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 JUNE 30, 1998 or
( ) Transition report pursuant to Section l3 or l5(d) of the Securities
Exchange Act of l934
For the transition period N/A
Commission file Number 1-10346
MICROTEL INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0226211
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4290 E. Brickell Street, Ontario California 91761
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number (909) 456-4321
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange
- --------------------------------- 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
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As of July 31, 1998, there were 11,930,444 shares of common stock outstanding.
MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PAGE
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
June 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 30, 1998 and l997 4
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1998 and l997 5
Notes to Consolidated Condensed Financial Statements 6-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(in thousands)
PROFORMA
(SEE NOTE 7)
JUNE 30, JUNE 30, DEC. 31,
1998 1998 1997
------------- ----------- -----------
ASSETS
Cash and cash equivalents $ 923 $ 2,311 $ 1,921
Accounts receivable 6,849 6,849 6,749
Inventories 6,288 6,288 7,087
Other current assets 715 715 869
------------- ----------- -----------
Total current assets 14,775 16,163 16,626
Property, plant and equipment-net 2,032 2,032 4,968
Goodwill-net 1,809 1,809 1,906
Other assets 2,490 2,602 1,940
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$ 21,106 $ 22,606 $ 25,440
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LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 4,320 $ 4,320 $ 3,630
Current portion of long-term debt 880 880 1,216
Accounts payable 4,540 4,540 6,621
Accrued expenses 3,542 3,542 3,837
------------- ----------- -----------
Total current liabilities 13,282 13,282 15,304
Long-term debt, less current portion 1,664 1,664 2,530
Other liabilities 720 720 789
Minority interest 94 94 88
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Total liabilities 15,760 15,760 18,711
Redeemable preferred stock 459 1,836 714
Stockholders' equity:
Common stock 39 39 39
Additional paid-in capital 20,005 20,128 19,960
Accumulated deficit (15,056) (15,056) (13,877)
Foreign currency translation adjustment (101) (101) (107)
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Total stockholders' equity 4,887 5,010 6,015
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$ 21,106 $ 22,606 $ 25,440
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See accompanying notes to consolidated condensed financial statements.
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(in thousands, except per share amounts)
Net sales $ 8,971 $ 12,029 $ 18,713 $ 19,736
Cost of sales 5,555 8,875 13,061 14,972
------------ ------------ ------------ ------------
Gross profit 3,416 3,154 5,652 4,764
Operating expenses:
Selling, general and administrative 2,796 3,643 5,914 5,555
Engineering and product development 574 694 1,145 792
------------ ------------ ------------ ------------
Income (loss) from operations 46 (1,183) (1,407) (1,583)
Other expense (income)
Interest expense 177 262 344 460
Gain on sale of subsidiary 90 -- (580) --
Other (25) (8) (43) (7)
------------ ------------ ------------ ------------
Loss before income taxes (196) (1,437) (1,128) (2,036)
Income taxes expense (benefit) 22 (2) 37 2
------------ ------------ ------------ ------------
Net loss $ (218) $ (1,435) $ (1,165) $ (2,038)
------------ ------------ ------------ ------------
Basic and diluted loss per share $ (0.02) $ (0.13) $ (0.10) $ (0.24)
------------ ------------ ------------ ------------
Weighted average number of shares used in calculating 11,929 11,005 11,928 8,638
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
See accompanying notes to consolidated condensed financial statements.
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1998 1997
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(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,165) $ (2,038)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 312 356
Amortization of intangibles 97 287
Gain on sale of subsidiary (580) --
Other noncash items (64) 46
Changes in operating assets and liabilities:
Accounts receivable (515) (1,177)
Inventories 6 1,265
Other assets (56) (62)
Accounts payable and accrued expenses (295) (1,443)
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Cash used in operating activities (2,260) (2,766)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (178) (23)
Proceeds from sale of subsidiary 1,350 --
Cash acquired in reverse acquisition -- 264
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Cash provided by investing activities 1,172 241
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from notes payable 640 (699)
Net repayments of long-term debt (1,015) (476)
Preferred stock dividends paid -- (140)
Private placement of convertible preferred stock 459 --
Private placement of common stock -- 4,258
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Cash provided by financing activities 84 2,943
EFFECT OF EXCHANGE RATE CHANGES ON CASH 6 --
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (998) 418
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,921 886
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 923 $ 1,304
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See accompanying notes to consolidated condensed financial statements.
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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 6 AND 8 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
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the "Company") is a holding company
for its three wholly-owned subsidiaries- CXR Telcom Corporation, CXR
S.A. and, effective March 26, 1997, XIT Corporation ("XIT"). CXR Telcom
Corporation and CXR S.A. design, manufacture and market electronic
telecommunication test instruments and data transmission and networking
equipment. XIT designs, manufactures, and markets information technology
products, including displays and input components, subsystem assemblies
power supplies, hybrid microelectronic and other circuits. The Company
conducts its operations out of various facilities in the U.S., France,
England, and Japan and organizes itself in three product line sectors -
Instrumentation and Test Equipment, Components and Subsystem Assemblies,
and Circuits.
BASIS OF PRESENTATION
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, 1998 and December 31, 1997 and the results of operations and cash flows
for the related interim periods ended June 30, 1998 and 1997. 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 1997 Annual
Report on Form 10-K.
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
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NUMERATOR:
Net loss $(218) $(1,435) $(1,165) $(2,038)
Less: accretion of the
excess of the redemption value
over the carrying value of
redeemable preferred stock -- 17 13 34
------- ------ ------ ------
Loss attributable to common
stockholders (218) (1,452) (1,178) (2,072)
DENOMINATOR:
Weighted average number of
common shares outstanding
during the period 11,929 11,005 11,928 8,638
------- ------ ------ ------
Basic and diluted loss per
share $(.02) $(.13) $ (.10) $(.24)
------- ------ ------ ------
------- ------ ------ ------
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.
(3) COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). Comprehensive income (loss) is comprised of net income
(loss) and all changes to stockholders' equity except those due to
investment by owners (changes in paid-in capital) and distributions to
owners (dividends). For interim reporting purposes, SFAS 130 requires
disclosure of total comprehensive income (loss). Comprehensive loss,
consisting of net loss, foreign currency translation effects and accretion
of preferred stock, was $272,000 and $1,452,000 for the three months ended
June 30, 1998 and 1997, respectively and $1,184,000 and $2,072,000 for the
six months ended June 30, 1998 and 1997, respectively.
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(4) INVENTORIES
Inventories consist of the following.
June 30, 1998 December 31, 1997
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Raw materials $ 2,475,000 $ 3,044,000
Work-in-process 2,172,000 2,333,000
Finished goods 1,641,000 1,710,000
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$ 6,288,000 $ 7,087,000
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-------------- --------------
(5) BANKING ARRANGEMENTS
The Company's XIT subsidiary had a line of credit with a bank (the
"XIT Debt") which provided for maximum borrowings of $3,500,000
collateralized by substantially all assets of XIT and its domestic
subsidiaries with interest at the bank's prime rate (8.5% at
June 30, 1998) plus 1%. The XIT Debt agreement required maintenance of
certain financial ratios and contained other restrictive covenants. XIT
was not in compliance with certain covenants of the XIT Debt agreement at
December 31, 1997 and at June 30, 1998. Although the bank did not waive
compliance with such debt covenants, it entered into a forbearance
agreement with the Company in which it agreed to forbear from exercising
its rights under the terms of the XIT Debt agreement provided the Company
obtain a replacement credit facility. Outstanding borrowings under this
line of credit were $2,831,000 and $2,377,000 at June 30, 1998 and
December 31, 1997, respectively.
On July 8, 1998, the Company finalized a $10.5 million credit
facility with a commercial finance company which provided a term loan of
approximately $1.5 million and a revolving line of credit of up to $8
million based upon assets available from either existing or
future-acquired operations of which the Company has utilized
approximately $4 million, and a capital equipment expenditure credit
line of up to $1 million. This credit facility replaced the existing
credit facilities of the Company's domestic operating companies, which
included the XIT Debt and CXR Telcom Corporation's line of credit, both
of which were paid in full at the closing and provides expanded
borrowing capability based upon available assets.
(6) 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.
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) LITIGATION (CONTINUED)
FRANCIS JOHN GORRY V. MICROTEL INTERNATIONAL, INC.
In 1994, Francis John Gorry, a former officer of the Company, alleged
that the Company breached a consulting agreement between he and the
Company. Subsequently, the Company and Mr. Gorry entered into an agreement
which called for certain cash payments to Mr. Gorry and for the issuance to
Mr. Gorry and subsequent registration of shares of the Company's common
stock by April 30, 1996. The Company failed to timely issue the stock and
on May 21, 1996, Mr. Gorry filed suit against the Company (the "1996
Suit"). Shortly thereafter, the Company and Mr. Gorry entered into a
Settlement Agreement which was thereafter amended twice. Based upon the
execution of the Settlement Agreement, the court dismissed Mr. Gorry's suit
without prejudice. The cash payments specified under the terms of the
Settlement Agreement, as amended, were timely made and the shares of the
Company's common stock were issued to Mr. Gorry and subsequently registered
pursuant to the terms of the Settlement Agreement, as amended. On
June 18, 1998, Mr. Gorry made a motion to the court for an order vacating
the dismissal of the 1996 Suit for the purpose of entering judgment against
the Company, claiming the common shares delivered to him did not conform to
the terms of the Settlement Agreement, as amended. On July 17, 1998, the
court granted Mr. Gorry's motion. The Company will appeal the court's
decision as it believes the claim which forms the basis for Mr. Gorry's
motion is without merit.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
In October 1996, David Scheinfeld brought an action in the Supreme
Court of the State of New York, County of New York, to recover monetary
damages in the amount of $300,000 allegedly sustained by the failure of the
Company, its stock transfer agent and its counsel to timely deliver and
register 30,000 shares of Common Stock for which payment had been made.
The Company was informed by Mr. Scheinfeld that in order to settle his
claims, the Company would have to issue him unrestricted shares of common
stock. Since the Company cannot issue unrestricted shares (absent
registration), the Company answered Mr. Scheinfeld's motion and sought to
compel him to serve a complaint upon the defendants. On June 30, 1997, the
complaint was served, and the Company has subsequently answered, denying
the material allegations of the complaint. In August 1997, the Company
served discovery requests on Mr. Scheinfeld, who was initially obligated to
respond by September 12, 1997. On March 2, 1998, Mr. Scheinfeld responded
to such discovery requests which response is currently under review by
counsel to the Company. Currently, the parties are actively engaged in
settlement discussions.
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
LITIGATION (CONTINUED)
DANIEL DROR V. MICROTEL INTERNATIONAL, INC.
In November 1996, the Company entered into an agreement (the
"Agreement") with the former Chairman of the Company, which involved
certain mutual obligations. In December 1997, the former Chairman
defaulted on the repayment of the first installment of a debt obligation
which was an obligation set forth in the Agreement. Also in December 1997,
the former Chairman of the Company, filed suit in the District Court for
Galveston County, Texas alleging the Company has breached an alleged oral
modification of the Agreement. In January 1998, the Company answered the
complaint denying the allegation and the matter is currently being
litigated in Texas. The Company believes that the former Chairman's claim
is without merit and intends to vigorously defend itself. Subsequently,
the Company brought an action in California against the former Chairman for
breach of the Agreement and which seeks recovery of all stock, warrants and
debt due the Company. The parties are currently conducting settlement
discussions in an attempt to resolve both this litigation and the
following matter ("Other litigation").
OTHER LITIGATION
In December 1997, Elk International Corporation Limited, a stockholder
of the Company, brought an action in Texas against the Company's current
Chairman and an unrelated party, alleging certain misrepresentations during
the merger discussions between XIT and the Company.
(7) PRIVATE PLACEMENT
In June 1998 the Company sold 50 shares of Series A convertible
preferred stock (the "Preferred Shares") at $10,000 per share to one
institutional investor. On July 8, 1998, the Company sold an additional
150 Preferred Shares at the same per share price to two other institutional
investors. Included with the sale of such Preferred Shares were a total of
one million warrants to purchase the Company's common stock exercisable at
$1.25 per share and expiring May 22, 2001. The unaudited proforma June 30,
1998 balance sheet information presented elsewhere herein has been prepared
to reflect the Company's financial position assuming the transactions which
were completed in July 1998 had occurred as of June 30, 1998.
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) PRIVATE PLACEMENT (CONTINUED)
The Company received net proceeds totaling approximately $1,847,000
after deduction of commissions and transaction-related expenses, and
utilized such proceeds for working capital. The Preferred Shares are
convertible into the common stock of the Company at the option of the
holder thereof at any time after the ninetieth (90th) day of issuance
thereof at the conversion price per share of Preferred Share equal to
$10,000 divided by the lesser of (x) $1.25 and (y) One Hundred Percent
(100%) of the arithmetic average of the three lowest closing bid prices
over the forty (40) trading days prior to the exercise date of any such
conversion. No more than 20% of the aggregate number of Preferred Shares
originally purchased and owned by any single entity may be converted in any
thirty (30) day period after the ninetieth (90th) day of issuance. In the
event of any liquidation, dissolution or winding up of the Company, the
holders of shares of Preferred Shares are entitled to receive, prior and in
preference to any distribution of any of the assets of the Company to the
holders of the Company's common stock, an amount per share equal to $10,000
for each outstanding Preferred Share. Any unconverted Preferred Shares may
be redeemed at the option of the Company for cash at a per share price
equal to $11,500 per Preferred Share and any Preferred Shares which remain
outstanding as of May 22, 2003 are subject to mandatory redemption by the
Company at the same per-share redemption price.
(8) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131")
issued by the FASB is effective for financial statements with fiscal years
beginning after December 15, 1997. The new standard requires that public
business enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in condensed
financial statements of interim periods issued to shareholders. It also
requires that public business enterprises report certain information about
their products and services, the geographic areas in which they operate and
their major customers. The Company does not expect adoption of SFAS 131 to
have a material effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132")
issued by the FASB is effective for financial statements with fiscal years
beginning after December 15, 1997 and will require restatement of
disclosures for earlier periods provided for comparative purposes. SFAS
132 standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer considered useful. The Company has not
determined the effect, if any, of adoption of SFAS 132 on its financial
position or results of operations.
-11-
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 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.
As discussed in Note 1 to the consolidated condensed financial statements,
the financial statements presented are those of XIT Corporation ("XIT")
resulting from the reverse acquisition by XIT of MicroTel International, Inc.
(the "Company") and its subsidiaries in a merger on March 26, 1997 (the
"Merger"). The pre-merger Company and "accounting acquiree" is described as CXR
in the discussion below. The Company's Components and Subsystem Assemblies, and
Instrumentation and Test Equipment Sectors are referred to as "the Components
Sector" and "the Test Equipment Sector", respectively, in the discussion below
for brevity.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 VERSUS THREE MONTHS ENDED JUNE 30, 1997
Net sales for the second quarter of 1998 decreased by $3,058,000 or 25%
from those in the same period of the prior year. This decrease resulted
primarily from the inclusion of the operating results of the Company's XCEL
Arnold Circuits, Inc. subsidiary ("XACI") in the second quarter of 1997. The
XACI operating results are not included in the same period in 1998 because
the Company sold XACI effective as of March 31, 1998. XACI represented
approximately $2,680,000 of the decrease and the remainder resulted from
decreases in net sales at the Company's other Circuits sector operations.
Although net sales for the Company's Components sector increased
approximately 7% for the second quarter of 1998 over that of the same period
in 1997 as a result of a combination of both volume and price increases, this
increase was offset by a corresponding decline in net sales of the Test
Equipment sector resulting principally from declines in the sale of
transmission products in the second quarter of 1998 compared with the second
quarter of 1997.
Gross profit, as a percentage of net sales, increased from 26% in the
second quarter of 1997 to 38% in the second quarter of 1998. This increase
resulted primarily from the absence in the second quarter of 1998 of the
negative operating results experienced by XACI in the same period in 1997.
Consequently, the Company's Circuits sector's gross profit rose to 22% of net
sales for the second quarter of 1998 from 7% for the same period in 1997.
Additionally, the Company's Components sector realized an increase in gross
profit as a percentage of net sales to 37% in the second quarter of 1998 versus
28% for the same period in the prior year. This increase resulted from both the
increase in
-12-
sales noted above, certain price increases instituted by the sector in the
fourth quarter of 1997 and implementation of a marketing strategy designed to
increase sales of higher margin products while concurrently decreasing sales
of products with lower gross profit margins. Gross profit margin as a
percentage of net sales in the Test Equipment sector rose slightly to 45% in
the second quarter of 1998 from 43% in the same period of 1997 as higher margins
from the domestic operation's sale of newer test instruments more than offset
the small decline in gross margin percentage from foreign operations which
experienced an increase in the sale of third-party versus in-house products.
Operating expenses (selling, general and administrative, and engineering
and product development) decreased approximately $970,000 from $4,337,000 in
the second quarter of 1997 to $3,370,000 in the second quarter of 1998. The
principal elements of this decline were: (i) a decrease in 1998 of such
expenses for the Circuits sector of approximately $420,000 resulting from the
absence of such expenses associated with XACI in 1998; (ii) a decrease in
such expenses for the Components sector of approximately $220,000 resulting
from reductions in general and administrative costs across the entire sector
but most significantly in the United Kingdom operations; and (iii) a decrease
in the Test Equipment sector of approximately $330,000 resulting from
reductions in general and administrative costs associated with the relocation
of the Company's CXR Telcom subsidiary to a smaller, more efficient facility
in the fourth quarter of 1997 as well as reduced engineering and product
development expenses.
Selling expenses in all sectors as a percentage of sales were
substantially the same in the second quarter of 1998 compared to the second
quarter of 1997. Total general and administrative expenses decreased by
approximately $540,000 or 26% in the second quarter of 1998 over the same
period in 1997 as a result of cost reductions in the Components sector and
the absence of such expenses for XACI for the second quarter of 1998.
Excluding XACI, general and administrative expenses for the Circuits sector
increased only $20,000 but increased as a percentage of net sales from 10% in
the second quarter of 1997 to 14% in the same period in 1998 as a direct
result of the decline in net sales for the sector. In the Components Sector,
general and administrative expenses decreased by approximately $320,000 and
also decreased as a percentage of net sales from 20% in the second quarter of
1997 to 9% for the same period in 1998 as the sector's operating companies in
the United Kingdom and Japan decreased staffing and facility costs as noted
above. General and administrative expenses for the Test Equipment sector
remained constant at approximately 8.5% of net sales while engineering and
product development expenses declined slightly as a percent of net sales from
14% in the second quarter of 1997 to 12% in the second quarter of 1998 due to
smaller expenditures required by the sector's European operations. Overall
corporate administrative costs were substantially the same in the second
quarter of 1998 compared with the same period in 1997.
Interest expense decreased by $85,000 in the second quarter of 1998
versus the second quarter of 1997 reflecting lower average borrowings during
the 1998 period. Other income (expense) is principally comprised of foreign
currency exchange gains and losses incurred during the respective periods.
As a result of the merger with XIT, the Company experienced a more than
50% ownership change for federal income tax purposes. As a result, an annual
limitation will be placed upon the Company's ability to realize the benefit
of its net operating loss and credit carryforwards. The amount of this
annual limitation, as well as the impact of the application of other possible
limitations under the consolidated return regulations, has not been
definitively determined at this time. Management believes sufficient
uncertainty exists regarding the realizability of the deferred tax asset
items and that a valuation allowance, equal to the net deferred tax asset
amount, is required.
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SIX MONTHS ENDED JUNE 30, 1998 VERSUS JUNE 30, 1997
Net sales for the first six months of 1998 decreased by approximately
$1,020,000 or 5% from those in the same period of the prior year and was
comprised of: (i) a decline in net sales of the Company's Circuits sector of
approximately $3,630,000, of which approximately $3,180,000 resulted from the
inclusion of the operating results of XACI for the entire period in 1997
versus only the first three months of the first half of 1998 as a result of
the sale of XACI which was effective as of March 31, 1998; (ii) a decrease in
net sales of the Company's Components sector of approximately $760,000; and
(iii) an increase in net sales for the Company's Test Equipment sector of
$3,370,000 resulting from the inclusion of CXR for the entire six month
period of 1998 versus only three months and five days during the first half
of 1997 as a result of the Merger. For the first six months of 1998, CXR
experienced an increase in net sales of approximately $375,000 over the same
period in 1997.
Gross profit, as a percentage of net sales, increased from 24% in the
first six months of 1997 to 30% in the same period in 1998. This increase
resulted primarily from the inclusion of the operating results of CXR for the
entire six month period in 1998 versus three months and five days during the
first six months of 1997. In the first half of 1998, CXR contributed
approximately $3,590,000 or 64% of the Company's total gross profit compared
with $2,220,000 or 47% in the first half of 1997. Gross profit, as a
percentage of net sales, in the Company's Circuits and Components sectors
remained essentially constant from the first half of 1997 to 1998 but
decreased by approximately $480,000 resulting from the decrease in net sales
in both sectors as noted above.
Operating expenses (selling, general and administrative, and engineering
and product development) increased $712,000 from $6,347,000 in the first six
months of 1997 to $7,059,000 in the same period of 1998. The principal
element of this increase was the inclusion of the operating results of CXR
for the entire six month period in 1998 versus three months and five days
during the first six months of 1997 partially offset by the absence of such
expenses in the second quarter of 1998 relating to XACI, subsequent to its
sale. Specifically, selling expenses experienced a net increase of
approximately $560,000 in the first half of 1998 over 1997, primarily as the
result of an increase of approximately $890,000 attributable to the inclusion
of CXR and a decrease of approximately $310,000 resulting from the absence
due to the sale of XACI. The increase in general and administrative expense
attributable to the inclusion of CXR for the entire six month period in 1998
was substantially offset by the reduction in such expenses resulting from the
sale of XACI. Engineering and product development expenses increased
approximately $350,000 in 1998 from 1997, substantially all of which was
attributable to the inclusion of CXR for the full six month period in 1998.
Selling expenses as a percentage of sales for the Circuits sector were
substantially the same in the first six month of 1998 compared to the same
period in 1997 while such expenses increased from 4.8% to 7.6% of net sales
from 1997 to 1998 for the Components sector and from 18% to 21% for the Test
Equipment sector as a result of spreading relatively fixed selling costs over
lower net sales. General and administrative expenses decreased approximately
$200,000 in the first six months of 1998 compared with the same period in
1997 principally as a result of a decrease in such expenses for the
Components sector resulting from reductions in such costs across the entire
sector, but most significantly in the United Kingdom operations which reduced
staffing and facilities expenses during the second half of 1997. Excluding
XACI, general and administrative expenses for the Circuits sector increased
only $23,000 but increased as a percentage of net sales from 7% in the first
six months of 1997 to 10% in the same period in 1998 as a direct result of
the decline in net sales for the sector. In the Components Sector, general
and administrative expenses decreased by approximately $590,000 and also
decreased as a percentage of net sales from 18% in the first six months of
1997 compared to 10% for the
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same period in 1998 as the sector's operating companies in the United Kingdom
and Japan decreased personnel and facility costs as noted above. Corporate
administrative costs increased for the first six months of 1998 increased by
approximately $130,000 over the same period in 1997 resulting principally
from audit and tax return preparation expenses associated with the change in
the Company's fiscal year-end.
Interest expense decreased by $116,000 in the first six months of 1998
versus the same period in 1997 reflecting lower average borrowings during the
1998 period. Other income (expense) is principally comprised of foreign
currency exchange gains and losses incurred during the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $2,260,000 was used in operations in the first six months of
1998 versus cash of $2,766,000 used in operations in the first six months of
1997. The decrease in cash used resulted from improved operating results in
the 1998 period coupled with changes in working capital management during the
respective periods. Significant cash was consumed by XACI to fund continued
operating losses until its sale at the end of the first quarter of 1998.
During the first quarter of 1998, the Company also paid down approximately
$660,000 in accrued expenses and accounts payable in connection with a $2.2
million order received from AT&T in 1997, $1.4 million of which was shipped
in the fourth quarter of 1997. Although collection of accounts receivable
remained stable during the first six months of 1998, at the end of the second
quarter, the Company's accounts receivable rose sharply due to significant
shipments by the Test Equipment sector at quarter-end. Effective as of March
31, 1998, the Company sold XACI, its principal circuits subsidiary, and in
early April, received $1,350,000 in cash and a note for $650,000 upon the
closing of the sale in early April. The cash received was utilized to reduce
certain long and short-term bank borrowings and other current debt.
The Company's XIT subsidiary had a line of credit with a bank (the "XIT
Debt") which provided for maximum borrowings of $3,500,000 collateralized by
substantially all assets of XIT and its domestic subsidiaries with interest
at the bank's prime rate (8.5% at June 30, 1998) plus 1%. The XIT Debt
agreement required maintenance of certain financial ratios and contained
other restrictive covenants. XIT was not in compliance with certain
covenants of the XIT Debt agreement at December 31, 1997 and at June 30,
1998. Although the bank did not waive compliance with such debt covenants,
it entered into a forbearance agreement with the Company in which it agreed
to forbear from exercising its rights under the terms of the XIT Debt
agreement provided the Company obtain a replacement credit facility.
On July 8, 1998, the Company finalized a $10.5 million credit facility
with a commercial finance company which provided a term loan of approximately
$1.5 million and a revolving line of credit of up to $8 million based upon
assets available from either existing or future-acquired operations, of which
the Company has utilized approximately $4 million, and a capital equipment
expenditure credit line of up to $1 million. This credit facility replaced
the existing credit facilities of the Company's domestic operating companies,
which included the XIT Debt and CXR Telcom Corporation's line of credit, both
of which were paid in full at the closing, and provides expanded borrowing
capability based upon available assets.
-15-
In June 1998, the Company sold 50 shares of Series A convertible
preferred stock (the "Preferred Shares") at $10,000 per share to one
institutional investor. On July 8, 1998, the Company sold an additional 150
Preferred Shares at the same per share price to two other institutional
investors. Included with the sale of such Preferred Shares were a total of
one million warrants to purchase the Company's common stock exercisable at
$1.25 per share and expiring May 22, 2001. The unaudited proforma June 30,
1998 balance sheet information presented elsewhere herein has been prepared
to reflect the Company's financial position assuming the transactions which
were completed in July 1998 had occurred as of June 30, 1998. In total, the
Company received net proceeds of approximately $1,847,000 after deduction of
commissions and transaction-related expenses and utilized such proceeds for
working capital. The Preferred Shares are convertible into the common stock
of the Company (see Note 7 to the Consolidated Condensed Financial Statements
included elsewhere in this report).
YEAR 2000 ISSUE
The Company continues to assess the impact, if any, of the Year 2000
issue on its computer applications and operating systems, products and
interactions with third parties. At its domestic facilities, the Company is
currently installing accounting and operations management computer
applications which are year 2000 compliant and which operate on computer
operating systems which are also year 2000 compliant. The Company estimates
that the completion of its conversion to such computer systems will occur
during 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. While the Company currently believes that the impact of the
change to the year 2000 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 some uncertainty exists as to whether material year
2000 issues exist.
LEGAL PROCEEDINGS
There are four legal proceedings pending against the Company (see Note 6
to the Consolidated Condensed Financial Statements included elsewhere in this
report). Management believes that the outcome of these pending proceedings
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
OUTLOOK
From the Merger at the end of March 1997 through early July 1998, the
Company directed its attention to stabilizing its financial condition and
improving its operating results. In addition, during the second half of
1997 and the first quarter of 1998, the Company expended considerable
management time and effort to divest itself of the XACI operation which, due
to its substantial operating losses, severely constricted the Company's cash
position. The Company's failure to maintain the requisite financial position
and consequential default on its major bank debt financing agreement, which
was eliminated in early July by the consolidated credit facility referenced
above, resulted principally from the operating losses incurred at XACI. The
time and effort to manage that situation coupled with efforts to obtain a
replacement credit facility absorbed considerable management attention.
Nonetheless, with one exception, all operating units attained profitability
in the second quarter of 1998.
-16-
Additionally, the Company added $1.8 million in cash from the
private equity placement referenced above. The Company believes these
achievements position it to continue to improve its operating results during
the remainder of 1998.
The Company's overall strategy is to expand its Test Equipment sector
through the acquisition and/or development of new products, product lines
and/or separate operating companies while concurrently continuing to evaluate
existing lower-margin or loss operations elsewhere throughout the Company
with a view toward divestment so as to redirect capital to the higher margin
Test Equipment sector. In addition, the Company will continue to seek to
maximize short to intermediate term profitability on existing maturing
product lines in all sectors through price increases and lower operating
costs. Over the last nine months, the Test Equipment sector in the United
States market has successfully acquired and integrated the products of a
state-of-the-art, customer-premises test equipment manufacturer located in St.
Charles, Illinois. The acquired products have replaced existing, aged
products and, in a short period of time, have become a significant portion of
the net sales of the US operation. Production of this product line has been
transferred to and consolidated with the CXR Telcom facility in Fremont,
California and the St. Charles facility has been repositioned as an
engineering, R&D and customer support center. Additionally, the French Test
Equipment subsidiary has begun to market a broader range of test,
transmission and networking products sourced through licensing, reseller and
other agreements. These actions, in conjunction with the reduction of lower
margin Circuits sector business and the restructured marketing focus in the
Components sector on higher margin products, has resulted in the Company
reducing its net loss in the first quarter of 1998 from approximately
$950,000 to just over $200,000 in the second quarter of 1998. The Company
believes continued improvement in operating results will continue in the
third quarter despite this traditionally weak summer period in the Test
Equipment sector - particularly in European - as demand for product in the
other sectors remains stable.
In the US Test Equipment Sector, the recent completion of mergers of
various Regional Bell Operating Companies is beginning to produce new
opportunities. The consolidation of Southwest Bell and Pacific Bell now
appears complete and release of equipment purchases is once again beginning
to return to traditional levels. Although the NYNEX and Bell Atlantic merger
had initially created some uncertainty and delayed capital equipment
purchases, this merger now affords the Company the opportunity to provide the
combined entity with the Company's newer test equipment products. Domestic
sales of transmission products are expected to improve with the introduction
of Remote Access Server products for Internet applications as well as trial
systems for other transmission products which are currently in place.
Additionally, in-house efforts are being directed toward developing software
which will allow the recently acquired test equipment products to be marketed
in both the Pacific Rim and Latin America.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in complete
sets of financial statements of the enterprise and in condensed financial
statements of interim periods issued to shareholders. It also requires that
public business enterprises report certain information about their products
and services, the geographic areas in which they operate and their major
customers. The Company does not expect adoption of SFAS 131 to have a
material effect on its financial position or results of operations.
-17-
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132")
issued by the FASB is effective for financial statements with fiscal years
beginning after December 15, 1997 and will require restatement of disclosures
for earlier periods provided for comparative purposes. SFAS 132 standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures that are no longer
considered useful. The Company has not determined the effect, if any, of
adoption of SFAS 132 on its financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 - Litigation in the accompanying Notes to Unaudited Consolidated
Condensed Financial Statements; Part II, Item 1 of the Registrant's
Quarterly Report on Form 10-Q filed on May 15, 1998; and, Legal Proceedings
section of Item 3 of the Registrant's Annual Report on Form 10-K filed on
April 15, 1998 for a description of previously reported proceedings.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) During June and July 1998, the Company, through its Placement Agent
Pacific Continental Securities Corporation, completed the sale to
three institutional investors of 200 shares of Series A convertible
preferred stock (the "Preferred Shares") at $10,000 per share and
one million warrants to purchase the Company's common stock
exercisable at $1.25 per share, expiring May 22, 2001. The
offering was completed on July 8, 1998 and the Company received net
proceeds of approximately $1,847,000 after deduction of commissions
and transaction-related expenses and utilized such proceeds for
working capital. The Preferred Shares are convertible into the
common stock of the Company at the option of the holder thereof at
any time after the ninetieth (90th) day of issuance thereof at the
conversion price per share of Preferred Share equal to $10,000
divided by the lesser of (x) $1.25 and (y) One Hundred Percent
(100%) of the arithmetic average of the three lowest closing bid
prices over the forty (40) trading days prior to the exercise date
of any such conversion. No more than 20% of the aggregate number
of Preferred Shares originally purchased and owned by any single
may be converted in any thirty (30) day period after the ninetieth
(90th) day of issuance. In the event of any liquidation,
dissolution or winding up of the Company, the holders of shares of
Preferred Shares are entitled to receive, prior and in preference
to any distribution of
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any of the assets of this corporation to the holders of the
company's common stock by reason of their ownership, an amount per
share equal to $10,000 for each outstanding Preferred Share. Any
unconverted Preferred Shares may be redeemed at the option of the
Company for cash at a per share price equal to $11,500 per
Preferred Share and any Preferred Shares which remain outstanding
as of May 22, 2003 are subject to mandatory redemption by the
Company at the same per-share redemption price.
(d) Not applicable.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On June 11, 1998, the Company held its Annual Meeting of Stockholders.
Matters voted on and results of the voting were as follows:
A. Election of Directors:
Name Class Votes Received Votes Withheld
---- ----- -------------- --------------
David A. Barrett I 7,541,152 39,515
Laurence P. Finnegan, Jr. II 7,541,281 39,386
Jack Talan II 3,966,229 3,614,438
Carmine T. Oliva and Robert Runyon are Class III directors whose term of
office expires at the Company's Annual Meeting of Stockholders in 1999.
Adoption of the Company's 1997 Stock Incentive Plan:
For Against Abstain Not Voted
--- ------- ------- ---------
4,264,393 340,971 614,870 2,360,433
C. Ratification of Selection by the Board of Directors of BDO Seidman,
LLP as Independent Accountants:
For Against Abstain
--- ------- -------
7,428,243 13,001 139,423
Item 5. Other Information
None.
-19-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Description
Number -----------
------
10.47 Loan and Security Agreement between Congress Financial
Corporation (Western) and MicroTel International, Inc., XIT
Corporation, CXR Telcom Corporation and HyComp, Inc. dated June
23, 1998.
10.48 Security Agreement between Congress Financial Corporation
(Western) and XIT Corporation dated June 23, 1998.
10.49 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Fortune Fund
Limited Seeker III.
10.50 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Rana General
Holding, Ltd.
10.51 Subscription Agreement for the sale of Series A Convertible
Preferred Stock of MicroTel International, Inc. to Resonace Ltd.
10.52 Form of Warrant to purchase the Common Stock of MicroTel
International, Inc. issued in connection with the sale of Series
A Convertible Preferred Stock..
10.53 Amended Certificate of Designations, Preferences and Rights of
Preferred Stock of MicroTel International, Inc. a Delaware
Corporation.
10.54 Employment Agreement between MicroTel International, Inc. and
James P. Butler dated May 1, 1998.
27 Unaudited Financial Data Schedule for the six months ended June 30,
1998.
(b) Reports on Form 8-K:
Reports on Form 8-K were filed as follows:
(1) Dated April 9, 1998 under Item 2. Acquisition and Disposition of
Assets was filed on April 4, 1997 and subsequently amended on
Form 8-KA filed June 3, 1998.
(2) Dated July 8, 1998 under Item 5. Other Events was filed on July
30, 1998.
-20-
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.
August 13, 1998 /s/ Carmine T. Oliva
-------------------------------
Carmine T. Oliva
Chief Executive Officer
(Principal Executive Officer)
/s/ James P. Butler
-------------------------------
James P. Butler
Chief Financial Officer
(Principal Accounting and Financial Officer)
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