segments $ (2,930,000) $ (526,000)
Unallocated amounts:
Gain on sale of assets of subsidiary 331,000 580,000
Equity in earnings of unconsolidated
affiliates 755,000 --
Unallocated general corporate expenses
(1,054,000) (1,243,000)
------------------ -----------------
Consolidated loss before income taxes $ (2,898,000) $ (1,189,000)
================== ================
SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------------- --------------------
ASSETS
Total assets for reportable segments $ 15,167,000 $ 20,369,000
Other assets 2,837,000 873,000
------------------ ---------------
Total consolidated assets $ 18,004,000 $ 21,242,000
================== =================
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MICROTEL INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD," "BELIEVE" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL
TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS
STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. PROSPECTIVE READERS OR
INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES
AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
1998
NET SALES
Consolidated net sales for the third quarter of 1999 decreased by
approximately $2,160,000 or 23.7% compared with the same period in 1998. The
table below sets forth the composition of consolidated net sales by business
sector.
Three Months Ended Three Months Ended Variance- Percent
Sector September 30, 1999 September 30, 1998 Increase (Decrease) Change
------------------ ------------------ ------------------- ---------
Test Equipment $ 3,922 $ 4,096 $ (174) (4.2)%
Components 2,478 3,694 (1,216) (32.9)%
Circuits 552 1,322 (770) (58.2)%
----------- ----------- ------------
Total $ 6,952 $ 9,112 $ (2,160) (23.7)%
=========== =========== ------------
The relative percent of net sale by sector between the respective
periods experienced the following changes:
Three Months Ended Three Months Ended
Sector September 30, 1999 September 30, 1998
------------------ ------------------
Test Equipment 56.4% 45.0%
Components 35.6% 40.5%
Circuits 7.9% 14.5%
Total 100.0% 100.0%
-12-
Test Equipment sales were down slightly in the third quarter of
1999 compared to the comparable prior year period. Sales of voice mail
systems increased but such sales increases were offset with reductions in
sales of instruments as several customers' capital budgets have already been
allocated and year end funds are not yet available.
The substantial decline of sales in the Components sector in the
current quarter as compared to the third quarter of 1998 was due mainly to a
large order for a subassembly that was recorded in the third quarter of 1998.
This resulted in larger than usual sales in the component sector in the third
quarter of 1998. There was also a decrease in the demand for digiital switch
products in the current quarter as compared to the comparable prior year
period and lastly The Company disposed of its XCEL Lite product line and
subsystem assembly work both of which were unprofitable product lines.
Sales in the Circuit sector in the third quarter of 1999 were
58.2% less than sales in the sector in the third quarter of 1998 mainly
because of the sale of the Company's HyComp. Inc. subsidiary, the assets of
which were sold effective March 31, 1999. Sales at the Company's XCEL Etch
Tek division were declined compared to the prior year due to constrained
working capital. The company intends to exit this segment soon as a buyer can
be found.
GROSS PROFIT
The composition of consolidated gross profit by business sector and
the percentages of related net sales are set forth in the following table for
the periods indicated:
Three Months Ended Percent Three Months Ended Percent
Sector September 30, 1999 of Net Sales September 30, 1998 of Net Sales
------------------ ------------ ------------------ ------------
Test Equipment $ 1,402 35.7% $ 1,962 47.9%
Components 837 33.8% 1,392 37.7%
Circuits (16) (2.9)% 204 15.4%
------------ ----------
Total $ 2,223 32.0% $ 3,558 39.0%
=========== ==========
Due to the decrease in net sales in the third quarter of 1999
compared with the same period in 1998, gross profit decreased $1,335,000 or
37.5%. Additionally, the Company experienced a decrease in gross profit as a
percent of net sales as shown above due principally to decreased gross profit
margins in the Test Equipment sector. This sector's U.S. business operation
experienced a substantial decline in gross profit margin from 47.9% in the
third quarter of 1998 to 35.7% in the same period of 1999 resulting
principally from lower sales and, consequentially, less absorption of fixed
manufacturing overhead and a $225,000 inventory valuation write-down. Also,
the Company has reduced its expense base by an annualized amount of
$1,065,000, the effects of which should favorably impact the fourth quarter.
Gross margin as a percent of net sales for the Components sector
declined due to minor changes in product mix and the decrease in net sales
with the consequential unabsorption of manufacturing overhead. The Components
sector has continued to reduce its infrastructure cost as it has disposed of
or phased out individual product lines. This planned approach to the
anticipated decrease in net sales enabled the U.S. operations to relatively
maintain its gross profit margin that decreased from 37.7% in the third
quarter of 1998 to 33.8% in the same period in 1999. The Company
-13-
is in the process of relocating its XIT Corporation subsidiary which
represents the domestic portion of the component sector. The relocation is
expected to result in approximately $360,000 of annual reductions in rent and
utility costs.
In the Company's Circuits sector, gross profit percent decreased
substantially due principally to the loss of the gross profit contribution
from the net sales of the Company's HyComp, Inc. subsidiary (the assets of
which were sold in the first quarter of 1999). Gross profit percent at the
Company's remaining circuit's business did not change materially from the
third quarter of 1998 to the same period of 1999.
OPERATING EXPENSES
Operating expenses for the three months ended September 30, 1999 and
1998 were comprised of the following:
Three Months Ended Three Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Commissions $ 197 $ 276
Other selling expense 869 968
---------- ----------
Total selling expense 1,066 1,244
General & Administrative 1,422 1,515
---------- ----------
Total Selling, General & Administrative $ 2,488 $ 2,759
=========== ===========
Engineering & product development $ 459 $ 640
=========== ===========
Total selling expense as a percentage of net sales was 15.3% and
13.7% for the three months ended September 30, 1999 and 1998, respectively.
Total selling expense decreased in the current quarter as compared with the
third quarter of 1998 but represented a greater percentage of sales due to
the large reduction in sales.
General and administrative expenses decreased by $93,000 from the
third quarter of 1998 to the third quarter of 1999. The decrease was due to
cost reduction efforts and the consolidation of the Test Equipment sector U.
S. administrative functions.
Engineering and product development costs were incurred by the Test
Equipment sector in the current quarter. Such expenses declined by $181,000
or 28.3% in third quarter of 1999 as compared to the third quarter of 1998.
These expenses represented 6.6% of sales in the third quarter of 1999.
Engineering and product expenses were reduced at the Test Equipment sector
due to a reduction of personnel and the absence of such expenses in the
Circuit sector in third quarter of 1999 as a result of the sale of the
Company's HyComp, Inc. subsidiary at the end of the first quarter of 1999. In
future periods, engineering and product development cost will be solely
attributable to the Test Equipment sector and are expected to increase
modestly as the U.S. Test Equipment operations add additional resources to
focus on bringing new products to market in the near term in order to
increase current net sales levels for that sector.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $92,000 in the third quarter of
1999 compared to the same period in 1998 resulted principally from lower
average borrowings during the current period. The
-14-
increase in the third quarter of 1999 in other expense of $198,000 was
primarily the result of increasing a potential product warranty expense by
$175,000 relating to the sale of HyComp, Inc. in the first quarter of 1999.
Also, a loss of $83,000 was recorded in the current quarter for the sale of
the partnership interest in the Company's Ontario, California facility.
NINE MONTHS ENDED SEPTEMBER 30, 1999 VERSUS SEPTEMBER 30, 1998
NET SALES
Consolidated net sales for the first nine months of 1999 decreased
by approximately $6,562,000 or 23.6% compared with the same period in 1998.
The table below sets for the composition of consolidated net sales by
business sector.
Variance-
Nine Months Ended Nine Months Ended Increase/ Percent
Sector September 30, 1999 September 30, 1998 (Decrease) Change
------------------ ------------------ ---------- -------
Test Equipment $ 11,279 $ 12,625 $ (1,346) (10.7)%
Components 8,018 9,347 (1,329) (14.2)%
Circuits 1,966 5,853 (3,887) (66.4)%
----------- ----------- ------------
Total $ 21,263 $ 27,825 $ (6,562) (23.6)%
=========== =========== ------------
The relative percent of net sale by sector between the respective
periods experienced the following changes:
Nine Months Ended Nine Months Ended
Sector September 30, 1999 September 30, 1998
------------------ ------------------
Test Equipment 53.0% 45.4%
Components 37.7% 33.6%
Circuits 9.3% 21.0%
Total 100.0% 100.0%
During the first nine months of 1999, the Test Equipment sector
experienced a decrease in net sales in the both the U.S. operations and to a
lesser extent, the French operations as compared to the first nine months of
1998. In the U.S. market, the decline in test instrument sales resulted from
a delay in the expected delivery of certain equipment to one of the Regional
Bell Operating Companies and other smaller customers as qualification efforts
progressed slower than originally anticipated. In the French business
operation, test equipment sales were impacted principally by the decision of
a significant customer to delay anticipated purchase and a general reduction
in demand for these products. The reduction was offset by an increase in the
sales of voice and data transmission products
The decline of sales in the Components sector in the current nine month
period as compared to the prior year nine month period was due mainly to a
large order for a subassembly that was recorded in the third quarter of 1998.
This resulted in larger than usual sales in the Components sector in the
third quarter of 1998. Also, the Company sold its XCEL Lite product line and
discontinued its domestic sub system assembly products in the current year,
both of which were unprofitable.
-15-
Net sales in the Company's Circuits sector decreased in the first nine months
of 1999 compared with the same period in 1998 as a result of the absence in
current period of net sales from both the Company's XCEL Arnold and HyComp,
Inc. subsidiaries, the assets of which were sold effective as of March 31,
1998 and March 31, 1999, respectively. Also affecting sales were a decrease
in net sales at the Company's XCEL Etch Tek division that resulted from
constrained working capital as well as a general decline in demand for
printed circuits principally related to weaker sales in the personal computer
industry.
GROSS PROFIT
The composition of consolidate gross profit by business sector and
the percentages of related net sale are set forth in the following table for
the periods indicated:
Nine Months Ended Percent Nine Months Ended Percent
Sector September 30, 1999 of Net Sales September 30, 1998 of Net Sales
------------------ ------------ ------------------ -------------
Test Equipment $ 4,302 38.1% $ 5,551 44.0%
Components 2,853 35.6% 3,235 34.6%
Circuits 65 3.3% 424 7.2%
-----------
Total $ 7,220 34.0% $ 9,210 33.1%
=========== ==========
Due to the decrease in net sales in the nine months of 1999 compared
with the same period in 1998, gross profit decreased $1,990,000 or 21.6%.
Additionally, the Company experienced a decrease in gross profit as a percent
of net sales as shown above due principally to decreased gross profit margins
in the Test Equipment sector. This sector's U.S. business operation
experienced a decline in gross profit margin from 44.0% in the first nine
months of 1998 to 38.1% in the same period of 1999 resulting principally from
lower sales and, consequentially, less absorption of fixed manufacturing
overhead and a $225,000 inventory valuation writedown. The Company has
implemented cost reductions of approximately $1,065,000 on an annualized
basis that will have a positive impact on the Company's earnings beginning in
the fourth quarter of 1999.
Gross margin percent for the Components sector remained at
approximately 35%. The gross margin percent remained at this level despite
less sales in the nine month period of 1999 compared to the same period in
1998 because the prior period included the sale of a large subassembly that
carried a less than average gross profit.
In the Company's Circuits sector, gross profit percent for the first
nine months of 1999 decreased substantially compared with the same period in
1998 due principally to the loss of the gross profit contribution from the
net sales of the Company's HyComp, Inc. subsidiary, the assets of which were
sold at the end of the first quarter of 1999. The HyComp, Inc. business was
sold because its business prospects were rapidly diminishing. HyComp, Inc.
became unprofitable in the first quarter of 1999 and was expected to continue
to be unprofitable. This decrease in the circuit sector's gross profit would
have been greater but for the absence of gross profit deficit of XCEL Arnold
Circuits, Inc. in the first nine months of 1999 (XCEL Arnold had a gross
profit of $(362,000) in 1998 prior to its sale on March 31, 1998.
-16-
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 1999 and
1998 were comprised of the following:
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ ------------------
Commissions $ 636 $ 870
Other selling expense 2,658 3,109
---------- ----------
Total selling expense 3,294 3,979
General & Administrative 5,801 4,694
----------
Total S,G & A $ 9,095 $ 8,673
=========== ===========
Engineering & product development $ 1,494 $ 1,785
=========== ===========
Total selling expense as a percentage of net sales was 15.5% and
14.3% for the first nine month periods of 1999 and 1998, respectively.
Commissions as a percent of net sales was essentially unchanged for the first
nine months of 1999 compared with the same period of 1998 (3.0% and 3.1% for
1999 and 1998, respectively).
General and administrative expenses increased $1,107,000 in the
first nine months of 1999 compared to the same period of 1998. This increase
was principally comprised of the following less reductions in administrative
expenses due to cost reduction efforts and the consolidation of
administrative functions:
- Investor relation expense totaling approximately $522,000
associated with the Company's program to retain the listing of its common
stock on the Nasdaq SmallCap Market ("Nasdaq"). These non-cash expenses were
attributable to the issuance of common stock and warrants as payment for
services provide by third parties in support of this effort. Despite this
effort, the trading price of the Company's common stock was insufficient to
meet the minimum listing maintenance requirement and was removed from Nasdaq
as of May 12, 1999 ("see Liquidity and Capital Resources"). The Company does
not expect to incur such expenses again in the foreseeable future.
- Compensation expense of approximately $193,000 in connection with
the Company's agreement to a one-time adjustment in the number of shares of
common stock issuable under the terms of certain Contingent Stock Agreements
between the Company and two of the former officers/owners of Critical
Communication, Inc. which was acquired by the Company in October 1997. The
Company made this adjustment to insure the retention of the engineering and
product development services of these individuals.
- The recording of a reserve in the second quarter of 1999 in the
amount of $466,000 for the net amount of a note receivable which was
determined to be uncollectable when the maker of the note was unable to remit
the first principal payment required in the second quarter of 1999.
Engineering and product development costs originated principally
from the research and product development activities of the Test Equipment
and Circuits sectors and decreased $291,000 or
-17-
16.3% due to the absence of such expenses in the second and third quarters of
1999 as a result of the sale of the Company's HyComp, Inc. subsidiary at the
end of the first quarter of 1999. In future periods, engineering and product
development costs will be solely attributable to the Test Equipment sector
and are expected to increase modestly.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $234,000 in the first nine
months of 1999 compared to the same period in 1998 resulted principally from
decreased average borrowing during the respective periods. The increase in
the first nine months of 1999 in other income (expense), net resulted
principally from the equity in the earnings of the unconsolidated affiliate
(Digital Transmission Systems, Inc.) acquired on January 31, 1999. Other
income (expense), net for the nine months ended September 30, 1999 and 1998
also included a gain on the sale of HyComp's assets of $331,000 and a gain on
the sale of XCEL Arnold's assets in the amount of $580,000, respectively. The
$313,000 of other expenses for the first nine month period of 1999 includes a
$175,000 increase in a product warranty provision related to the sale of
HyComp. Also, a loss of $83,000 was recorded in the current quarter for the
sale of the partnership interest in the Company's Ontario, California
facility.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $311,000 was provided by operations in the first nine months
of 1999 versus cash of $3,133,000 used in operations in the first nine months
of 1998. The decrease in cash used in operations resulted from improved
collection of accounts receivable and reduction of inventories. Total cash
used in the first nine months of 1999 was $387,000 compared to total cash
used of $1,389,000 in the first nine months of 1998. Significant cash was
consumed by XACI to fund continued operating losses until its sale at the end
of the first quarter of 1998 The Company also paid down approximately
$668,000 in long-term debt obligations and $645,000 in current notes payable
with the cash flow from operations and the proceeds of the sale of HyComp,
which proceeds were received early in the second quarter of 1999.
The Company entered into an agreement with Congress Financial
Corporation on July 12, 1999. The agreement allowed the Company maintain an
overdraft status with its credit lines to Congress Financial Corporation in
the amount of $350,000. The Company was in an overdraft situation at the time
of the agreement in the amount of $350,000. The agreement required the
overdraft to be repaid by September 22, 1999. As of September 30, 1999, the
Company was in an overdraft position of $250,000. Congress Financial
Corporation is reducing the Company's credit availability by $5,000 a week in
order to pay down the overdraft balance.
The agreement of July 12, 1999 with Congress Financial Corporation
("Congress")also required the Company to establish a $350,000 availability
reserve against its term loan balance by paying down the loan balance by the
amount of the reserve. The reserve is required to be established by November
1, 1999 and to the extent that the reserve is not paid, the reserve is to be
captured by Congress during the period November 1, 1999 to December 31, 1999.
The Company has not paid the $350,000 to establish the reserve and Congress
has not recaptured the reserve as of the writing of this
-18-
report. The Company does not have the cash resources to meet its obligation
to pay the $350,000 by December 31, 1999 and also provide the working capital
needed to continue operations.
The Company's financial position worsened during the quarter ended
September 30, 1999 as compared to the quarter ended June 30, 1999 due to the
net loss and increased debt used to finance the loss. The Company is unable
to timely pay some of its vendors and has been placed on COD terms by several
of its suppliers. If the Company is unable to obtain additional financing,
the Company may not be able to continue operations. There can be no assurance
that even if additional capital were obtained that the Company would be
capable of continuing its operations. Consequently, the Company is in the
process of selling certain assets and while significant buyers are in the due
diligence process there can be no assurance the Company can sell such assets
on a timely basis to support continued operations.
The Company intends to sell its Circuit sector businesses and its
37% interest in Digital Transmission Systems, Inc. in order to improve its
liquidity. The Company is also considering a proposal to sell its Components
business to a management buyout group. The Company has reduced expenses
considerably by over $1,500,000 on an annualized basis by actions taken this
year. However there can be no assurance that these efforts to improve
liquidity will be sufficient or timely enough to provide the Company with the
resources to continue operations.
DELISTING OF COMMON STOCK
On May 12, 1999, the listing of the Company's common stock on the
Nasdaq SmallCap Market ("Nasdaq") was discontinued and thereafter, the
Company's common stock has been traded on the OTC Bulletin Board under the
symbol "MCTL".
On August 6, 1999, the Company announced that an agreement
previously reached with the holders of the Company's Series A preferred stock
(the "Preferred Shares") and an extension thereof, which limited the
conversion rate of such stock to $0.50 per common share so long as the
Company's common stock continued to be listed on Nasdaq, had been terminated
as a result of the delisting. The conversion rate for the Preferred Shares
reverted to the provisions of the original subscription agreement which
provided that conversion would occur at the lower of $1.25 per common share
or the arithmetic average of the three lowest closing bid prices during the
forty (40) days immediately prior to conversion. The elimination of the
minimum conversion price may increase the number of common shares to be
issued upon conversion.
As a consequence of these two events, the Company could likely find
it more difficult to obtain capital though an equity offering of its stock in
the future.
LEGAL PROCEEDINGS
None
YEAR 2000
The Company continues its assessment of the potential impact of the
Year 2000 issue on its (i) computer applications and operating systems, (ii)
equipment which uses embedded software,
-19-
(iii) products sold to customers and (iv) interactions with third parties in
order to determine the Company's state of readiness; costs to address the
Company's Year 2000 issues; risks of the Company's Year 2000 issues; and any
necessary contingency plans. Certain of the Company's telephone test and
transmission software-driven products utilize computer calendar/clock data
and are presently Year 2000 compliant. Additionally, information regarding
available upgrades necessary to enable previous versions of such products to
be made Year 2000 compliant have been made available to purchasers. The
majority of the products produced by the Company does not utilize computer
calendar/clock data and consequently have no potential Year 2000 problems.
The Company is currently installing accounting and operations
management computer applications which are Year 2000 compliant and which
operate on computer operating systems that are also Year 2000 compliant at
the last facility that requires such installation. The Company estimates that
the completion of this installation will be completed during the third
quarter of 1999. The Company did not initiate such changes in application and
operating software systems in order to accommodate the Year 2000 issue but
rather to upgrade and enhance its management information systems capability.
As a part of its selection criteria, the Company considered the impact of the
Year 2000 issue.
The Company is currently finalizing its review of internal Year 2000
issues and its evaluation of any potential Year 2000 issues related to third
parties. While the Company currently believes that the impact of the Year
2000 issue will not have a material effect on the Company's operations or
financial condition, its assessment of this issue is not yet complete and
therefore uncertainty exists as to whether material Year 2000 issues exist.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant
on the financial condition or results of operations of either the Company or
its various operating subsidiaries.
EURO CONVERSION
The Company has operating subsidiaries located in France and the
U.K. with combined net sales from these operations in the third quarter of
1999 approximating 58% of total Company net sales. Net sales from the French
subsidiary participating in the Euro conversion were 36% of the Company's net
sales in the first nine months of 1999. The Company continues to review the
impact of the Euro conversion on its operations.
In 1998, the Company's European operations took steps to ensure
their capability of entering into Euro transactions as of January 1, 1999. No
material changes to information technology and other systems were necessary
to accommodate these transactions as such systems previously had the
capability to utilize multiple currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on the Company's European operations, at this time, the Company
does not foresee any material impediments in its ability to compete for
orders from customers requesting pricing using the new exchange rate. Since
the Company has no significant direct sales between its U.S. operations and
Europe, exchange rate risk is regarded as nominal.
-20-
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" ("SFAS 133") issued
by the FASB is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. SFAS 133 provides a comprehensive and consistent
standard for the recognition and measurement of derivatives and hedging
activities. The Company does not expect adoption of SFAS 133 to have a
material effect on its financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Settlement of the Scheinfeld case. See Note 4 - Litigation in the
accompanying unaudited consolidated condensed financial statements and
Legal Proceedings section of Item 3 of the Company's 1998 Annual Report
on Form 10-K for a description of previously reported proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
None
Item 5. Other Information - Subsequent Events
On October 16, the Company sold its partnership interest in the
property at 4290 E. Brickell Street, Ontario, California, which the Company
leased, for assumption of the Company's rent debt, $75,000 and forgiveness of
certain other debt. The sale also included a provision to release the company
of its future lease obligations consisting of seven remaining years and
approximately $3,000,000 of future lease payments regarding such property. As
part of the mutual release the Company relinquished its claim on a $51,000
deposit and $144,000 note receivable from the lessor. In accordance with this
agreement, the Company vacated the Brickell Street property on October 31,
1999. The company relocated its XIT Corporation components manufacturing
operations to a 15,745 square foot manufacturing facility at 9654 Hermosa
Avenue, Rancho Cucamonga, California and relocated its administration and
executive headquarters to a 5,404 square foot office facility at 9485
-21-
Haven Avenue, Suite 100, Rancho Cucamonga, California. This move will result
in monthly rent reduction of $25,000 per month plus lower utilities estimated
to be a reduction of $5,000 a month.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description
Number -----------
10.1 Lease agreement between MicroTel International
Inc. and Property Reserve Inc.
10.2 Lease agreement between XIT, Inc. and Rancho
Cucamonga Development Company
27 Unaudited Financial Data Schedule for the nine months
ended September 30, 1999. - electronic filing only
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed in
the quarter ended September 30, 1999.
-22-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
l934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
MicroTel International, Inc.
November 15, 1999 /s/ Carmine T. Oliva
--------------------------------------------
Carmine T. Oliva
Chief Executive Officer
(Principal Executive Officer)
/s/ Randolph D. Foote
--------------------------------------------
Randolph D. Foote
Chief Financial Officer
(Principal Accounting and Financial Officer)
-23-