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 March 31, 1999 or
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( ) 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
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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
--- ---
As of May 13, 1999, there were 16,636,674 shares of common stock outstanding.
-1-
MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PAGE
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Operations
Three Months Ended March 31, 1999 and l998 4
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 1999 and l998 5
Notes to Consolidated Condensed Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 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 21
Signatures 22
-2-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
--------------- ---------------
Cash and cash equivalents $ 362 $ 572
Accounts receivable 6,635 7,337
Receivable from sale of subsidiary 750 --
Current portion of notes receivable 282 291
Inventories 5,822 6,426
Other current assets 1,082 926
--------- --------
Total current assets 14,933 15,552
Property, plant and equipment-net 1,534 1,939
Goodwill-net 1,652 1,701
Notes receivable, less current portion 533 533
Investment in unconsolidated affiliates 1,720 150
Other assets 1,205 1,367
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$ 21,577 $ 21,242
--------- ---------
--------- ---------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 3,797 $ 3,379
Current portion of long-term debt 684 805
Accounts payable 3,345 4,269
Accrued expenses 3,866 3,312
--------- ---------
Total current liabilities 11,692 11,765
Long-term debt, less current portion 1,300 1,430
Other liabilities 925 954
Minority interest 119 95
--------- ---------
Total liabilities 14,036 14,244
Convertible redeemable preferred stock 761 1,516
Stockholders' equity:
Common stock 54 42
Additional paid-in capital 23,043 20,463
Accumulated deficit (16,153) (15,122)
Accumulated comprehensive income (loss) (164) 99
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Total stockholders' equity 6,780 5,482
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$ 21,577 $ 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
MARCH 31,
1999 1998
---------------------- ---------------------
(in thousands, except per share amounts)
Net sales $ 7,510 $ 9,742
Cost of sales 4,904 7,506
---------- ----------
Gross profit 2,606 2,236
Operating expenses:
Selling, general and administrative 3,716 3,119
Engineering and product development 558 571
---------- ----------
Loss from operations (1,668) (1,454)
Other expense (income)
Interest expense 119 167
Gain on sale of subsidiary (331) (670)
Equity in earnings of unconsolidated (536) (10)
affiliates
Other 47 (8)
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Loss before income taxes (967) (933)
Income taxes 8 15
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Net loss $ (975) $ (948)
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Other comprehensive income (loss):
Foreign currency translation adjustment (263) 102
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Total comprehensive loss $ (1,238) $ (846)
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----------- ----------
Basic and diluted loss per share $ (0.07) $ (0.08)
----------- ----------
----------- ----------
See accompanying notes to consolidated condensed financial statements.
-4-
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
1999 1998
--------------- --------------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (975) $ (948)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 136 206
Amortization of intangibles 91 48
Gain on sale of subsidiary (331) (670)
Equity in earnings of unconsolidated entities (536) (10)
Stock and warrants issued as compensation 781 --
Other noncash items 360 18
Changes in operating assets and liabilities:
Accounts receivable 687 93
Inventories (77) 279
Other assets (95) 190
Accounts payable and accrued expenses (192) (537)
---------- ----------
Cash used in operating activities (151) (1,331)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (8) (132)
Cash collected on note receivable 9 --
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Cash provided by (used in) investing activities 1 (132)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in notes payable 418 303
Repayment of long-term debt (216) (305)
Proceeds from sale of common stock 1 --
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Cash provided by (used in) financing activities 203 (2)
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (263) 60
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NET DECREASE IN CASH AND CASH EQUIVALENTS (210) (1,405)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 572 1,921
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 362 $ 516
---------- ----------
---------- ----------
See accompanying notes to consolidated condensed financial statements.
-5-
MICROTEL INTERNATIONAL, INC.
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 5 AND 7 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 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 completed the Company's planned exit of the Circuits
business and commencing in the second calendar quarter of 1999, the
Company's remaining circuit business operation, which has been retained
principally to provide manufacturing capability to the Company's
Components and Test Equipment sectors, has been consolidated with the
Company's Components sector.
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 March 31, 1999 and December
31, 1998 and the results of operations and cash flows for the related
interim periods ended March 31, 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:
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
--------------------- --------------------
NUMERATOR:
Net loss $ (975,000) $ (948,000)
Less: accretion of the excess of the
redemption value over the carrying value of
redeemable preferred stock 56,000 13,000
--------------------- --------------------
Loss attributable to common stockholders
(1,031,000) (961,000)
DENOMINATOR:
Weighted average number of common shares
outstanding during the period
14,766,000 11,929,000
--------------------- --------------------
Basic and diluted loss per share $ (.07) $ (.08)
--------------------- --------------------
--------------------- --------------------
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-
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(3) INVENTORIES
Inventories consist of the following.
March 31, 1999 December 31, 1998
-------------- -----------------
Raw materials $ 2,793,000 $ 2,926,000
Work-in-process 1,776,000 2,375,000
Finished goods 1,253,000 1,125,000
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$ 5,822,000 $ 6,426,000
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(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.
DANIEL DROR & ELK INTERNATIONAL CORPORATION, LTD. V. MICROTEL
INTERNATIONAL, INC., ET. AL.
In November 1996, the Company entered into an agreement (the
"Agreement") with the Daniel Dror, former Chairman of the Company,
which involved certain mutual obligations. In December 1997, Mr. Dror
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, Mr. Dror filed suit in the District Court for Galveston
County, Texas alleging the Company had breached an alleged oral
modification of the Agreement. In January 1998, the Company answered
the complaint denying the allegation and litigation commenced in Texas.
In April 1998, the Company brought an action in California
against Mr. Dror for breach of the Agreement and sought recovery of all
stock, warrants and debt due the Company. The Company obtained a
judgement in the amount of $211,000 against Mr. Dror in this
litigation.
-8-
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(4) LITIGATION (CONTINUED)
In December 1997, Elk International Corporation, Limited
("Elk"), a stockholder of the Company, brought an action in Texas
against the Company's current Chairman and an unrelated party, alleging
certain misrepresentations during the merger discussions between XIT
and the Company. In February 1999, Elk filed suit against the Company,
the current Chairman and counsel to the Company in connection with a
stop transfer placed by the Company on certain common shares then held
by Elk. Elk is described in the litigation as a Bahamian corporation
with an investment office in Galveston County, Texas. Mr. Dror
stipulated in the litigation that he manages the affairs of Elk in the
United States.
On March 1, 1999, the parties entered into a settlement
agreement which terminated all of the foregoing actions. Pursuant to
the terms of the settlement agreement, the Company cancelled 750,000
options to purchase the Company's common stock formerly held by Elk and
issued to Elk warrants to purchase 1,000,000 shares of the Company's
restricted common stock. Additionally, the Company issued 100,000
shares of its restricted common stock to Elk and 25,000 shares each to
two other parties to the settlement agreement. The Company also agreed
to pay certain legal expenses, totaling $60,000, over a period of six
months. The aggregated fair value of the settlement was approximately
$130,000 and is reflected in the Company's consolidated financial
statements as of December 31, 1998.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
In October 1996, David Scheinfeld brought an action in the
Supreme Court of the State of New York, County of New York, to recover
monetary damages in the amount of $300,000 allegedly sustained by the
failure of the Company, its stock transfer agent and its counsel to
timely deliver and register 40,000 shares of common stock purchased by
Mr. Scheinfeld. The Company was informed by Mr. Scheinfeld that in
order to settle his claims, the Company would have to issue him
unrestricted shares of common stock. Since, in the absence of
registrations, the Company could not issue unrestricted shares, the
Company answered Mr. Scheinfeld's motion and sought to compel him to
serve a complaint upon the defendants. On June 30, 1997, the complaint
was served, and the Company has subsequently answered, denying the
material allegations of the complaint. In August 1997, the Company
served discovery requests on Mr. Scheinfeld, who was initially
obligated to respond by September 12, 1997. Several court scheduling
and preliminary settlement conferences were held during 1998 with no
definitive outcome. A court arranged settlement conference scheduled
for May 11, 1999 was rescheduled to June 21, 1999 and discovery is
presently anticipated to be completed during June 1999.
Although the ultimate outcome of this matter cannot be
predicted with certainty, pending actual resolution, management
believes the disposition of this matter will not have a material
adverse affect on the Company's consolidated financial position,
results of operations or cash flows.
-9-
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(5) ACQUISITION AND DISPOSITION OF BUSINESSES
On January 31, 1999, the Company exercised an option to
purchase 1,738,159 shares or 41.4% of the then outstanding common stock
of Digital Transmission Systems, Inc. ("DTS") from a private company in
exchange for 1,000,000 shares of common stock of the Company. This
option was granted to the Company on December 31, 1998 in exchange for
warrants (with a fair value of approximately $55,000) to purchase
152,381 shares of the Company's common stock at $0.66 per share for
five years. The Company does not consolidate the operating results of
DTS but accounts for its interest in DTS' operating results using the
equity method.
On March 31, 1999, the Company's HyComp, Inc. subsidiary
("HyComp"), a manufacturer of hybrid, thin film and flip-chip assembly
circuits, entered into a definitive agreement to sell, effective as of
March 31, 1999, substantially all of it assets and liabilities to
SatCon Technology Corporation, a public company. HyComp completed the
sale on April 19, 1999 and received $750,000 in cash and a royalty on
certain future sales of the HyComp business and was reimbursed
approximately $85,000 for certain expenses paid by HyComp between March
31, 1999 and the closing. The proceeds from this sale were used to
partially repay amounts due under certain notes payable and other
current debt.
The sale resulted in a gain of approximately $331,000 which is
included in the results of operations for the three months ended March
31, 1999. 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 $ 7,054,000
Net loss $ (1,183,000)
Basic and diluted loss per share $ (.09)
(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.
-10-
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS
Through March 31, 1999, the Company had three reportable
segments: Instrumentation and Test Equipment, and Subsystem Assemblies,
and Circuits. The Instrumentation and Test Equipment segment operates
principally in the U.S. and European markets and designs, manufactures
and distributes telecommunications test instruments and voice and data
transmission and networking equipment. The Components and Subsystems
Assemblies segment operates in the U.S., European and Asian markets and
designs, manufactures and markets information technology products,
including input and display components, subsystem assemblies, and power
supplies. The Circuits Sector operated principally in the U.S. market
and designed, manufactured and marketed hybrid microelectronic and
other circuits through the 1st quarter of 1999 (see also Note 1 above).
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.
Selected financial data for each of the Company's operating
segments is shown below.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------ ------------------
SALES FROM EXTERNAL CUSTOMERS:
Instruments $ 3,708,000 $ 4,190,000
Components 2,918,000 2,525,000
Circuits 884,000 3,027,000
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$ 7,510,000 $ 9,742,000
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------------------ ------------------
INTERSEGMENT SALES:
Instruments $ -- $ --
Components 60,000 178,000
Circuits 181,000 226,000
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$ 241,000 $ 404,000
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-11-
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS (CONTINUED)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
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SEGMENT PROFITS
Instruments $ (781,000) $ (190,000)
Components 512,000 149,000
Circuits (387,000) (858,000)
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$ (656,000) $ (899,000)
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MARCH 31, 1999 DECEMBER 31, 1998
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SEGMENT ASSETS
Instruments $ 9,439,000 $ 10,234,000
Components 7,133,000 7,193,000
Circuits 2,421,000 2,737,000
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$ 18,993,000 $ 20,164,000
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------------------ ------------------
The following is a reconciliation of the reportable segment
loss and assets to the Company's consolidated totals.
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------ ------------------
Loss
----
Total loss for reportable segments $ (656,000) $ (899,000)
Unallocated amounts:
Gain on sale of assets of subsidiary (331,000) (670,000)
Equity in earnings of unconsolidated
affiliates (540,000) (10,000)
Unallocated general corporate expenses 1,182,000 694,000
------------------ ------------------
Consolidated loss before income taxes $ (967,000) $ (933,000)
------------------ ------------------
------------------ ------------------
MARCH 31, 1999 DECEMBER 31, 1998
------------------ ------------------
Assets
------
Total assets for reportable segments $ 18,993,000 $ 20,164,000
Other assets 2,584,000 1,078,000
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Total consolidated assets $ 21,577,000 $ 21,242,000
------------------ ------------------
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-12-
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,
READERS OR OTHER USERS OF THIS REPORT ARE CAUTIONED THAT ANY FORWARD-LOOKING
STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS
AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE
INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales for the first quarter of 1999 decreased by
approximately $2,232,000 or 22.9% compared with the same period in the prior
year. This decrease in sales was comprised of:
- The sale of the Company's XCEL Arnold Circuits, Inc. subsidiary
("XCEL Arnold") as of March 31, 1998.
- A decline in the net sales of the Test Equipment sector and the
remainder of Circuits sector.
- An increase in the net sales of the Components sector.
The table below sets forth the composition of consolidated net sales
by business sector, separately identifying the operations of XCEL Arnold for
the three months ended March 31, 1999 and 1998.
MARCH 31, MARCH 31,
1999 1998 VARIANCE
INCREASE/(DECREASE)
Sector (DOLLARS IN THOUSANDS) PERCENT
- ------ ------------------------------------------------------------------ ---------
Test Equipment $ 3,708 $ 4,190 $ (482) (11.5)%
Components 2,918 2,525 393 15.6%
Circuits 884 1,517 (633) (41.7)%
XCEL Arnold (sold 3/31/98) -- 1,510 (1,510) (100.0)%
----------- ----------- ------------
Total Sales $ 7,510 $ 9,742 $ (2,232) (22.9)%
----------- ----------- ------------
----------- ----------- ------------
-13-
During the first quarter of 1999, the Test Equipment sector
experienced a decrease in net sales in both the U.S. and French business
operations, which was principally the result of the decreased sales of test
instruments in both markets and a decline in sales in the French operation of
networking products and services. The decline in test instrument sales was
substantially the result of nominal sales of older test instrument product
lines in the first quarter of 1999 as these products had reached the end of
their life by the end of 1998. While domestic sales of the sector's newer
test instrument product line (introduced during the first quarter of 1998)
increased in the first quarter of 1999 over the same period in 1998, this
increase was insufficient to offset the lack of revenue from the older
products in the first quarter of 1999.
In the U.S. market, capital equipment budgets for this sector's
customers are usually established in the months of January and February and
consequently, purchases by such customers is traditionally lower than average
in the first calendar quarter. In the French business operation, test
instrument sales were impacted by the decision of a significant customer to
delay the anticipated purchase of test instruments. In the French networking
business operations, several major suppliers of networking equipment have
merged and one such supplier has introduced new equipment models, causing a
temporary delay due to retraining of personnel and business partners. To
lessen dependency on products from these now merged suppliers, the French
operation has recently added a new line of networking products to its
offering and began to obtain orders at the end of the first quarter.
The increase in net sales in the Component sector was substantially
the results of increased sales of custom power supply products manufactured
at the sector's XCEL Power Systems ("XPS") in the U. K. Net sales of the
sector's other products remained essentially constant from the first quarter
of 1998. The backlog for U.K. business operations, which peaked at
approximately $6.4 million in July 1998, has steadily decreased thereafter as
product delivery has occurred. During the three months ended March 31, 1999,
the backlog for U.K. operations decreased significantly from approximately
$5.4 million at December 1998 to approximately $3.7 at March 1999. This
decrease was the result of the cancellation of one significant order and a
change in the scope of another. Net sales of the sector's other products
increased slightly compared to the first quarter of 1998 and are anticipated
to remain at a level comparable with the first quarter of 1999 throughout the
remainder of the current year.
Overall Circuits sector sales, excluding XCEL Arnold, decreased as
sales for both XIT's XCEL Etch-Tek division ("Etch-Tek") and its HyComp, Inc.
subsidiary ("HyComp") decreased approximately $630,000 in the first quarter
1999 compared with sales levels for the same period in 1998. The sales at
Etch-Tek are not expected to return to former levels in the foreseeable
future and the Company has instituted significant cost reduction measures to
bring the operation's overhead expenses more into line with anticipated
internal requirements and outside customer sales levels. Additionally, the
backlog of HyComp had fallen by approximately 50% during the later half of
1998 resulting in reduced first quarter 1999 sales. As a consequence of this
expected continuing reduced level of sales, the Company sold substantially
all the assets of the HyComp business effective as of March 31, 1999 (see
Note 6 to the Condensed Consolidated Financial Statements included elsewhere
herein).
The sale of substantially all the assets of the HyComp subsidiary
completed the Company's planned exit of the Circuits business and commencing
in the second calendar quarter of 1999 Etch-Tek, the Company's remaining
circuit business operation which has been retained principally to provide
manufacturing capability to the Company's Components and Test Equipment
sectors, has been consolidated with the Company's Components sector.
-14-
GROSS PROFIT
The composition of consolidated gross profit by business sector and
the percentages of related net sales are as follows for the three months
ended March 31, 1999 and 1998.
MARCH 31, MARCH 31,
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
Sector
- ------
Test Equipment $ 1,452 39.2% $ 1,649 39.4%
Components 1,083 37.1% 690 27.3%
Circuits 71 8.0% (103) (3.4)%
-------- ---------
Total Gross Profit $ 2,606 34.7% $ 2,236 23.0%
-------- ---------
-------- ---------
Despite the decline in net sales, consolidated total gross profit
increased by $370,000 in the first quarter of 1999 compared with 1998 because
of the absence of sales in 1999 of XCEL Arnold that had negative gross profit
in 1998 and the increase in gross profit experience by the Components sector
resulting from both an increase in net sales and an increase in gross profit
margin percent. Overall consolidated gross profit as a percentage of net
sales increased 11.7% percentage points, or 50.9%, from the first quarter of
1998 to the first quarter of 1999 due to the higher margins experienced by
both the Component and Circuits sectors. Gross profit margin percentages in
the Test Equipment Sector remained constant from 1998 to 1999 while that
sector's net sales declined resulting in lower gross profit.
The improvement in gross profit percentage for the Components Sector
resulted principally from:
- a favorable product mix shift to higher margin products sold by XPS.
- substantial reductions in manufacturing overhead costs in the sector's
domestic business operations.
- the elimination, through closure and sale of two domestic product
lines which experienced negative gross profit in 1998.
The increase in gross profit for the Circuits Sector was principally
the result of the sale of XCEL Arnold and the associated avoidance of
continued negative margins at that operation which occurred in the first
quarter of 1998.
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 1999 and
1998 were comprised of the following:
MARCH 31, MARCH 31,
1999 1998
---- ----
Commissions $ 250 $ 387
Other selling 937 1,096
----------- -----------
Total selling expense 1,187 1,483
General & administrative expense 2,529 1,636
----------- -----------
Total selling, general & administrative $ 3,716 $ 3,119
----------- -----------
----------- -----------
Engineering & product development $ 558 $ 571
----------- -----------
----------- -----------
-15-
Total selling expense as a percentage of net sales was 15.8% and
15.2% for the three months ended March 31, 1999 and 1998, respectively.
Commissions as a percentage of sales decreased slightly from 4.0 % in 1998 to
3.3% in 1999 as a result of the decrease in commission expense associated
with the decrease in Circuits sector net sales. In contrast to Components
Sector sales which are primarily achieved through direct selling, the
majority of Circuits Sector sales are made through manufacturer
representatives. The decrease in other selling expense from the first quarter
of 1998 to the first quarter of 1999, which consists of sales and marketing
departmental costs, occurred principally in the Circuits sector, again
principally as a result of the sale of XCEL Arnold.
General and administrative expenses represent not only those costs
associated with general corporate overhead but also reflects the dispersion
of the Company's business operations onto three continents as well as the
broad diversity of products which are produced in each of the local markets
served by those business operations. General and administrative expense
increased by $893,000 in the first quarter of 1999 compared with the first
quarter of 1998. This net increase is principally comprised of:
- Investor relations expenses totaling approximately $522,000
associated with the Company's program to retain the listing of its
common stock on the Nasdaq SmallCap-SM- Market ("Nasdaq"). These
non-cash expenses were attributable to the issuance of common
stock and warrants in connection with services provided by third
parties in support of this effort. Despite this effort, the
trading price of the Company's common stock was unable to meet the
minimum listing maintenance requirement and was removed from
Nasdaq effective May 12, 1999 (see "Liquidity and Capital
Resources"). The Company does not expect to incur such expenses
again in the foreseeable future.
- Expense of approximately $193,000 in connection with the Company's
agreement to a one-time increase in the number of shares of common
stock to be issued, pursuant to certain individual Contingent
Stock Agreements, to two of the former owner's of Critical
Communications, Inc. which the Company acquired in October 1997.
The Company made this one-time adjustment to ensure the retention
of the engineering and product development services of the former
owners.
- General increase in labor expense of approximately $167,000 for
the Components Sector.
Engineering and product development costs originated principally
from the research and product development activities of the Test Equipment
Sector and were comparable in the three months ended March 31, 1999 and 1998.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $48,000 in the first quarter of
1999 compared to 1998 resulted principally from decreased average borrowings
during the respective periods. The increase in the first quarter of 1999 in
other expense (income), net resulted principally from the equity in the
earnings of the unconsolidated affiliate acquired on January 31, 1999 (see
Note 5 to Notes to Consolidated Condensed Financial Statements included
elsewhere herein and "Liquidity and Capital Resources"). Other income for the
three months ended March 31, 1999 and 1998 also included gains on the sale of
HyComp in the amount of $331,000 and XCEL Arnold in the amount of $670,000,
respectively.
-16-
INCOME TAXES
Income taxes were nominal in both respective periods and domestic
income tax obligations, consist primarily of minimum state tax payments as
the Company is in a loss carryforward position for Federal income tax
purposes. As a result of its merger with XIT in 1997, the Company experienced
a more than 50% ownership change for federal income tax purposes. As a
result, an annual limitation was 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, cannot
presently be definitively determined. Management believes sufficient
uncertainty exists regarding the realizability of the deferred tax asset
items and, accordingly, a valuation allowance in an amount equal to the net
deferred tax asset amount has been previously recorded.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $151,000 was used in operating activities in the first three
months of 1999 versus cash of $1,331,000 used in the first three months of
1998. This decrease in cash use was caused principally by the improvement in
results of operations, as adjusted for non-cash items, supplemented by
collection of accounts receivable during the first quarter of 1999.
Significant cash used in operations in the first quarter of 1998 was consumed
by XACI to fund continued operating losses until its sale at the end of the
quarter. Improvements in results from operations for the first quarter of
1999 occurred principally as a result of the substantial improvement in gross
profit margins as described above. Capital expenditures in the first quarter
were nominal and are not expected to be significant during the remainder of
1999. The Company financed its cash requirement for operating activities
through a net increase short term borrowings under its credit facilities.
On May 12, 1999, the Company's Nasdaq listing was discontinued and
the Company's common stock thereafter has been listed on the OTC Bulletin
Board-Registered Trademark-. As a consequence of such delisting, the Company
could likely find it more difficult to obtain capital through an equity
offering of its stock.
ACQUISITION AND DISPOSITION OF BUSINESSES
On January 31, 1999, the Company exercised an option to purchase
1,738,159 shares or 41.4% of the then outstanding common stock of Digital
Transmission Systems, Inc. ("DTS") from a private company in exchange for
1,000,000 shares of restricted common stock of the Company. This option was
granted to the Company on December 31, 1998 in exchange for warrants (with a
fair value of approximately $55,000) to purchase 152,381 shares of the
Company's restricted common stock at $0.66 per share for five years. DTS was
founded in 1990 and is a publicly-traded company with its headquarters near
Atlanta, Georgia. It designs, manufactures and markets electronic products
used to build, access and monitor high-speed telecommunications networks
worldwide. DTS's primary customers include domestic and international
wireless service providers, telephone service providers and private wireless
network users.
This acquisition provides the Company with a wireless transmission
product which is complementary to the Company's wireline transmission
products and affords both the Company and DTS the opportunity to market both
company's product lines to their respective customer bases. The acquisition
also establishes a relationship which affords the Company the opportunity to
build DTS' products in lieu of the use of outside contract manufacturers thus
providing DTS with greater
-17-
flexibility and control of the production of its products and affording the
Company the opportunity to employ certain underutilized plant capacity by
building certain DTS products.
Effective as of March 31, 1999, the Company sold substantially all
the assets of its HyComp subsidiary and received $750,000 in cash as
consideration and reimbursement of $85,000, representing severance expenses
paid by HyComp to certain of its employees in connection with the sale, upon
the closing of the sale in April. The cash received was primarily utilized to
reduce certain long and short-term borrowings and other current debt.
While the Company has been successful in implementing its strategy,
specific needs for and timing of any subsequent financing arrangements will
depend upon results of operations, acquisition opportunities, and other
unforeseen factors which cannot presently be predicted. There can be no
assurance that such financing arrangements will either be available or be
available on terms and conditions acceptable to the Company. If available,
any additional equity financing arrangements may be dilutive to the Company's
stockholders and any debt financing may contain restrictive covenants and
additional debt service requirements which could adversely affect the
Company's operating results.
LEGAL PROCEEDINGS
There is one legal proceeding pending against the Company (see Note
4 to the Consolidated Condensed Financial Statements included elsewhere
herein). As of the date hereof, management believes that the outcome of this
pending proceeding will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
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, (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 do not utilize computer calendar/clock data and consequently have no
potential Year 2000 problems.
At certain of 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 be completed in the first half
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 developing assessment processes to finalize
its review of internal Year 2000 issues and expects to shortly begin an
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
-18-
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 first three months
of 1999 approximating 50% of total Company net sales. Net sales from the
French subsidiary participating in the Euro conversion were 31% of the
Company's net sales. 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.
OUTLOOK FOR THE COMPANY
From the merger with XIT 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 XCEL Arnold 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 1998 by the consolidated credit
facility referenced above, resulted principally from the operating losses
incurred at XCEL Arnold. The time and effort to manage that situation coupled
with efforts to obtain a replacement credit facility absorbed considerable
management attention. Nonetheless, with two exceptions, all operating units
experienced positive operating income, before interest and miscellaneous
expense/(income), in the second quarter of 1998. Additionally, the Company
added $1.8 million in cash from a private equity placement. As of March 31,
1999, the Company sold substantially all the assets of its HyComp, Inc.
subsidiary, which sale closed on April 19, 1999. Also, the sale of the real
property in which the Company's XIT subsidiary owns a 50% interest is planned
for late in 1999 or early 2000.
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, such as its recent acquisition of
41% of DTS in January 1999, while concurrently continuing to evaluate
existing lower-margin or loss operations elsewhere throughout the Company,
with a view toward divestment
-19-
and downsizing so as to redirect capital to the higher margin Test Equipment
sector. In addition, the Company will continue to seek to maximize short to
intermediate term profitability on existing maturing product lines in all
sectors through price increases and lower operating costs. Over the last
year, the Test Equipment sector in the United States market has successfully
acquired and integrated the products of a state-of-the-art, customer-premises
hand-held 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 CXR
U.S. operation. Production of this product line was transferred to and
consolidated with the CXR Telcom facility in Fremont, California and the St.
Charles facility was 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, the
sale of the domestic display business, and the restructured marketing focus
in the Components sector on higher margin products, have resulted in the
Company reducing its net cash used in operating activities in the first
quarter of 1998 of $1,331,000 to cash used of $151,000 in the first quarter
of 1999. Although there can be no assurances, the Company believes continued
improvement in operating results will continue throughout 1999.
In the US Test Equipment Sector, the recent completion of mergers of
various Regional Bell Operating Companies has begun to produce new
opportunities. The consolidation of Southwest Bell and Pacific Bell is now
complete and release of equipment purchases has once again returned to
traditional levels. Although the NYNEX and Bell Atlantic merger had initially
created some uncertainty and delayed capital equipment purchases, this merger
now 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 at SBC Communications and
GTE. SBC's Pacific Bell subsidiary has purchased product for its San Diego
and Anaheim locations following the trial and additional orders are expected
throughout the remainder of the current year and thereafter. Additionally,
in-house efforts are being directed toward developing software which will
allow the recently acquired test equipment products to be marketed in both
Europe and Latin America.
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
-20-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material new developments. 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
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.50 - Asset Purchase Agreement between HyComp, Inc.
and HyComp Acquisition Corp., c/o SatCon Technology Corporation,
dated March 31, 1999.
Exhibit 27 - Unaudited Financial Data Schedule for the three
months ended March 31, 1999.
(b) Reports on Form 8-K:
One report on Form 8-K dated January 31, 1999 under Item 5 - Other
was filed on February 11, 1999.
-21-
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.
May 14, 1999 /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)
-22-