<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 June 30, 1999 or
( ) Transition report pursuant to Section l3 or l5(d) of the Securities
Exchange Act of l934
For the transition period N/A
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:
Name of each exchange
Title of each class 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 August 13, 1999, there were 16,987,315 shares of common stock
outstanding.
<PAGE>
MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
June 30, 1999 and December 31, 1998 3
Consolidated Condensed Statements of Operations
Three and Six Months Ended June 30, 1999 and l998 4
Consolidated Condensed Statements of Cash Flows
Six Months Ended June 30, 1999 and l998 5
Notes to Consolidated Condensed Financial Statements 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Part II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
- ------ -------- ------------
<S> <C> <C>
Cash and cash equivalents $ 122 $ 572
Accounts receivable, net 5,946 7,337
Current portion of notes receivable, net 137 291
Inventories 5,441 6,426
Other current assets 729 926
------- -------
Total current assets 12,375 15,552
Property, plant and equipment-net 1,474 1,939
Goodwill, net 1,604 1,701
Notes receivable, net, less current portion -- 533
Investment in unconsolidated affiliates 1,911 150
Other assets 1,175 1,367
------- -------
$18,539 $21,242
------- -------
------- -------
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,734 $ 3,379
Current portion of long-term debt 497 805
Accounts payable 3,353 4,269
Accrued expenses 3,039 3,312
------- -------
Total current liabilities 9,623 11,765
Long-term debt, less current portion 1,035 1,430
Other liabilities 855 954
Minority interest 119 95
------- -------
Total liabilities 11,632 14,244
Convertible redeemable preferred stock 810 1,516
Stockholders' equity:
Common stock 56 42
Additional paid-in capital 23,422 20,463
Accumulated deficit (17,056) (15,122)
Accumulated comprehensive income (loss) (325) 99
------- -------
Total stockholders' equity 6,907 5,482
------- -------
$18,539 $21,242
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
----------- ----------- ----------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 6,801 $ 8,971 $ 14,311 $ 18,713
Cost of sales 4,411 5,555 9,314 13,061
-------- -------- --------- ---------
Gross profit 2,390 3,416 4,997 5,652
Operating expenses:
Selling, general and administrative 2,890 2,796 6,607 5,914
Engineering and product development 477 574 1,035 1,145
-------- -------- --------- ---------
Income (loss) from operations (977) 46 (2,645) (1,407)
Other expense (income)
Interest expense 83 177 202 344
Loss (gain) on sale of subsidiary -- 90 (331) (580)
Equity in earnings of unconsolidated affiliates (191) -- (727) (16)
Other 40 (25) 87 (27)
-------- -------- --------- ---------
Loss before income taxes (909) (196) (1,876) (1,128)
Income taxes expense 5 22 13 37
-------- -------- --------- ---------
Net loss (914) (218) (1,889) (1,165)
Other comprehensive loss:
Foreign currency translation adjustment (161) (54) (424) (19)
-------- -------- --------- ---------
Total comprehensive loss $ (1,074) $ (272) $ (2,313) $ (1,184)
-------- -------- --------- ---------
-------- -------- --------- ---------
Basic and diluted loss per share $ (0.06) $ (0.02) $ (0.12) $ (0.10)
-------- -------- --------- ---------
-------- -------- --------- ---------
</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>
SIX MONTHS ENDED JUNE 30,
1999 1998
------------------------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,889) $ (1,165)
Adjustments to reconcile net loss to cash provided by (used in)
operating activities:
Depreciation and amortization 240 312
Amortization of intangibles 173 97
Gain on sale of subsidiary (331) (580)
Equity in earnings of unconsolidated entities (727) (15)
Stock and warrants issued as compensation 1,219 --
Other noncash items 463 (49)
Changes in operating assets and liabilities:
Accounts receivable 1,576 (515)
Inventories 626 6
Other assets 59 (56)
Accounts payable and accrued expenses (1,081) (295)
--------- ---------
Cash provided by (used in) operating activities 328 (2,260)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (52) (178)
Proceeds from sale of subsidiary 750 1,350
Cash received from note receivable 9 --
--------- ---------
Cash provided by investing activities 707 1,172
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of notes payable (395) 640
Repayments of long-term debt (668) (1,015)
Private placement of convertible preferred stock -- 459
Proceeds from sale of common stock 2 --
--------- ---------
Cash provided by (used in) financing activities (1,061) 84
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (424) 6
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (450) (998)
--------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 572 1,921
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 122 $ 923
--------- ---------
--------- ---------
</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 4 AND 6 HEREOF.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND
THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MicroTel International, Inc. (the "Company") is a holding company for
its three wholly owned subsidiaries - CXR Telcom Corporation in Fremont,
CA; CXR, S.A. in Paris, France, XIT Corporation in Ontario, CA. and its 37%
owned affiliate company Digital Transmission Systems, Inc. located near
Atlanta, Georgia. CXR Telcom Corporation, CXR, S.A. and Digital
Transmission Systems, Inc. design, manufacture and market electronic
telecommunication test instruments, wireless and wireline voice, data and
video transmission and networking equipment. XIT Corporation designs,
manufactures and markets information technology products, including input
and display components, subsystem assemblies and power supplies. The
Company operates out of facilities in the U.S., France, England and Japan.
The Company organizes itself in three product line sectors- Circuits,
Components and Subsystem Assemblies, and Instrumentation and Test
Equipment. The sale of substantially all the assets of the Company's
HyComp, Inc. subsidiary effective as of March 31, 1999 was a further step
in the Company's planned exit of the Circuits business. The Company now has
one remaining material circuits business operation.
BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and therefore do not include all
information and footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles.
-6-
<PAGE>
MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited consolidated condensed financial statements do, however,
reflect all adjustments, consisting of only normal recurring adjustments,
which are, in the opinion of management, necessary to state fairly the
financial position as of June 30, 1999 and December 31, 1998 and the
results of operations and cash flows for the related interim periods ended
June 30, 1999 and 1998. However, these results are not necessarily
indicative of results for any other interim period or for the year. It is
suggested that the accompanying consolidated condensed financial statements
be read in conjunction with the Company's Consolidated Financial Statements
included in its 1998 Annual Report on Form 10-K.
(2) LOSS PER SHARE
The following table illustrates the computation of basic and diluted
loss per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------------
1999 1998 1999 1998
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
NUMERATOR:
Net loss $ (914) $ (218) $ (1,889) $ (1,165)
Less: accretion of the excess of the
redemption value over the carrying
value of redeemable preferred stock (11) -- 45 13
------- ------- --------- ---------
Loss attributable to common stockholders (903) (218) (1,934) (1,178)
DENOMINATOR:
Weighted average number of common
shares outstanding during the period 16,594 11,929 15,685 11,928
------- ------- --------- ---------
Basic and diluted loss per share $ (.06) $ (.02) $ (.12) $ (.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.
-7-
<PAGE>
(3) INVENTORIES
Inventories consist of the following.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Raw materials $ 2,281,000 $ 2,926,000
Work-in-process 1,758,000 2,375,000
Finished goods 1,402,000 1,125,000
------------ -------------
$ 5,441,000 $ 6,426,000
------------ -------------
------------ -------------
</TABLE>
(4) LITIGATION
The Company and its subsidiaries are, from time to time, involved in
legal proceedings, claims and litigation arising in the ordinary course of
business. While the amounts claimed may be substantial, the ultimate
liability cannot presently be determined because of considerable
uncertainties that exist. Therefore, it is possible the outcome of such
legal proceedings, claims and litigation could have a material effect on
quarterly or annual operating results or cash flows when resolved in a
future period. However, based on facts currently available, management
believes such matters will not have a material adverse affect on the
Company's consolidated financial position, results of operations or cash
flows.
SCHEINFELD V. MICROTEL INTERNATIONAL, INC.
During the second quarter of 1999, two court-directed settlement
conferences were conducted with no material outcome. Discovery is
substantially completed with only one or two depositions remaining to be
taken as of June 30, 1999. The next court-directed settlement conference is
presently scheduled for late August, 1999.
Although the ultimate outcome of this matter cannot be predicted with
certainty, pending actual resolution, management believes the disposition
of this matter will not have a material adverse affect on the Company's
consolidated financial position, results of operations or cash flows.
(5) ACQUISITION AND DISPOSITION OF BUSINESSES
On April 19, 1999, the Company completed the sale of substantially all
of the assets and liabilities of its HyComp, Inc. subsidiary ("HyComp"), a
manufacturer of hybrid, thin film and flip-chip assembly circuits to SatCon
Technology Corporation, a public company. The sale was effective as of
March 31, 1999 and resulted in a gain of approximately $331,000 which was
included in the results of operations for the three months ended March 31,
1999. HyComp received $750,000 in cash and a royalty on certain future
sales and was reimbursed approximately $85,000 for certain expenses paid by
HyComp between March 31, 1999 and the closing date. The proceeds from this
sale were used to partially repay amounts due under certain notes payable
and other current debt.
-8-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(5) ACQUISITION AND DISPOSITION OF BUSINESSES (CONTINUED)
Summarized below are unaudited pro forma financial results of
operations of the Company as though the assets and liabilities had been
sold at the beginning of 1999.
<TABLE>
<S> <C>
Net sales $ 13,855,000
Net loss $ (1,771,000)
Basic and diluted loss per share $ (.12)
</TABLE>
(6) NEW ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 133, ''Accounting for
Derivative Financial Instruments and Hedging Activities'' (''SFAS 133'')
issued by the FASB is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS 133 provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. The Company does not expect adoption of SFAS 133 to
have a material effect on its financial position or results of operations.
(7) REPORTABLE SEGMENTS
Through June 30, 1999, the Company had three reportable segments:
Instrumentation and Test Equipment, and Components and Subsystem
Assemblies, and Circuits. The Instrumentation and Test Equipment segment
operates principally in the U.S. and European markets and designs,
manufactures and distributes telecommunications test instruments and voice
and data transmission and networking equipment. The Components and
Subsystems Assemblies segment operates in the U.S., European and Asian
markets and designs, manufactures and markets information technology
products, including input and display components, subsystem assemblies, and
power supplies. The Circuits Sector operates principally in the U.S. market
and designs, manufactures and markets printed circuits and, through the
1st quarter of 1999, hybrid microelectronic and other circuits (see also
Notes 1 and 5 above). The Company has disposed of the majority of its
circuits business operations and currently has only one such operation that
is material.
The Company evaluates performance based upon profit or loss from
operations before income taxes exclusive of nonrecurring gains and losses.
The Company accounts for intersegment sales at prices negotiated between
the individual segments.
The Company's reportable segments are comprised of operating entities
offering the same or similar products to similar customers. Each segment is
managed separately because each business has different customers, and
different design, manufacturing and marketing strategies.
-9-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS (CONTINUED)
There were no differences in the basis of segmentation or in the basis
of measurement of segment profit or loss from the amounts disclosed in the
Company's consolidated financial statements included in its 1998 Annual
Report on Form 10-K.
Selected financial data for each of the Company's operating segments
is shown below.
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED JUNE 30, 1999 ENDED JUNE 30, 1998
------------------- -------------------
<S> <C> <C>
SALES FROM EXTERNAL CUSTOMERS:
Instruments $ 7,357,000 $ 8,529,000
Components 5,540,000 5,653,000
Circuits 1,414,000 4,531,000
------------ -------------
$ 14,311,000 $ 18,713,000
------------ -------------
------------ -------------
INTERSEGMENT SALES:
Instruments $ -- $ --
Components 130,000 343,000
Circuits 321,000 346,000
------------ -------------
$ 451,000 $ 689,000
------------ -------------
------------ -------------
SEGMENT PROFITS
Instruments $ (971,000) $ (69,000)
Components 722,000 494,000
Circuits (892,000) (1,086,000)
------------ -------------
$ (1,141,000) $ (661,000)
------------ -------------
------------ -------------
SEGMENT ASSETS
Instruments $ 8,648,000 $ 10,234,000
Components 5,782,000 7,193,000
Circuits 1,357,000 2,737,000
------------ -------------
$ 15,787,000 $ 20,164,000
------------ -------------
------------ -------------
</TABLE>
-10-
<PAGE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS (CONTINUED)
The following is a reconciliation of the reportable segment loss and
assets to the Company's consolidated totals.
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
LOSS
Total loss for reportable segments $ (1,141,000) $ (661,000)
Unallocated amounts:
Gain on sale of assets of subsidiary (331,000) (580,000)
Equity in earnings of unconsolidated
affiliates (727,000) (16,000)
Write down of note receivable 466,000 --
Unallocated general corporate expenses 1,327,000 1,063,000
------------- -------------
Consolidated loss before income taxes $ (1,876,000) $ (1,128,000)
------------- -------------
------------- -------------
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Total assets for reportable segments $ 15,787,000 $ 20,164,000
Other assets 2,752,000 1,078,000
------------- -------------
Total consolidated assets $ 18,539,000 $ 21,242,000
------------- -------------
------------- -------------
</TABLE>
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<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 READERS OR
INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES
OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL
RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 VERSUS THREE MONTHS ENDED JUNE 30, 1998
NET SALES
Consolidated net sales for the second quarter of 1999 decreased by
approximately $2,170,000 or 24.2% compared with the same period in 1998. The
table below shows the composition of consolidated net sales by business
sector.
<TABLE>
<CAPTION>
Three Months Three Months Variance-
Ended Ended (increase) Percent
Sector June 30, 1999 June 30, 1998 (Decrease) Change
------------- ------------- ---------- ------
<S> <C> <C> <C> <C>
Test Equipment $ 3,649 $ 4,339 $ (690) (15.9)%
Components 2,622 3,129 (507) (16.2)%
Circuits 530 1,503 (973) (64.7)%
-------- -------- -------
Total $ 6,801 $ 8,971 $(2,170) (24.2)%
-------- -------- -------
-------- -------- -------
</TABLE>
The relative percent of net sales by sector between the respective periods
experienced the following changes:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
Sector June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Test Equipment 53.6% 48.3%
Components 38.6% 34.9%
Circuits 7.8% 16.8%
----- -----
Total 100.0% 100.0%
----- -----
----- -----
</TABLE>
During the second quarter of 1999, the Test Equipment sector experienced
a decrease in net sales in both the U.S. and French business that resulted
principally from a decrease in net sales of test instruments in both markets
and a decline in net sales in the French operation of networking products
-12-
<PAGE>
and services. In the U.S. market, the decline in test instrument sales was
caused by approximately $440,000 of returned product by a major distributor
due to delays in demand by one of the Regional Bell Operating Companies
("RBOC") and other customers. In the French business operation, the decline
in test equipment sales was principally due to decreased demand from several
existing customers. The decline in net sales of networking products and
services was principally due to increased competition from additional
distributors appointed by the product manufacturers. These additional
distributors resulted from a change in the product manufacturers' marketing
approach following the merger and consolidation of several major equipment
manufacturers and the increased competition has resulted in a reduction of
overall prices. The French operation has entered into new distributor
agreements in order to obtain additional or replacement products, sales of
which are expected to commence in the third quarter of 1999. Net sales of
voice and data transmission products in France increased and partially offset
the reduction in net sales of other products due to increased demand, however
this increase is not expected to be sustained beyond the current year. Sales
of new products introduced this year (e.g. remote access servers and digital
subscriber line transmission products) are expected to offset the reduced
demand for existing transmission products next year.
The decrease in net sales in the Components sector resulted principally from:
- A decrease in demand for digital switch products manufactured and
distributed in the U.S. market;
- The absence of net sales from the Company's XCEL Lite display monitor
business which was disposed of in the fourth quarter 1998; and,
- A decrease in net sales of the Company's subsystem assembly products
in the U.S., sales of which were discontinued as of the end of the second
quarter of 1999.
Net sales for the Company's U.K. and Japan operations were substantially
the same in the second quarter of 1999 as those of 1998, although a change in
product mix occurred. Net sales of digital switch and sub assembly products
marketed in the U.K. in the second quarter of 1999 declined by approximately
35% from the same period of the prior year but this decline was offset by an
increase in the net sales of custom power supply products. Additionally,
while the backlog for power supply products has declined from last year due
to delays in placement of long-term orders, this condition is not expected to
continue as order bookings toward the end of the second quarter of 1999 and
thereafter have increased.
Net sales in the Company's Circuits sector decreased in the second quarter
of 1999 compared with the same period in 1998 as a result of:
- The absence in the second quarter of net sales from the Company's HyComp,
Inc. subsidiary, the assets of which were sold effective March 31, 1999; and,
- A decrease in net sales at the Company's XCEL Etch Tek division that
resulted from constrained working capital.
-13-
<PAGE>
GROSS PROFIT
The composition of consolidated gross profit by business sector and the
percentages of related net sales are shown in the following table for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Percent of Three Months Percent of
Ended Related Ended Related
Sector June 30, 1999 Net Sales June 30, 1998 Net Sales
------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Test Equipment $ 1,446 39.6% $ 1,940 44.7%
Components 933 35.6% 1,153 36.8%
Circuits 11 2.0% 323 21.5%
-------- --------
Total $ 2,390 35.1% $ 3,416 38.1%
-------- --------
-------- --------
</TABLE>
Due to the decrease in net sales in the second quarter of 1999 compared
with the same period in 1998, consolidated gross profit decreased $1,026,000
or 30.0%. Additionally, the Company experienced a decrease in gross profit as
a percent of net sales, as shown above, due principally to decreased gross
profit margins in the Test Equipment sector. This sector's U.S. business
operation experienced a substantial decline in gross profit margin from
approximately 60% in the second quarter of 1998 to 47% in the same period of
1999 resulting principally from lower sales and, consequentially, less
absorption of fixed manufacturing overhead. Consequently, the Company
restructured this operation in the second quarter of 1999 and expects to
realize annual cost savings of approximately $1 million. The sector's French
operation experienced a slight increase in gross profit percent (from 36.7%
in the second quarter of 1998 to 37.4% for the second quarter of 1999) as
higher transmission product margins helped support what otherwise would have
been a larger decrease in gross margin percent due to lower net sales.
Gross margin as a percent of net sales for the Components sector
declined only slightly due to minor changes in product mix and the decrease
in net sales and consequential unabsoption of manufacturing overhead. The
U.S. operation of the Components sector has continued to reduce its
infrastructure cost as it has disposed of or phased out individual product
lines. This planned approach to the anticipated decrease in net sales enabled
the U.S. operations to substantially maintain its gross profit margin that
decreased from 44.1% in the second quarter of 1998 to 41.8% in the same
period in 1999. Additionally, in order to further ensure the continued
profitability of this operation, in August 1999, the Company instituted
additional cost reduction measures that are expected to result in annualized
savings of an additional $310,000. Gross profit percent for the Company's
U.K. business operations increased from 25.4% in the second quarter of 1998
to 27.3% in the second quarter of 1999 principally as a result of the sale of
higher margin digital switch and sub assembly products however this
experience is not expected to continue in future periods.
In the Company's Circuits sector, gross profit percent decreased
substantially principally due to the loss of the gross profit contribution from
the net sales of the Company's HyComp, Inc. subsidiary (the assets of which were
sold in the first quarter of 1999). Gross profit percent at the Company's
remaining circuit's business did not change materially from the second quarter
of 1998 to the same period of 1999.
-14-
<PAGE>
OPERATING EXPENSES
Operating expense for the three months ended June 30, 1999 and 1998 were
comprised of the following.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Commissions $ 189 $ 312
Other selling expense 850 941
------ ------
Total selling expense 1,039 1,253
General & Administrative 1,851 1,543
------ ------
Total Selling, General & Administrative $2,890 $2,796
------ ------
------ ------
Engineering & product development $ 477 $ 574
------ ------
------ ------
</TABLE>
Total selling expense as a percentage of net sales was 15.3% and 14.0%
for the three months ended June 30, 1999 and 1998, respectively. Commissions
as a percent of net sales decreased to 2.8% in the second quarter of 1999
from 3.5% in the second quarter of 1998 due principally to the relative
increase in the percentage of net sales from the Components sector and the
relative decrease in the percentage of net sales from the Circuits sector
which more than offset the higher commission percentage of the Test Equipment
sector. The increase in total selling expenses as a percentage of net sales
was due to the relative increase in net sales of the Test Equipment sector
(as a percent of total net sales) in the second quarter of 1999 versus the
same period in 1998 as this sector has much higher fixed sales and marketing
expenses (as a percentage of net sales) than the other two sectors.
General and administrative expenses increased by $308,000 from the
second quarter of 1998 to the second quarter of 1999. This increase was
principally due to the recording of a reserve in the amount of $466,000 for
the net amount of a note receivable which was determined to be uncollectable
when the maker of the note was unable to remit the first principal payment
that was due in the second quarter of 1999. The note originated as part of
the sale of the Company's XCEL Arnold Circuits, Inc. subsidiary ("XCEL
Arnold") in the first quarter of 1998. The expense associated with the
reserve was partially offset by lower general and administrative expenses in
the U.S. Test Equipment sector business, a reduction in general corporate
expenses and reduced shareholder relations expenses.
Engineering and product development costs originated principally from
the research and product development activities of the Test Equipment sector
and the Company's Hycomp, Inc. subsidiary in the Circuits sector and
decreased $97,000 or 16.9% due to the absence of such expenses in the second
quarter of 1999 from the Company's HyComp, Inc. subsidiary, that was sold at
the end of the first quarter of 1999. In future periods, engineering and
product development costs will be solely attributable to the Test Equipment
sector and are expected to increase modestly as the U.S. Test Equipment
operations add additional resources to focus on bringing newer products to
market in the near term in an effort to increase future net sales.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $94,000 in the second quarter of 1999
compared to the same period in 1998 resulted principally from lower average
borrowings during the current period. The increase in the second quarter of 1999
in other expense (income), net resulted principally from the equity in the
earnings of the Company's unconsolidated affiliate - Digital Transmission
Systems, Inc. -
-15-
<PAGE>
acquired on January 31, 1999. Other income for the three months ended June 30,
1998 also included a reduction in the gain on the sale of XCEL Arnold in the
amount of $90,000.
SIX MONTHS ENDED JUNE 30, 1999 VERSUS JUNE 30, 1998
NET SALES
Consolidated net sales for the first six months of 1999 decreased by
approximately $4,402,000 or 23.5% compared with the same period in 1998. The
table below shows the composition of consolidated net sales by business
sector.
<TABLE>
<CAPTION>
Six Months Six Months Variance-
Ended Ended Increase/ Percent
Sector June 30, 1999 June 30, 1998 (Decrease) Change
------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Test Equipment $ 7,357 $ 8,529 $(1,172) (13.7)%
Components 5,540 5,653 (113) (2.0)%
Circuits 1,414 4,531 (3,117) (68.8)%
------- ------- -------
Total $14,311 $18,713 $(4,402) (23.5)%
------- ------- -------
------- ------- -------
</TABLE>
The relative percent of net sales by sector between the respective periods
experienced the following changes:
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
Sector June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Test Equipment 51.4% 45.6%
Components 38.7% 30.2%
Circuits 9.9% 24.2%
----- -----
Total 100.0% 100.0%
----- -----
----- -----
</TABLE>
During the first six months of 1999, the Test Equipment sector
experienced a decrease in net sales in both the U.S. and French business that
resulted principally from the decreased sales of test instruments in both
markets and a decline in sales in the French operation of networking products
and services. In the U.S. market, the decline in test instrument sales
resulted from a delay in the expected delivery of certain equipment to an
RBOC and other smaller customers and traditionally reduced capital spending
in the early months of each calendar year, during which time customers
develop and finalize their capital spending plans for the current year. In
the French business operation, test equipment sales were impacted principally
by the decision of a significant customer to delay anticipated purchases and
a general reduction in demand for these products. The decline in net sales of
networking products and services was principally due to the merger of several
major products suppliers, the introduction of new equipment models and
associated delay relating to retraining of personnel and business partners,
and increased competition due to the introduction into the marketplace of
additional competing distributors appointed by the manufacturers that has
resulted in a reduction of overall prices. The French operation entered into
new distribution agreements in order to obtain additional or replacement
products, sales of which are expected to commence in the third quarter of
1999.
Due to increased demand, the net sales of voice and data transmission
products in France increased during the second quarter of 1999, partially
offsetting the reduction in net sales of other products. Although this
increase is not expected to be sustained beyond the current year, sales of
new products
-16-
<PAGE>
introduced this year (e.g. remote access servers and digital subscriber line
transmission products) are expected to offset the reduced demand for existing
transmission products next year.
There was only a nominal change in the level of net sales in the
Components sector as the absence of net sales of XCEL Lite display monitor in
the U.S (which was disposed of in the fourth quarter 1998) and reduced net
sales of the Company's subsystem assembly products (which were discontinued at
the end of the second quarter of 1999) were substantially offset by increased
sales at the Company's U.K. business operations. The increase in net sales
for the U.K. operation was principally due to increased net sales of custom
power supply products. Net sales at the Company's Japan operation were
substantially the same in the first six months of 1999 as those of 1998.
Net sales in the Company's Circuits sector decreased in the first six
months of 1999 compared with the same period in 1998 as a result of:
- The absence in current period of net sales from both the Company's XCEL
Arnold and HyComp, Inc. subsidiaries the assets of which were sold effective as
of March 31, 1998 and March 31, 1999, respectively; and,
- A decrease in net sales at the Company's XCEL Etch Tek division that
resulted from constrained working capital as well as a general decline in demand
in the personal computer industry which generated increased competition for all
other market segments in which the division competes.
GROSS PROFIT
The composition of consolidated gross profit by business sector and the
percentages of related net sale are shown in the following table for the
periods indicated:
<TABLE>
<CAPTION>
Six Months Percent of Six Months Percent of
Ended Related Ended Related
Sector June 30, 1999 Net Sales June 30, 1998 Net Sales
------------- --------- ------------- ---------
<S> <C> <C> <C> <C>
Test Equipment $ 2,900 39.4% $ 3,589 42.1%
Components 2,016 36.4% 1,843 32.6%
Circuits 81 5.7% 220 4.9%
-------- --------
Total $ 4,997 34.9% $ 5,652 30.2%
-------- --------
-------- --------
</TABLE>
Due to the decrease in net sales in the first six months of 1999
compared with the same period in 1998, gross profit decreased $655,000 or
11.6%. Additionally, the Company experienced a decrease in gross profit as a
percent of net sales, as shown above, principally due to increased gross
profit margins in the Components sector. The Test Equipment sector's U.S.
business operation experienced a decline in gross profit margin from
approximately 49.6% in the first six months of 1998 to 39.2% in the same
period of 1999 as a result of lower sales caused by approximately $440,000 of
return product by a major distributor due to delays in demand by an RBOC and
other smaller customers. The decreased in net sales for this sector resulted
in lower gross profit due to lower absorption of fixed manufacturing
overhead. The sector's French operation experienced a small increase in gross
profit percent (from 38.1% in the first six months of 1998 to 40.0% for the
first six months of 1999) due to the change in product sales mix to the
internally manufactured higher margin transmission products.
-17-
<PAGE>
Gross margin as a percent of net sales for the Components sector
increased in the first six months of 1999 compared with the same period in
1998 due to a shift in product mix in the U.S. business operations to
higher-margin digital switch products which comprised a larger portion of
total net sales (from 72.3% of net sales in the first six months of 1998 to
83.4% in the same period of 1999). Despite an overall decline in net sales
for the U.S. component operation, this product mix change enabled gross
profit to remain essentially the same for the comparable period in the prior
year. Additionally, as the U.S. operation of the Components sector has shed
lower margin product lines, it has continued to reduce its infrastructure,
enabling it to maintain gross profit margins despite a continued decline in
net sales. Gross profit percent for the Company's U.K. business operations
increased from 25.7% for the first six months of 1998 to 28.7% in the same
period of 1999 principally as a result of a change in the sales mix toward
the higher margin digital switch and sub assembly products, which increase is
not expected to continue in the second half of 1999.
In the Company's Circuits sector, gross profit for the first six months
of 1999 increased slightly compared with the same period in 1998 due
principally to the absence of the gross profit deficit of XCEL Arnold
Circuits, Inc. in the first six months of 1999 (XCEL Arnold had a gross
profit of $(362,000) in 1998 prior to its sale on March 31, 1998). Gross
profit percent at the Company's remaining circuit's business did not change
materially from the first six months of 1998 to the same period of 1999.
OPERATING EXPENSES
Operating expense for the six months ended June 30, 1999 and 1998 were
comprised of the following.
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Commissions $ 439 $ 594
Other selling expense 1,788 2,142
------ ------
Total selling expense 2,227 2,736
General & Administrative 4,380 3,178
------ ------
Total S,G & A $6,607 $5,914
------ ------
------ ------
Engineering & product development $1,035 $1,145
------ ------
------ ------
</TABLE>
Total selling expense as a percentage of net sales was 15.6% and 14.6%
for the six months ended June 30, 1999 and 1998, respectively. Commissions as
a percent of net sales was essentially unchanged for the first six months of
1999 compared with the same period of 1998 (3.1% and 3.2% for 1999 and 1998,
respectively). The increase in commission expense as a percent of net sales
for the Test Equipment sector (from 3.6% to 5.5% for the first six months of
1998 to the same period in 1999) was offset by a similar decline in the
commission percentage in the Circuits sector. This decrease resulted from the
reduction in the relative percentage of net sales from the Circuits sector
compared to total net sales. With the expected increase in relative
percentage of net sales from the Test Equipment sector compared of total net
sales, commission expense as a percent of total net sales is expected to
increase accordingly. The increase in total selling expenses as a percentage
of net sales was due to the increase in Test Equipment sector net sales, as a
percent of total net sales, in the first six months of 1999 versus the same
period in 1998. This phenomenon results from the fact that this sector has
much higher fixed as well as variable sales and marketing expenses (as a
percentage of net sales) than the other sectors.
-18-
<PAGE>
General and administrative expenses increased $1,202,000 in the first six
months of 1999 compared to the same period of 1998. This increase was
principally comprised of the following:
- Investor relations expense totaling approximately $522,000 associated
with the Company's program to retain the listing of its common stock on the
Nasdaq SmallCap Market ("Nasdaq"). These non-cash expenses were attributable to
the issuance of common stock and warrants as payment for services provide by
third parties in support of this effort. Despite this effort, the trading price
of the Company's common stock was insufficient to meet the minimum listing
maintenance requirement and the stock was consequently delisted from Nasdaq as
of May 12, 1999 ("see Liquidity and Capital Resources"). The Company does not
expect to incur such expenses again in the foreseeable future.
- Compensation expense of approximately $193,000 in connection with the
Company's agreement to a one-time adjustment in the number of shares of common
stock issuable under the terms of certain Contingent Stock Agreements between
the Company and two of the former officers/owners of Critical Communications,
Inc. which was acquired by the Company in October 1997. The Company made this
adjustment to ensure the retention of the engineering and product development
services of these individuals.
- The recording of a reserve in the second quarter of 1999 in the amount of
$466,000 for the net amount of a note receivable which was determined to be
uncollectable when the maker of the note was unable to remit the first principal
payment required in the second quarter of 1999. (see second quarter discussion
above).
Engineering and product development costs originated principally from
the research and product development activities of the Test Equipment sector
and the HyComp, Inc. subsidiary of the Circuits sector and decreased $110,000
or 9.6% due to the absence of such expenses in the second quarter of 1999 as
a result of the sale of the assets of the Company's HyComp, Inc. subsidiary
at the end of the first quarter of 1999. In future periods, engineering and
product development costs will be solely attributable to the Test Equipment
sector and are expected to increase modestly.
OTHER INCOME AND EXPENSE
The decrease in interest expense of $142,000 in the first six months of
1999 compared to the same period in 1998 resulted principally from decreased
average borrowings during the respective periods. The increase in the first six
months of 1999 in other expense (income), net resulted principally from the
equity in the earnings of an unconsolidated affiliate (Digital Transmission
Systems, Inc.) acquired on January 31, 1999. Other expense (income), net for the
six months ended June 30, 1999 and 1998 also included a gain on the sale of
HyComp's assets of $331,000 and a gain on the sale of XCEL Arnold's assets in
the amount of $580,000.
-19-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash of $328,000 was provided by operations in the first six months of
1999 versus cash of $2,260,000 used in operations in the first six months of
1998. The decrease in cash used in operations resulted from improved
collection of accounts receivable, reduction of inventories and adjustments
to net loss for other non-cash expenses. The Company received $750,000 from
the sale of the assets of HyComp and used those proceeds for reduction of
both long-term and current debt as well as for additional working capital
purposes. During the first six months of 1999 the Company paid down
approximately $668,000 in long-term debt obligations (approximately $183,000
of which was related to HyComp) and $395,000 in current notes payable
utilizing the cash flow from operations and the proceeds of the HyComp sale.
The Company acquired only $52,000 in new property plant and equipment and
does not expect to make any major purchases for the remainder of the current
year.
The Company requested and received a temporary overadvance of $350,000
on its line of credit from its domestic lender in June 1999. The overadvance
is scheduled to decrease by $50,000 on August 1st, by an additional
$100,000 on August 31st and to be retired by September 23rd. As of the date
hereof, the Company has complied with the terms of the overadvance agreement.
The temporary overadvance was required due the return of approximately
$440,000 of certain equipment purchased by a domestic distributor of the
Company's Test Equipment sector business. The return was caused by a delay in
the anticipated timing of orders from an RBOC and certain other smaller
customers. Reshipment of the equipment to the end users began in late June
1999 and completion is expected by September 1999.
In May 1999, the Company restructured the operations of its U.S. Test
Equipment sector business. Substantial reductions in staff occurred as well as
major changes in the management of the business. The business infrastructure
costs were reduced to a level that is expected to assist the business to operate
profitably at its current level of sales. The anticipated annual cash savings is
approximately $1 million. Additionally, the business will attempt to reduce its
facility size by subletting a portion of its current facility. The completion of
the reduction in facility space is expected by the end of the third quarter of
1999.
As a result of the expected improved operating results from restructured
operations described above and improvements in the results of operations the
Company's Etch Tek division which occurred in June and July 1999 and are
expected to be maintained during the third quarter of 1999, the Company has
repaid the August 1st reduction in the overadvance on its line of credit and
expects to be able to repay the remaining overadvance in accordance with the
terms described above.
DELISTING OF COMMON STOCK AND CONVERSION RATE OF PREFERRED STOCK
On May 12, 1999, the listing of the Company's common stock on the Nasdaq
SmallCap Market ("Nasdaq") was discontinued and thereafter, the Company's common
stock has been traded on the OTC Bulletin Board under the symbol "MCTL".
On August 6, 1999, the Company announced that an agreement previously
reached with the holders of the Company's Series A convertible preferred
stock (the "Preferred Shares") and an extension thereof, which limited the
conversion rate of such stock to $0.50 per common share so long as the
Company's common stock continued to be listed on Nasdaq, had been terminated
as a result of the delisting. The conversion rate for the Preferred Shares
reverted to the terms of the original subscription agreement which provided
that conversion would occur at the lower of $1.25 per common share or the
-20-
<PAGE>
arithmetic average of the three lowest closing bid prices during the forty (40)
days immediately prior to conversion. The elimination of the minimum conversion
price may increase the number of common shares to be issued upon conversion.
As a consequence of these two events, the Company could likely find it more
difficult to obtain capital though an equity offering of its stock in the
future.
LEGAL PROCEEDINGS
There is one legal proceeding pending against the Company (see Note 4 to
the Consolidated Condensed Financial Statements included elsewhere herein). As
of the date hereof, management believes that the outcome of this pending
proceeding will not have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
YEAR 2000
The Company continues its assessment of the potential impact of the
Year 2000 issue on its (i) computer applications and operating systems, (ii)
equipment which uses embedded software, (iii) products sold to customers and
(iv) interactions with third parties in order to determine the Company's state
of readiness; costs to address the Company's Year 2000 issues; risks of the
Company's Year 2000 issues; and any necessary contingency plans. Certain of the
Company's telephone test and transmission software-driven products utilize
computer calendar/clock data and are presently Year 2000 compliant.
Additionally, information regarding available upgrades necessary to enable
previous versions of such products to be made Year 2000 compliant have been made
available to purchasers. The majority of the products produced by the Company
do not utilize computer calendar/clock data and consequently have no potential
Year 2000 problems.
The Company is currently installing accounting and operations management
computer applications which are Year 2000 compliant and which operate on
computer operating systems that are also Year 2000 compliant at the last
facility requiring such installation. The Company estimates that the
completion of this final installation will occur during the third quarter of
1999. The Company did not initiate such changes in application and operating
software systems in order to accommodate the Year 2000 issue but rather to
upgrade and enhance its information systems capability. As a part of its
selection criteria, the Company considered the impact of the Year 2000 issue.
The Company is currently finalizing its review of internal Year 2000 issues
and its evaluation of any potential Year 2000 issues related to third parties.
While the Company currently believes that the impact of the Year 2000 issue will
not have a material effect on the Company's operations or financial condition,
its assessment of this issue is not yet complete and therefore uncertainty
exists as to whether material Year 2000 issues exist.
EFFECTS OF INFLATION
The impact of inflation and changing prices has not been significant on the
financial condition or results of operations of either the Company or its
various operating subsidiaries.
-21-
<PAGE>
EURO CONVERSION
The Company has operating subsidiaries located in France and the U.K. with
combined net sales from these operations in the first six months of 1999
approximating 53% of total Company net sales. Net sales from the French
subsidiary participating in the Euro conversion were 34% of the Company's net
sales in the first six months of 1999. The Company continues to review the
impact of the Euro conversion on its operations.
In 1998, the Company's European operations took steps to ensure their
capability of entering into Euro transactions as of January 1, 1999. No material
changes to information technology and other systems were necessary to
accommodate these transactions as such systems previously had the capability to
utilize multiple currencies.
While it is difficult to assess the competitive impact of the Euro
conversion on the Company's European operations, at this time, the Company does
not foresee any material impediments in its ability to compete for orders from
customers requesting pricing using the new exchange rate. Since the Company has
no significant direct sales between its U.S. operations and Europe, exchange
rate risk is regarded as nominal.
OUTLOOK FOR THE COMPANY
The Company's overall strategy continues to be focused on the expansion
of its Test Equipment sector businesses through the acquisition and/or
development of new products, product lines and/or separate operating
companies while concurrently maximizing the synergy between its wholly-owned
Test Equipment sector businesses and its recently acquired 37%-owned
affiliate, Digital Transmission Systems, Inc. The Company is also directing
its efforts to the divestment of the Company's existing non-core business
operations so as to be able to redirect capital to the higher margin Test
Equipment sector. In addition, the Company continues its efforts to maximize
short to intermediate term profitability on existing maturing product lines
in all sectors through price increases and lower operating costs as has been
recently accomplished in the U.S. Components business and in the U.S. Test
Equipment business. These recent cost reduction actions are expected to
result in an annualized cost savings of approximately $1,350,000. As noted
above, the French Test Equipment subsidiary has begun to market a broader
range of test, transmission and networking products sourced through
licensing, reseller and other agreements. These actions, in conjunction with
the disposal of lower margin Circuits and Components sector businesses, and
the restructured business operations at the Company's domestic Test Equipment
sector business have resulted in the Company generating cash from operating
activities during the first six months of 1999 of $328,000 compared with cash
being consumed by operating activities of $2,260,000 in the first six months
of 1998. Although there can be no assurances, the Company believes these
actions to date will result in continued improvement in operating results
through the remainder 1999 and thereafter.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Financial Instruments and Hedging Activities" ("SFAS 133") issued
by the FASB is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS 133 provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. The
-22-
<PAGE>
Company does not expect adoption of SFAS 133 to have a material effect on its
financial position or results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
No material new developments. See Note 4 - Litigation in the
accompanying unaudited consolidated condensed financial statements and
Legal Proceedings section of Item 3 of the Company's 1998 Annual
Report on Form 10-K for a description of previously reported
proceedings.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
On June 10, 1999, the Company held its Annual Meeting of Stockholders.
Matters voted on and results of the voting were as follows:
A. Election of Directors:
<TABLE>
<CAPTION>
Name Class Votes Received Votes Withheld
---- ----- -------------- --------------
<S> <C> <C> <C>
Carmine T. Oliva III 10,648,848 90,384
Robert B. Runyon III 10,654,852 84,380
</TABLE>
David A. Barrett is a Class I director and Laurence P. Finnegan, Jr.
is a Class II director whose terms of office expire at the Company's
Annual Meeting of Stockholders in 2000 and 2001, respectively.
B. Ratification of Selection by the Board of Directors of BDO
Seidman, LLP as Certified Public Independent Accountants:
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
10,676,037 32,721 30,474
</TABLE>
David Barrett resigned his position as a director of the Company on
June 30, 1999 for personal reasons.
-23-
<PAGE>
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 six months
ended June 30, 1999.
(b) Reports on Form 8-K.
Reports on Form 8-K were filed as follows:
(1) Dated April 19, 1999, under Item 5 - Other, was filed on
April 30, 1999.
(2) Dated May 13, 1999, under Item 5 - Other, was filed on May
19, 1999.
-24-
<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.
August 13, 1999 /s/ Carmine T. Oliva
--------------------------------------
Carmine T. Oliva
Chief Executive Officer
(Principal Executive Officer)
/s/ James P. Butler
--------------------------------------
James P. Butler
Chief Financial Officer
(Principal Accounting and Financial Officer)
-25-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 122
<SECURITIES> 0
<RECEIVABLES> 6,206
<ALLOWANCES> 260
<INVENTORY> 5,441
<CURRENT-ASSETS> 12,375
<PP&E> 4,499
<DEPRECIATION> 3,025
<TOTAL-ASSETS> 18,539
<CURRENT-LIABILITIES> 9,623
<BONDS> 1,532
810
0
<COMMON> 56
<OTHER-SE> 6,851
<TOTAL-LIABILITY-AND-EQUITY> 18,539
<SALES> 14,311
<TOTAL-REVENUES> 14,311
<CGS> 9,314
<TOTAL-COSTS> 16,471
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 485
<INTEREST-EXPENSE> 202
<INCOME-PRETAX> (1,876)
<INCOME-TAX> 13
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,889)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
