<PAGE>
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, 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)
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
---------------------
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 May 14, 1998, there were 11,927,793 shares of common stock outstanding.
1
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MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 1998 and December 31, 1997 3
Consolidated Condensed Statements of Operations
Three Months Ended March 31, 1998 and l997 4
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 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 11-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
2
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MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DEC. 31,
1998 1997
---------- ----------
(in thousands)
ASSETS
Cash and cash equivalents $ 516 $ 1,921
Accounts receivable 6,241 6,749
Receivable from sale of subsidiary 1,350 -
Inventories 6,042 7,087
Other current assets 454 869
---------- ----------
Total current assets 14,603 16,626
Property, plant and equipment-net 2,092 4,968
Goodwill-net 1,858 1,906
Other assets 2,460 1,940
---------- ----------
$ 21,013 $ 25,440
---------- ----------
---------- ----------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 3,982 $ 3,630
Current portion of long-term debt 1,087 1,216
Accounts payable 4,478 6,621
Accrued expenses 3,298 3,837
---------- ----------
Total current liabilities 12,845 15,304
Long-term debt, less current portion 2,167 2,530
Other liabilities 792 789
Minority interest 94 88
---------- ----------
Total liabilities 15,898 18,711
Redeemable preferred stock - 714
Stockholders' equity:
Common stock 39 39
Additional paid-in capital 19,961 19,960
Accumulated deficit (14,838) (13,877)
Foreign currency translation adjustment (47) (107)
---------- ----------
Total stockholders' equity 5,115 6,015
---------- ----------
$ 21,013 $ 25,440
---------- ----------
---------- ----------
See accompanying notes to consolidated condensed financial statements.
3
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MicroTel International, Inc.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
--------- ---------
(in thousands, except per share amounts)
<S> <C> <C>
Net sales $9,742 $7,707
Cost of sales 7,506 6,234
------ ------
Gross profit 2,236 1,473
Operating expenses:
Selling, general and administrative 3,119 1,775
Engineering and product development 571 98
------ ------
Loss from operations (1,454) (400)
Other income (expense)
Interest expense (167) (198)
Gain on sale of subsidiary 670 -
Other 18 (1)
------ ------
Loss before income taxes (933) (599)
Income taxes 15 4
------ ------
Net loss $(948) $(603)
------ ------
------ ------
Basic and diluted loss per share $(0.08) $(0.10)
------ ------
------ ------
Weighted average number of shares used in calculating
basic and diluted loss per share 11,927 6,244
------ ------
------ ------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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MICROTEL INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (948) $ (603)
Adjustments to reconcile net loss to cash (used in) operating activities:
Depreciation and amortization 206 162
Amortization of intangibles 48 48
Gain on sale of subsidiary (670) -
Minority interest and other noncash items 8 2
Changes in operating assets and liabilities:
Accounts receivable 93 (157)
Inventories 279 440
Other assets 190 (43)
Accounts payable and accrued expenses (537) 93
---------- ----------
Cash used in operating activities (1,331) (58)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (132) 13
Cash acquired in reverse acquisition - 264
---------- ----------
Cash provided by (used in) investing activities (132) 277
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) of notes payable 303 290
Net borrowings (repayments) of long-term debt (305) (281)
---------- ----------
Cash provided by (used in) financing activities (2) 9
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 60 (116)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,405) 112
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,921 886
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 516 $998
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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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 6 AND 8 HEREOF.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
MicroTel International, Inc. (the "Company") is a holding company for its
three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A. and,
effective March 26, 1997, XIT Corporation ("XIT"). CXR Telcom Corporation
and CXR S.A. design, manufacture and market electronic telecommunication test
instruments and data communications equipment. XIT designs, manufactures, and
markets information technology products, including displays and input
components, subsystem assemblies, hybrid microelectronic and other circuits.
The Company conducts its operations out of various facilities in the U.S.,
France, England, and Japan and organizes itself in three product line
sectors- Circuits, Components and Subsystem Assemblies, and Instrumentation
and Test Equipment.
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 March 31, 1998 and December 31,
1997 and the results of operations and cash flows for the related interim
periods ended March 31, 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
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(2) LOSS PER SHARE
The following table illustrates the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
<S> <C> <C>
NUMERATOR:
Net loss $ (948,000) $ (603,000)
Less: accretion of the excess of the redemption value over
the carrying value of redeemable preferred stock 13,000 17,000
---------- ----------
Loss attributable to common stockholders (961,000) (620,000)
DENOMINATOR:
Weighted average number of common shares outstanding
during the period 11,927,000 6,244,000
---------- ----------
Basic and diluted loss per share $ (.08) $ (.10)
---------- ----------
---------- ----------
</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.
(3) COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"). Comprehensive income (loss) is comprised of net income
(loss) and all changes to stockholders' equity except those due to
investment by owners (changes in paid-in capital) and distributions to
owners (dividends). For interim reporting purposes, SFAS 130 requires
disclosure of total comprehensive income (loss). Comprehensive loss,
consisting of net loss, foreign currency translation effects and
accretion of preferred stock, was $961,000 and $616,000 for the three
months ended March 31, 1998 and 1997, respectively.
7
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(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials $2,215,000 $3,044,000
Work-in-process 2,192,000 2,333,000
Finished goods 1,635,000 1,710,000
---------- ----------
$6,042,000 $7,087,000
---------- ----------
---------- ----------
</TABLE>
(5) BANKING ARRANGEMENTS
The Company's XIT subsidiary has a line of credit with a bank (the
"XIT Debt") which provides for maximum borrowings of $3,500,000. The
line of credit was renewed on July 22, 1997 and expires on June 25,
1998. The credit line is collateralized by substantially all assets of
XIT and its domestic subsidiaries, bears interest at the bank's prime
rate (8.5% at March 31, 1998) plus 1% and is payable on demand.
The XIT Debt agreement requires maintenance of certain financial
ratios and contains other restrictive covenants. XIT was not in
compliance with certain debt covenants at December 31, 1997 and at March
31, 1998. Although the bank did not waive compliance with such debt
covenants, it entered into a forbearance agreement with the Company in
which it agreed to forbear through May 31, 1998 from exercising its
rights under the terms of the XIT Debt agreement provided certain events
occur, principally the consummation of the sale of the Company's XCEL
Arnold Circuits, Inc. subsidiary (see Note 7) and the Company obtaining
a replacement credit facility. Outstanding borrowings under this line
of credit were $2,947,000 and $2,377,000 at March 31, 1998 and December
31, 1997, respectively.
(6) LITIGATION
The Company and its subsidiaries are, from time to time, involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate
liability cannot presently be determined because of considerable
uncertainties that exist. Therefore, it is possible the outcome of such
legal proceedings, claims and litigation could have a material effect on
quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management
believes such matters will not have a material adverse affect on the
Company's consolidated financial position, results of operations or cash
flows.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
In October 1996, David Scheinfeld brought an action in the Supreme
Court of the State of New York, County of New York, to recover monetary
damages in the amount of $300,000 allegedly sustained by the failure of the
Company, its stock transfer agent and its counsel to timely deliver and
register 30,000 shares of Common Stock for which payment had been made. The
Company was informed by Mr. Scheinfeld that in order to settle his claims,
the Company would have to issue him unrestricted shares of common stock.
Since the Company cannot issue
8
<PAGE>
unrestricted shares (absent registration), the Company answered Mr.
Scheinfeld's motion and sought to compel him to serve a complaint upon
the defendants. On June 30, 1997, the complaint was served, and the
Company has subsequently answered, denying the material allegations of
the complaint. In August 1997, the Company served discovery requests on
Mr. Scheinfeld, who was initially obligated to respond by September 12,
1997. On March 2, 1998, Mr. Scheinfeld responded to such discovery
requests which response is currently under review by counsel to the
Company.
DANIEL DROR V. MICROTEL INTERNATIONAL, INC.
In November 1996, the Company entered into an agreement (the
"Agreement") with the former Chairman of the Company, which involved
certain mutual obligations. In December 1997, the former Chairman
defaulted on the repayment of the first installment of a debt obligation
which was an obligation set forth in the Agreement. Also in December
1997, the former Chairman of the Company, filed suit in the District
Court for Galveston County, Texas alleging the Company has breached an
alleged oral modification of the Agreement. In January 1998, the
Company answered the complaint denying the allegation and the matter is
currently being litigated in Texas. The Company believes that the former
Chairman's claim is without merit and intends to vigorously defend
itself. More recently, the Company has brought an action in California
against the former Chairman for breach of the Agreement and seeks
recovery of all stock, warrants and debt due the Company.
OTHER LITIGATION
In December 1997, Elk International Corporation Limited, a stockholder
of the Company, brought an action in Texas against the Company's current
Chairman and an unrelated party, alleging certain misrepresentations during
the merger discussions between XIT and the Company. The Company has moved
to dismiss this suit on jurisdictional grounds and will vigorously defend
the current Chairman on the merits should the matter not be dismissed.
(7) DISPOSITION OF BUSINESS
On January 9, 1998, the Company entered into a definitive agreement
to sell certain of the assets and liabilities of its XCEL Arnold
Circuits, Inc. subsidiary ("XACI"), a manufacturer of multi-layer bare
printed circuit boards, effective as of March 31, 1998. The Company
completed the sale and received $1,350,000 in cash and a note receivable
aggregating $650,000, which is payable over the three years commencing
May 1, 1998. The proceeds from this sale were received in April and were
used to partially repay amounts due under certain notes payable and other
current debt. The sale resulted in a gain of approximately $670,000
which is included in the results of operations for the three months ended
March 31, 1998. 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 1998.
Net sales $8,554,000
Net loss $ (927,000)
Basic and diluted loss per share $ (.08)
9
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(8) NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131")
issued by the FASB is effective for financial statements with fiscal
years beginning after December 15, 1997. The new standard requires that
public business enterprises report certain information about operating
segments in complete sets of financial statements of the enterprise and
in condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic
areas in which they operate and their major customers. The Company does
not expect adoption of SFAS 131 to have a material effect on its
financial position or results of operations.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS
132") issued by the FASB is effective for financial statements with
fiscal years beginning after December 15, 1997 and will require
restatement of disclosures for earlier periods provided for comparative
purposes. SFAS 132 standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations
and fair values of plan assets that will facilitate financial analysis,
and eliminates certain disclosures that are no longer considered useful.
The Company has not determined the effect, if any, of adoption of SFAS
132 on its financial position or results of operations.
10
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MICROTEL INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD," "BELIEVE" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL
TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS
STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. PROSPECTIVE 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
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
Net sales for the first quarter of 1998 increased by approximately $2,035,000
or 26.4% from those in the same period of the prior year. This increase was
comprised of increased sales of CXR of $3,690,000 resulting from the
inclusion of CXR's operating results for the entire first quarter in 1998
versus five (5) days in the first quarter of 1997 subsequent to its
acquisition on March 26, 1997 which were partially offset by lower net sales
for the Company's Circuits Sector of approximately $666,000 and lower net
sales for the Components Sector of $989,000. The decrease in the Circuits
Sector resulted primarily from lower demand from the major customer of the
group, Motorola, and limited working capital which constrained the ability of
the group to accept certain "quick turn" orders. The net decrease in the
Components Sector was due to delays in the receipt of orders from existing
customers, which orders were received in the first quarter for delivery
thereafter, as well as a general decline in demand for sector products due to
the aging of related customer programs.
Gross profit, as a percentage of net sales, increased from 19.1% in the first
quarter of 1997 to 23.0% in the first quarter of 1998. This increase was due
primarily to the inclusion of CXR for the entire first quarter of 1998 (versus
five days in the same period in 1997) as the average gross profit as a
percentage of net sales for CXR generally exceeds that of the other sectors.
This increase would have been greater but was minimized by the decrease in gross
profit for the Circuits and Components Sectors whose gross profit as a
percentage of net sales decreased in the first quarter of 1998 versus 1997 due
to the decrease in net sales noted above and the consequential decline in
absorption of fixed manufacturing costs.
Operating expenses (selling, general and administrative, and engineering and
product development) increased $1,817,000 from $1,873,000 in the first quarter
of
11
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1997 to $3,690,000 in the first quarter of 1998. The primary component of
this increase was a net increase of approximately $1,718,000 due to the
inclusion of such expenses for CXR for the entire first quarter of 1998
versus five days in the same period in 1997. Selling expenses as a
percentage of sales rose from 7.9% in the first quarter of 1997 to 15.2% in
1998 for the same reason as well as the fact that such expenses as a
percentage of net sales for CXR have a higher average than the other sectors.
Selling expenses in the Circuits Sector as a percentage of sales increased
from 9.5% in the first quarter of 1997 to 11.5% in the first quarter of 1998
as the result of a change in sales mix toward those products with higher
commissions. The increase was due to a higher mix of house account to
manufacturer's representative sales in 1997 and the effects on the percentage
in 1998 of spreading fixed departmental costs over the lower sales volume.
Selling expenses in the Components Sector as a percentage of sales increased
from 5.3% in the first quarter of 1997 to 8.0% in the same period in 1998
also as a result of the effect on the percentage in 1998 of spreading
relatively fixed departmental costs over the lower sales volume. General and
administrative expenses increased by $361,000 or 20.3% in the first quarter
of 1998 over the same period in 1997 as a result of the inclusion of such
expenses for CXR for the entire first quarter of 1998 versus five days in the
same period in 1997. In the Circuits Sector, general and administrative
expenses declined slightly but increased as a percentage of net sales as a
direct result of the decrease in net sales for the sector. In the Components
Sector, general and administrative expenses decreased by approximately
$267,000 and also decreased as a percentage of net sales from 15.1% in the
first quarter of 1997 to 10.4% for the same period in 1998 as the sector's
operating companies in the United Kingdom and Japan decreased headcount and
facility costs. This decline in general and administrative expenses was more
than outweighed by higher corporate administrative costs which increases
relate principally to incremental accounting and legal fees associated with
public reporting requirements and the change in 1997 of the Company's fiscal
year end.
Engineering and product development expenses increased by $473,000 from the
first quarter of 1997 to the same period in 1998 again due principally to the
inclusion of such expenses for CXR for the entire first quarter of 1998
versus five days in the same period in 1997 for which such expenses have been
historically substantially higher than for the other two sectors.
The Company recorded a gain on the sale of its XCEL Arnold Circuits, Inc.
subsidiary ("XACI") of approximately $670,000 which was sold as of March 31,
1998. Had XACI been sold as of January 1, 1998 and its results of operations
not included with those of the Company for the first quarter of 1998, the net
loss for the Company would have been approximately $927,000 (see Note 7 to
the Consolidated Condensed Financial Statements included elsewhere in this
report).
Interest expense decreased by $31,000 in the first quarter of 1998 versus the
first quarter of 1997 reflecting lower average borrowings during the 1998
period. Other income (expense) is principally comprised of foreign currency
exchange gains and losses incurred during the respective periods.
As a result of the merger with XIT, the Company experienced a more than 50%
ownership change for federal income tax purposes. As a result, an annual
limitation will be placed upon the Company's ability to realize the benefit
of its net operating loss and credit carryforwards. The amount of this
annual limitation, as well as the impact of the application of other possible
limitations under the consolidated return regulations, has not been
definitively determined at this time. Management believes sufficient
uncertainty exists regarding the realizability of the deferred tax asset
items and that a valuation allowance, equal to the net deferred tax asset
amount, is required.
12
<PAGE>
As noted above, the consolidated results of operations for the three months
ended March 31, 1998 and 1997 include the results of operations of CXR since
its acquisition on March 26, 1997. The table below sets forth the results of
CXR for the three months ended March 31, 1998 and 1997 and the following
discussion relates to such results of operations.
<TABLE>
<CAPTION>
CXR
(in thousands)
THREE MONTHS ENDED
MARCH 31,
1998 1997
--------- ----------
<S> <C> <C>
Net sales $ 4,190 $ 3,496
Cost of sales 2,542 2,454
--------- ----------
Gross profit 1,648 1,042
Selling expense 933 896
General & administrative 391 1,424
Engineering & product
development 504 552
Interest expense 16 16
Other expense (income) (6) 58
--------- ----------
Net loss $ (190) $ (1,904)
--------- ----------
--------- ----------
</TABLE>
For the three months ended March 31, 1998, net sales increased $694,000 as a
result of sales of a new product line of test instruments acquired in October
1997 for sale in the U. S. and an increase in the sale of test instruments at
CXR's French subsidiary. Gross profit increased in both absolute dollars as
a result of the increase in sales and also as a percentage of net sales as
gross profit for the new domestic test instrument products average higher
than those of preexisting product lines. Selling expenses increased slightly
but fell from 25.6% of net sales in the first quarter of 1997 to 22.3% in the
same period in 1998 as the result of spreading relatively fixed selling
expenses over the higher sales volume, principally at CXR's domestic
operation.
General and administrative expense decreased $1,033,000 from the first
quarter of 1997 compared to the same period in 1998 as CXR incurred certain
significant charges in 1997 including approximately $462,000 of compensation
expense related to certain officers and directors whose corporate capacities
terminated or changed upon the merger with XIT Corporation and $287,000 of
asset write-downs and severance costs related to the reassessment of the
impact on asset realizable values and certain reductions in personnel,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $1,331,000 was used in operations in the first three months of 1998
versus cash of $58,000 used in operations in the first three months of 1997.
The increase in cash use was caused by the decline in results of operations,
coupled with changes in working capital management during the respective
periods. Significant cash used in operations was consumed by XACI to fund
continued operating losses until its sale at the end of the quarter. The
Company also paid down approximately $660,000 in accrued expenses and
accounts payable in connection with a $2.2 million order received from AT&T
in 1997, $1.4 million of which was shipped in the fourth quarter.
Additionally, the Company experienced somewhat improved collections of
accounts receivable and reduced inventories by
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<PAGE>
$279,000, primarily at XACI in response to reduced net sales.
Effective as of March 31, 1998, the Company sold XACI, its principal
circuits subsidiary, and received $1,350,000 in cash and a note for $650,000
upon the closing of the sale in early April. The cash received was utilized
to reduce certain long and short-term bank borrowings and other current debt.
The Company's XIT subsidiary has a line of credit with a bank (the "XIT
Debt") which was renewed on July 22, 1997 and expires on June 25, 1998. The
credit line is collateralized by substantially all assets of XIT and its
domestic subsidiaries. The XIT Debt agreement requires maintenance of
certain financial ratios and contains other restrictive covenants. XIT was
not in compliance with certain debt covenants at December 31, 1997 and at
March 31, 1998. Although the bank did not waive compliance with such debt
covenants, it entered into a forbearance agreement with the Company in which
it agreed to forbear through May 31, 1998 from exercising its rights under
the terms of the XIT Debt agreement provided certain events occur,
principally the consummation of the sale of the XACI (see Note 7 to the
Consolidated Condensed Financial Statements included elsewhere in this
report) and the Company obtaining a replacement credit facility. As noted
above , XACI was sold and the Company has obtained a proposal from a
commercial asset-based lender for the purpose of replacing the existing bank
credit facility. Management anticipates that the requirements necessary to
finalize such replacement credit facility will be substantially completed
during May 1998. Additionally, management is actively seeking additional
funds through a private placement of equity securities. There can be no
assurance, however, that such financing will be available, or if available,
that it will be on terms favorable to the Company.
There are two legal proceedings pending against the Company (see Note 6 to
the Consolidated Condensed Financial Statements included elsewhere in this
report). Management believes that the outcome of these pending proceedings
will not have a material adverse effect on the financial position, results of
operations or cash flows of the Company.
OUTLOOK
CIRCUITS SECTOR
As a result of substantial losses incurred by XACI in 1997 and despite the
expectation of ultimately improved operating performance, the Company sold
XACI effective as of March 31, 1998. The net loss for XACI represented
approximately 68% of the total net loss for the Company, excluding the
write-down of goodwill of $5.7 million, for the year ended December 31, 1997
and approximately 43% of the net loss for the Company, excluding the gain on
its sale, for the first quarter of 1998. Although the sale closed in early
April, the sale was effective as of March 31, 1998 and therefore the
operating results of XACI will have no impact on the results of operations of
the Company in the second quarter of 1998 or thereafter. The sale of XACI
resulted in a gain of $670,000 which was recorded in the first quarter.
Unfortunately the losses sustained by XACI diverted working capital from the
Company's XCEL Etch-Tek division, which reported a net loss of $348,000 in
the first quarter due to the lack of working capital, which severely
constrained shipments and resulted in other operating inefficiencies.
Acquired in 1996, Etch-Tek first became profitable in mid-1997 and remained
so for the last six months of 1997 until constrained by the lack of working
capital. Despite EtchTek's 1998 first quarter loss, the Company expects
Etch-Tek to return to profitability during the third quarter if additional
working
14
<PAGE>
capital becomes available as a result of management's efforts to obtain an
expanded credit facility and to obtain additional funds through the sale of
equity (see "Liquidity and Capital Resources" above). Also, following the
sale of XACI and in order to reduce costs and increase management efficiency,
the Company consolidated the sales, marketing and overall management
functions of its XCEL Circuits Division operation in Monrovia, California
with that of Etch-Tek.
Another component of the Circuits sector, HyComp, Inc., in 1997 established
an industry-leading position in the production and assembly of "flip chip"
devices utilizing single semiconductor chips, rather than requiring complete
semiconductor wafers. Management believes that HyComp is presently the only
company commercially producing flip chip assemblies from single chips. Flip
chip technology is forecasted by Prismark Partners, a recognized market
research firm in the microelectronics industry, to be the fastest growing
interconnection technology of the next five years. HyComp's 6-year
development of flip chip interconnection has been primarily funded by
$810,000 in contracts from the Defense Advanced Research Projects Agency to
set up a prototype production facility based on flipping single chips and was
the only company so funded. This has brought HyComp into joint development
programs with Hewlett Packard, Litton, Amecon, General Dynamics, Orbital
Sciences, Raytheon, General Electric, Poly-Flex Circuits, Lawrence Berkeley
Laboratories, and Rutherford Laboratories (UK), among others. While these
development programs have totaled less than $50,000 in sales to date, the
first significant production program, approaching $500,000 in sales per year
is scheduled for the third quarter of 1998, with others of similar or larger
size expected to follow.
COMPONENTS SECTOR
While the Components Sector incurred a small loss in the first quarter of
1998, both the order backlog and shipments increased significantly during the
quarter and thereafter and the Company expects this situation to continue.
Order backlog for the Component Sector's domestic operating unit increased
55% to $2,467,000 from January 1st through the end of April 1998.
Unfortunately, shipments and production efficiencies during this same period
have been negatively impacted by a lack of working capital. The Company
expects this situation to be resolved if additional working capital becomes
available as a result of management's efforts to obtain an expanded credit
facility and additional funds through the sale of equity (see "Liquidity and
Capital Resources" above).
TEST EQUIPMENT SECTOR
In the Test Equipment Sector, the negative impact of the reorganizations of
the Sector's domestic customers has eased with the merger of Southwest Bell
and PAC Bell, and Nynex and Mid-Atlantic Bell, as well as the final
privatization approvals being settled for France Telecom. As a result, in
France, the Company's CXR, S. A. operating subsidiary was profitable for both
the full year 1997 and the first quarter of 1998 on increasing revenues. The
Company expects this performance to continue to improve going forward in 1998.
The CXR Telcom subsidiary in Fremont, California was unprofitable for the
full year 1997 and produced a loss of approximately $445,000 in the first
quarter of 1998, reflecting a typically weak first quarter following a very
strong fourth quarter in 1997, the quarter in which CXR's customers
historically consume their remaining capital funds for test instruments for
the calendar year.
Revenues for CXR Telcom for the first quarter of 1998 increased 96% over
those of the first quarter of 1997 and orders received for the first quarter
of 1998 increased by 56% to $1,432,000 from the corresponding period last
year. The increase in the order rate resulted from completion of the
reorganizations noted above and the introduction of several new products
following the acquisition of Critical Communications, Inc. ("Critical") in
October 1997. These new products are sophisticated, state-of-the-art,
portable telephone test instruments used by both long-distance carriers and
local telephone service providers as well as by corporate and
15
<PAGE>
government telecommunications end users. The Company has merged the
manufacturing operations of Critical into those of CXR Telcom and is
distributing its products through both existing CXR and Critical sales
channels. These new products expand the existing CXR product offering to
include additional software-driven, user-friendly and cost-competitive
products which are broadening CXR's penetration of the Installation and
Maintenance ("I&M") segments of the telecommunications marketplace - i.e.,
that segment in which corporate services installations and maintenance are
provided by the various telephone companies. While CXR's existing I&M
products are used extensively in the Central Office testing environment
(which necessitates the use of a multi-function, all-in-one test instrument),
Critical's products are primarily designed to service the test instrument
needs at outside plant service installations, where lightweight, portable
products requiring fewer functional testing features are required. It is
particularly in this market segment, where CXR presently competes with only
one, outdated product, that the Critical product line is having a significant
impact. Orders received for these products, which are now branded under the
CXR name, are a major contributor to CXR Telcom's revenue and increase in
booked orders.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material developments. See Note 6 - Litigation of the accompanying
unaudited consolidated condensed financial statements and Legal Proceedings
section of Item 3 of the Registrant's Annual Report on Form 10-K filed on
April 15, 1998 for a description of previously reported proceedings.
Item 2. Changes in Securities and Use of Proceeds
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 27 - Unaudited Financial Data Schedule for the three months ended
March 31, 1998.
(b) Reports on Form 8-K:
None
17
<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.
May 14, 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)
18
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