<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarter ended SEPTEMBER 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.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0226211
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4290 E. BRICKELL STREET, ONTARIO CALIFORNIA 91761
(Address of principal executive offices) (Zip Code)
(909) 456-4321
Registrant's telephone number
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
ON WHICH REGISTERED
Common Stock $.0033 par value None
Securities registered pursuant to Section 12 (g) of the Act:
NONE
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
As of November 12, 1998, there were 11,932,971 shares of common stock
outstanding.
<PAGE>
MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item l. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Operations
Three and Nine Months Ended September 30, 1998 and l997 4
Consolidated Condensed Statements of Cash Flows
Nine Months Ended September 30, 1998 and l997 5
Notes to Consolidated Condensed Financial Statements 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 19
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
-2-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 532 $ 1,921
Accounts receivable 6,861 6,749
Inventories 6,464 7,087
Other current assets 1,360 869
------- ------
Total current assets 15,217 16,626
Property, plant and equipment-net 2,057 4,968
Goodwill-net 1,760 1,906
Other assets 2,180 1,940
------- -------
$21,214 $25,440
------- -------
------- -------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
<S> <C> <C>
Notes payable $ 3,567 $ 3,630
Current portion of long-term debt 793 1,216
Accounts payable 3,730 6,621
Accrued expenses 3,756 3,837
-------- --------
Total current liabilities 11,846 15,304
Long-term debt, less current portion 1,689 2,530
Other liabilities 693 789
Minority interest 87 88
-------- --------
Total liabilities 14,315 18,711
Redeemable preferred stock 1,860 714
Stockholders' equity:
Common stock 39 39
Additional paid-in capital 20,128 19,960
Accumulated deficit (14,938) (13,707)
Accumulated other comprehensive loss (190) (277)
-------- --------
Total stockholders' equity 5,039 6,015
-------- --------
$ 21,214 $ 25,440
-------- --------
-------- --------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-3-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------------- -----------------
<S> <C> <C> <C> <C>
Net sales $ 9,112 $ 11,536 $ 27,825 $ 31,356
Cost of sales 5,554 8,570 18,615 23,626
-------- -------- -------- --------
Gross profit 3,558 2,966 9,210 7,730
Operating expenses:
Selling, general and 2,759 3,247 8,673 8,802
administrative
Engineering and product 640 569 1,785 1,361
development
Write-down of goodwill -- 5,693 -- 5,693
-------- -------- -------- --------
Income (loss) from operations 159 (6,543) (1,248) (8,126)
Other expense (income)
Interest expense 192 199 536 659
Gain on sale of subsidiary -- -- (580) --
Other 28 27 (15) 20
-------- -------- -------- --------
Loss before income taxes (61) (6,769) (1,189) (8,805)
Income tax expense 5 4 42 6
-------- -------- -------- --------
Net loss (66) (6,773) (1,231) (8,811)
-------- -------- -------- --------
Other comprehensive income (loss),
net of tax
Foreign currency translation
adjustment (118) 7 (123) 6
Accretion of preferred stock 24 15 36 48
-------- -------- -------- --------
Comprehensive income (loss) $ 28 $ (6,795) $ (1,144) $ (8,865)
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted loss per share $ (0.01) $ (0.59) $ (0.11) $ (0.92)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-4-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,231) $(8,811)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 496 516
Amortization of intangibles 147 450
Gain on sale of subsidiary (580) --
Write-down of goodwill -- 5,693
Other noncash items (97) (87)
Changes in operating assets and
liabilities:
Accounts receivable (528) (811)
Inventories (170) 1,432
Other assets (279) (353)
Accounts payable and accrued expenses (891) (1,437)
------- -------
Cash used in operating activities (3,133) (3,408)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (387) (45)
Proceeds from sale of subsidiary 1,350 --
Cash acquired in reverse acquisition -- 264
------- -------
Cash provided by investing activities 963 219
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from notes payable (113) (317)
Net repayments of long-term debt (1,077) (637)
Preferred stock dividends paid -- (140)
Net proceeds from private placement of
convertible preferred stock 1,843 --
Proceeds from sale of common stock-employee
stock purchase plan 4 --
Private placement of common stock -- 4,258
------- -------
Cash provided by financing activities 657 3,164
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 124 --
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,389) (25)
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,921 886
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 532 $ 861
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
-5-
<PAGE>
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 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, 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 from 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
September 30, 1998 and the results of operations and cash flows for the
related interim periods ended September 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.
-6-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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). Accordingly, all periods presented in the accompanying
unaudited consolidated condensed financial statements reflect the
application of the provisions of this statement.
(2) LOSS PER SHARE
The following table illustrates the computation of basic and diluted
loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss $ (66) $ (6,773) $ (1,231) $ (8,811)
Less: accretion of the excess of the redemption
value over the carrying value of redeemable
preferred stock 24 15 36 48
-------- -------- -------- --------
Loss attributable to common stockholders (90) (6,788) (1,267) (8,859)
DENOMINATOR:
Weighted average number of common shares outstanding
during the period 11,931 11,520 11,929 9,581
-------- -------- -------- --------
Basic and diluted loss per share $ (.01) $ (.59) $ (.11) $ (.92)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
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-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(3) INVENTORIES
Inventories consist of the following.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw materials $ 3,019,000 $ 3,044,000
Work-in-process 2,169,000 2,333,000
Finished goods 1,276,000 1,710,000
----------- -----------
$ 6,464,000 $ 7,087,000
----------- -----------
----------- -----------
</TABLE>
(4) BANKING ARRANGEMENTS
On July 8, 1998, the Company completed a new credit facility with
a commercial lender of up to $10.5 million collateralized by
substantially all assets of the Company's domestic subsidiaries. The
new credit facility provides a term loan of approximately $1.5 million
all of which replaced existing domestic term loans, a revolving line of
credit of up to $8 million secured by inventory and accounts receivable,
of which $493,000 was available to be borrowed at September 30, 1998 and
a capital equipment expenditure credit line of up to $1 million all of
which was available at September 30, 1998. This credit facility replaced
the existing credit facilities of the Company's domestic operating
companies, which included both the XIT and CXR Telcom Corporation lines
of credit - both of which were paid in full as of the completion of the
new facility - and provides expanded borrowing capability based upon
available assets from either existing or future-acquired operations.
Outstanding borrowing under the new line of credit was $2,213,000 at
September 30, 1998 and $2,377,000 under the prior line of credit
facilities at December 31, 1997.
(5) 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.
-8-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(5) LITIGATION (CONTINUED)
FRANCIS JOHN GORRY V. MICROTEL INTERNATIONAL, INC.
In early November 1998, the Company and Mr. Gorry executed a
settlement agreement which resolved the dispute between Mr. Gorry and the
Company. The terms of the settlement agreement are confidential although
the Company has determined that such terms will not have a material
adverse affect on the Company's consolidated financial position, results
of operations or cash flows.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
On October 19, 1998 a settlement conference was held in the Supreme
court of New York, the outcome of which was inconclusive. A subsequent
settlement conference is presently scheduled for November 16, 1998, at
which time additional information will be presented to the court by the
parties in an attempt to settle the case.
DANIEL DROR V. MICROTEL INTERNATIONAL, INC.
In November 1996, the Company entered into an agreement (the
"Agreement") with the former Chairman of the Company (Daniel Dror), 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.
On April 8, 1998, the Company brought an action in the United States
District Court in California against the former Chairman for breach of the
Agreement and which seeks recovery of a $211,000 debt due the Company. As
a result of Mr. Dror's failure to answer the complaint, a default was enter
against Mr. Dror on September 4, 1998. On November 3, 1998, the Company
entered a Request to Enter Default Judgement against Mr. Dror.
(6) 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 (the "Warrants") to purchase the Company's common
stock exercisable at $1.25 per share and expiring May 22, 2001.
-9-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company received net proceeds totaling approximately $1,843,000
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 from 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 from 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.
On October 5, 1998, the Company's registration statement on Form S-1
which registered the common stock underlying the Preferred Shares and the
Warrants was declared effective. As of the date hereof, no Preferred
Shares have been converted.
(7) 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.
-10-
<PAGE>
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 September 30, 1998 versus Three Months Ended September 30,
1997
Net sales for the third quarter of 1998 decreased by $2,424,000 or 21%
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 third 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
$2,137,000 of this decrease and an additional $247,000 resulted from
decreases in net sales at the Company's other Circuits Sector operations. Net
sales for the Company's Components Sector increased $389,000 or
12% for the third quarter of 1998 over that of the same period in 1997 as a
result of a combination of both volume and price increases. Net sales for
the Test Equipment Sector declined by $429,000 resulting principally from
declines in the sale of transmission products in the domestic operation and
in the sale of networking equipment in France during the third quarter of
1998 compared with the third quarter of 1997.
Gross profit, as a percentage of net sales, increased from 26% in the third
quarter of 1997 to 39% in the third quarter of 1998. This increase resulted
primarily from the absence in the third 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 15% of net sales for the
third quarter of 1998 5% for the same period in 1997. The Company's
Components Sector realized an increase in gross profit as a percentage of net
sales to 38% in the third quarter of 1998 versus 29% for
-11-
<PAGE>
the same period in the prior year. This increase resulted from both the
increase in 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 as a percentage of net sales in the Test Equipment Sector
rose to 48% in the third quarter in 1998 from 40% in the same period in 1997
as higher margins from the domestic operation's sale of newer test
instruments more than offset the small decline in gross profit percentage
from foreign operations which experienced an increase in profit the sale of
third-party versus in-house products.
Operating expenses (selling, general and administrative, and engineering
and product development) decreased $417,000 from $3,816,000 in the
third quarter of 1997 to $3,399,000 in the third quarter of 1998. The principal
elements of this decline were: (i) a decrease in 1998 of such expenses for the
Circuits Sector of approximately $267,000 resulting from the absence of such
expenses associated with XACI of $328,000 in 1998 partially offset in the
remainder of the sector of $61,000; (ii) a decrease in such expenses for
the Components Sector of approximately $365,000 resulting from reductions in
general and administrative costs across the entire sector but most significantly
in the United Kingdom and Japan operations; and (iii) a increase in the Test
Equipment Sector of approximately $215,000 resulting principally from increases
in sales commissions expense associated with sales through sales representative
organizations versus in-house accounts.
Selling expenses increased approximately $67,000 in total and in all
sectors as a percentage of sales during the third quarter of 1998 compared to
the third quarter of 1997, resulting principally from the increase in the Test
Equipment Sector noted above. Total general and administrative expenses
decreased by approximately $422,000 or 22% in the third 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 third quarter of 1998. Excluding
XACI, general and administrative expenses for the Circuits Sector decreased by
approximately $28,000 but increased as a percentage of net sales from 10% in the
third quarter of 1997 to 11% 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 $339,000 and also decreased
as a percentage of net sales from 19% in the third quarter of 1997 to 7% 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 9% of net sales while engineering and product development expenses
increased as a percent of net sales from 11% in the third quarter of 1997 to
14 % in 1998 due principally to the decrease in sales for the sector. Overall
corporate administrative costs remained constant in the third quarter of 1998
compared with the same period in 1997. In the third quarter of 1997, the
Company wrote down the carrying value of the goodwill originating from the
reverse acquisition with XIT and other goodwill to its net realizable value
which resulted in an expense of $5,693,000. No such write down occurred in the
third quarter of 1998.
Interest expense decreased by $7,000 in the third quarter of 1998 versus
the third 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
-12-
<PAGE>
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.
NINE MONTHS ENDED SEPTEMBER 30, 1998 VERSUS SEPTEMBER 30, 1997
Net sales for the first nine months of 1998 decreased $3,531,000 or 11%
from those in the same period of the prior year which decrease was comprised
of: (i) a decline in net sales of the Company's Circuits Sector of
$6,011,000, of which $5,321,000 resulted from the inclusion of the operating
results of XACI for the entire period in 1997 versus only the first three
months of 1998 until its sale effective as of March 31, 1998; (ii) a decrease
in net sales of the Company's Components Sector of $409,000; and (iii) an
increase in net sales for the Company's Test Equipment Sector of $2,889,000
resulting from the inclusion of CXR for the entire nine month period of 1998
versus only six months and five days during the first nine months of 1997 as
a result of the Merger. On a proforma basis, for the first nine months of
1998, CXR experienced a nominal decrease in net sales of approximately
$54,000 over the same period in 1997.
Gross profit, as a percentage of net sales, increased from 25% in the
first nine months of 1997 to 33% in the same period in 1998. This increase
resulted primarily from the inclusion of the operating results of CXR for the
entire nine month period in 1998 versus six months and five days during the
first nine months of 1997. In the first nine months of 1998, CXR contributed
approximately $5,551,000 or 60% of the Company's total gross profit compared
with $4,036,000 or 52% in the first nine months of 1997. Gross profit, as a
percentage of net sales, in the Company's Components Sector increased from
31% to 35% and increased by approximately $228,000 in the first nine months
of 1998 compared with the same period in 1997 despite a reduction in net
sales of $409,000. This increase in gross profit resulted from both the
increase in 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, as a percentage of net sales, in the Company's Circuits Sector
increased slightly, from 6% to 7%, in the first nine months of 1997 to 1998
but decreased by approximately $265,000 resulting from the decrease in net
sales in the sector as noted above.
Operating expenses (selling, general and administrative, and engineering
and product development) increased $295,000 from $10,163,000 in the first nine
months of 1997 to $10,458,000 in the same period of 1998. The principal element
of this increase was the inclusion of the operating results of CXR for the
entire nine month period in 1998 versus six months and five days during the
first nine months of 1997 partially offset by the absence of such expenses in
1998 relating to XACI, subsequent to its sale. Specifically, selling expenses
experienced a net increase of approximately $493,000 in the first nine months of
1998 over 1997, primarily as the result of an increase of approximately
$1,050,000 attributable to the inclusion of CXR, a decrease of approximately
$547,000 resulting from the absence of such expenses associated with XACI due to
the sale and a net decrease of approximately $10,000 attributable to all other
operations. The increase in general and administrative expense attributable to
the inclusion of CXR for the entire nine month period in 1998 of $312,000 was
partially offset by the reduction in such expenses of $243,000 resulting from
the sale of XACI, a decrease in general corporate overhead expenses of $123,000
and a net increase of approximately $54,000 attributable to all other
operations. Engineering and product development expenses increased
approximately $424,000 for the first nine months of 1998 from the same period in
1997, substantially all of which was attributable to the inclusion of CXR for
the full nine month period in 1998.
-13-
<PAGE>
Selling expenses as a percentage of sales for the Test Equipment Sector
increased in the first nine months of 1998 compared to the same period in 1997
as a result of spreading relatively fixed selling costs over lower net sales.
Such expenses increased slightly from 6% to 7% of net sales from 1997 to 1998
for the Components Sector and from 10% to 11% for the Circuits Sector although
actual selling expenses decreased $564,000 principally from the absence of such
expenses associated with XACI.
General and administrative expenses decreased $892,000 in the first nine
months of 1998 compared with the same period in 1997 principally as a result
of: (i) an increase of $312,000 resulting from the inclusion of CXR for the
full nine months in 1998 versus six months and five days for the same period
in 1997; (ii) a decrease of $928,000 for the Components Sector; (iii) a
decrease of $243,000 resulting from the exclusion of such expenses for XACI
subsequent to its sale; (iv) an increase of approximately $90,000 for the
remainder of the Circuits Sector; and, (v) a decrease in general corporate
expenses of $123,000. The decrease in general and administrative expenses
for the Components Sector resulted 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 $90,000 and as a percentage of net sales from 7% in the first nine
months of 1997 to 12% in the same period in 1998 as a result. In the
Components Sector, general and administrative expenses decreased by $928,000
and also decreased as a percentage of net sales from 18% in the first nine
months of 1997 compared to 9% for the 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 decreased for
the first nine months of 1998 compared with the same period in 1997 resulting
principally from reduced legal, SEC, NASD and related filing fees associated
with the Company's registration of its common stock associated with the
Merger and private placement in 1997.
Interest expense decreased by $123,000 in the first nine months of 1998
versus the same period in 1997 principally as the result of lower borrowings
during the 1998 period. Other expense (income) is principally comprised of
foreign currency exchange gains and losses incurred during the respective
periods.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $3,133,000 was used in operations during the first nine months
of 1998 versus cash of $3,408,000 used in operations in the first nine months
of 1997. The decrease in cash used resulted primarily from substantially
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. Although collection of accounts receivable
remained stable during the first nine months of 1998, at the end of the third
quarter, the Company's accounts receivable rose 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
-14-
<PAGE>
$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.
On July 8, 1998, the Company completed a new credit facility with a
commercial lender of up to $10.5 million collateralized by substantially all
assets of the Company's domestic subsidiaries. The new credit facility
provides a term loan of approximately $1.5 million all of which replaced
existing domestic term loans, a revolving line of credit of up to $8 million
secured by inventory and accounts receivable, of which $493,000 was available
to be borrowed at September 30, 1998 and a capital equipment expenditure
credit line of up to $1 million all of which was available at September 30,
1998. This credit facility replaced the existing credit facilities of the
Company's domestic operating companies, which included both the XIT and CXR
Telcom Corporation lines of credit - both of which were paid in full as of
the completion of the new facility - and provides expanded borrowing
capability based upon available assets from either existing or
future-acquired operations. Outstanding borrowing under the new line of
credit was $2,213,000 at September 30, 1998 and $2,377,000 under the prior
line of credit facilities at December 31, 1997.
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. 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 6 to the Consolidated Condensed Financial Statements included
elsewhere in this report).
The Company's Common Stock is currently quoted on the NASDAQ Stock
Market ("NASDAQ"). For continued listing, a company, among other things,
must maintain a minimum bid price of $1.00 per share. If the Company is
unable to satisfy NASDAQ's maintenance criteria, its securities may be
delisted from NASDAQ. As of the date of this report, the closing bid price
of the Company's common stock has remained below $1.00 per share since July
9, 1998. The Company has received written notification from NASDAQ that its
closing bid price must be $1.00 or more for any ten consecutive trading days
prior to November 13, 1998 to avoid the Company's common stock being subject
to delisting as of the close of business on such date. In such an event,
trading in the Company's securities would thereafter be conducted in the
over-the-counter market in the "pink sheets" or on the NASD's "Electronic
Bulletin Board." As a consequence of such delisting, the Company could
likely find it more difficult to obtain capital through an equity offering of
its stock.
While the Company believes that it has made substantial progress toward
the achievement of sustainable profitability from its business operations,
the specific need for and timing of any subsequent capital requirements and
financing arrangements relating thereto will depend upon future results of
operations, acquisition opportunities, and other unforeseen factors which
cannot presently be predicted. Additionally, delisting of the Company's
common stock could adversely affect the Company's ability to obtain
additional financing. Further, there can be no assurance that such financing
will be available, or that it will be available on terms and conditions
acceptable to the Company. If available, any additional equity financings
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.
-15-
<PAGE>
YEAR 2000 ISSUE
The Company continues to assess the impact of the Year 2000 issue on its
computer applications and operating systems, equipment which uses embedded
software, its products and 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 issue.
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 occur in early 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 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.
EURO CONVERSION
The Company has operating subsidiaries located in France and the U.K.
with combined net sales from these operations in the first nine months of
1998 approximating 43% of total Company net sales. Net sales from the French
subsidiary participating in the Euro conversion were 28% of total Company net
sales. The Company is currently assessing the impact of the Euro conversion
on its operations.
The Company's European operations are taking steps to ensure their
capability of entering into Euro transactions as of January 1, 1999. It is
not anticipated that changes to information technology and other systems
necessary to enter these transactions will be material as such systems
presently have 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.
-16-
<PAGE>
LEGAL PROCEEDINGS
As of the date of this report, there are three legal proceedings pending
against the Company (see Note 5 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
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. During the last year, the Test Equipment Sector in
the United States market acquired and integrated the products of a hand-held,
state-of-the-art, customer-premises test equipment manufacturer. 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. This new product line has enabled the Test Equipment Sector in
the United States to successfully compete in the large outside plant test
equipment market. The caliber of these new products has enabled the
Company's CXR Telcom unit to obtain an agreement from Bell Atlantic for the
purchase of an estimated $8 million in such products over the next three
years. The Company expects to receive additional purchase agreements of
similar size from other regional Bell operating companies in the very near
term. The French Test Equipment subsidiary is experiencing increased sales
in the professional data transmission product market segment which it serves,
as competitors continue to exit this high margin but lower volume market
segment in favor of the larger, high volume but lower-margin
consumer-oriented data transmission market segment. The Company believes
continued improvement in operating results will continue in the fourth
quarter for this operation particularly in light of its ability to supply
professional product customized to its customers specifications.
In addition to the foregoing, the Company continues to seek to maximize
short to intermediate term profitability on existing maturing product lines in
all sectors through price increases and lower operating costs. In July 1998,
the Company's XIT subsidiary implemented cost reductions designed to
significantly lower annual operating expenses by approximately $425,000. At the
end of October 1998, the Company restructured its operations and again reduced
overhead costs at XIT and one of its circuits divisions which lower annual
operating costs by approximately $970,000. Additionally, on October 8, 1998 the
Company's U. K.-based subsidiary was awarded a contract expected to result in
$8 million in new revenues over four years commencing in the first quarter of
1999.
This tactical approach has resulted in the Company reducing its net loss
throughout 1998 from $947,000 in the first quarter, to $218,000 in the second
quarter and finally to $66,000 in the third quarter. Although there are no
assurances as to the Company's future results of operations, management
believes that the Company's current overall strategy and related cost
reductions will assist it in reaching its goal of profitability in the final
quarter of 1998 and thereafter.
-17-
<PAGE>
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.
-18-
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 5 - Litigation in the accompanying Notes to Unaudited Consolidated
Condensed Financial Statements; Part II, Item 1 of the Registrant's
Quarterly Reports on Form 10-Q filed on May 15, 1998 and August 13; 1998;
Legal Proceedings section of Item 3 of the Registrant's Annual Report on
Form 10-K filed on April 15, 1998; and Legal Proceeding section of the
Registrant's Form S-1 declared effective October 5, 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
$1,843,000 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 from 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 from 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 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.
On October 5, 1998, the Company's registration statement on Form S-1
which registered the common stock underlying the Preferred Shares and
the Warrants was declared effective. As of the date hereof, no
Preferred Shares have been converted.
(d) Not applicable.
-19-
<PAGE>
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 DESCRIPTION
NUMBER
27 Unaudited Financial Data Schedule for the nine months
ended September 30, 1998.
(b) Reports on Form 8-K:
Reports on Form 8-K were filed as follows:
(1) Dated July 8, 1998 under Item 5. Other Events was filed on
July 30, 1998.
-20-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MicroTel International, Inc.
November 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)
-21-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 532
<SECURITIES> 0
<RECEIVABLES> 7,122
<ALLOWANCES> 261
<INVENTORY> 6,464
<CURRENT-ASSETS> 15,217
<PP&E> 5,546
<DEPRECIATION> 3,489
<TOTAL-ASSETS> 21,214
<CURRENT-LIABILITIES> 11,846
<BONDS> 2,482
1,860
0
<COMMON> 39
<OTHER-SE> 5,000
<TOTAL-LIABILITY-AND-EQUITY> 21,214
<SALES> 27,825
<TOTAL-REVENUES> 27,825
<CGS> 18,615
<TOTAL-COSTS> 18,615
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 536
<INCOME-PRETAX> (1,189)
<INCOME-TAX> 42
<INCOME-CONTINUING> (1,231)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,231)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
