<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, 2000 or
--------------
[ ] Transition report pursuant to Section l3 or l5(d) of the Securities
Exchange Act of l934
For the transition period N/A
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Commission file Number 1-10346
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MICROTEL INTERNATIONAL, INC.
- ------------------------------------------------------
(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.)
9485 Haven Avenue, Suite 100, Rancho Cucamonga, CA 91730
- --------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (909) 297-2699
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 May 10, 2000, there were 18,493,602 shares of common stock outstanding.
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<TABLE>
MICROTEL INTERNATIONAL, INC.
INDEX TO FORM 10-Q
<CAPTION>
PAGE
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item l. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Operations
Three Months Ended March 31, 2000 and l999 4
Consolidated Condensed Statements of Cash Flows
Three Months Ended March 31, 2000 and l999 5
Notes to Consolidated Condensed Financial Statements 6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS)
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
Cash and cash equivalents $ 635 $ 481
Short-term investments 1,181 --
Accounts receivable - net 5,544 6,519
Inventories 4,129 4,181
Other current assets 632 578
------------ ------------
Total current assets 12,121 11,759
Property, plant and equipment-net 1,312 1,393
Goodwill-net 1,459 1,507
Investment in unconsolidated affiliate -- 1,240
Other assets 649 722
------------ ------------
$ 15,541 $ 16,621
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Notes payable $ 2,046 $ 2,107
Current portion of long-term debt 1,245 1,422
Accounts payable 4,124 4,771
Accrued expenses 2,595 2,985
------------ ------------
Total current liabilities 10,010 11,285
Long-term debt, less current portion 121 165
Other liabilities 722 782
------------ ------------
Total liabilities 10,853 12,232
Convertible redeemable preferred stock 611 588
Stockholders' equity:
Common stock 61 60
Additional paid-in capital 23,817 23,726
Accumulated deficit (19,871) (19,759)
Accumulated comprehensive income (loss) 70 (226)
------------ ------------
Total stockholders' equity 4,077 3,801
------------ ------------
$ 15,541 $ 16,621
============ ============
See accompanying notes to consolidated condensed financial statements.
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MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------ ------------
Net sales $ 6,486 $ 7,510
Cost of sales 4,113 4,904
------------ ------------
Gross profit 2,373 2,606
Operating expenses:
Selling, general and administrative 2,212 3,716
Engineering and product development 243 558
------------ ------------
Loss from operations (82) (1,668)
Other income (expense)
Interest expense (96) (119)
Gain on sale of subsidiary -- 331
Equity in earnings of unconsolidated affiliates -- 536
Other 95 (47)
------------ ------------
Loss before income taxes (83) (967)
Income taxes 6 8
------------ ------------
Net loss $ (89) $ (975)
------------ ------------
Other comprehensive income (loss):
Change in net unrealized gain on marketable
securities 461 --
Foreign currency translation adjustment (165) (263)
------------ ------------
Total comprehensive income (loss) $ 207 $ (1,238)
============ ============
Basic and diluted loss per share $ (0.01) $ (0.07)
============ ============
See accompanying notes to consolidated condensed financial statements.
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<TABLE>
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------ ------------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (89) $ (975)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 32 136
Amortization of intangibles 66 91
Gain on sale of subsidiary -- (331)
Gain on sale of fixed assets (43) --
Equity in earnings of unconsolidated entities -- (536)
Stock and warrants issued as compensation -- 781
Other noncash items 84 360
Changes in operating assets and liabilities:
Accounts receivable 975 687
Inventories 52 (77)
Other assets 56 (95)
Accounts payable and accrued expenses (1,097) (192)
------------ ------------
Cash provided by (used in) operating activities 36 (151)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (6) (8)
Cash received for sale of DTS stock 520 --
Proceeds from sale of fixed assets 43 --
Cash collected on note receivable -- 9
------------ ------------
Cash from investing activities 557 1
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in notes payable and long term debt (282) 202
Proceeds from exercise of employee stock options 8 --
Proceeds from sale of common stock -- 1
------------ ------------
Cash provided by (used in) financing activities (274) 203
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (165) (263)
------------ ------------
NET INCREASE (DECREASE) IN CASH 154 (210)
CASH AT BEGINNING OF PERIOD 481 572
------------ ------------
CASH AT END OF PERIOD $ 635 $ 362
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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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 NOTE 4 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. is an international
telecommunications electronics company comprised of three wholly owned
subsidiaries - CXR Telcom Corporation in Fremont, California, CXR, S.
A. in Paris, France and XIT Corporation in Rancho Cucamonga,
California. CXR Telcom Corporation and CXR, S. A. design, manufacture
and market electronic telecommunications test instruments, wireless and
wireline voice, data and video transmission and network access
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 is organized into three segments - Instrumentation
and Test Equipment, Components and Subsystem Assemblies, and Circuits.
Through the sale of various subsidiaries in 1998 and 1999, the Company
has divested a majority of its circuits operations.
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.
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MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited consolidated condensed financial statements do,
however, reflect all adjustments, consisting of only normal recurring
adjustments, which are, in the opinion of management, necessary to
state fairly the financial position as of March 31, 2000 and December
31, 1999 and the results of operations and cash flows for the related
interim periods ended March 31, 2000 and 1999. 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 1999 Annual
Report on Form 10-K.
(2) LOSS PER SHARE
The following table illustrates the computation of basic and
diluted loss per share:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
NUMERATOR:
Net loss $ (89,000) $ (975,000)
Less: accretion of the excess of the
redemption value over the carrying
value of redeemable preferred stock $ (23,000) (56,000)
------------ ------------
Loss attributable to common stockholders (112,000) (1,031,000)
DENOMINATOR:
Weighted average number of common shares
outstanding during the period 18,174,000 14,766,000
------------ ------------
Basic and diluted loss per share $ (.006) $ (.070)
============ ============
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.
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MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(3) INVENTORIES
Inventories consist of the following.
March 31, 2000 December 31, 1999
----------------- -----------------
Raw materials $ 1,644,000 $ 1,728,000
Work-in-process 962,000 1,199,000
Finished goods 1,523,000 1,254,000
----------------- -----------------
$ 4,129,000 $ 4,181,000
================= =================
(4) LITIGATION
The Company and its subsidiaries from time to time become
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.
(5) DISPOSITION OF A BUSINESS
On January 7, 2000, the Company sold all of its interest in
the common stock in Digital Transmission Systems, Inc. ("DTS") to
Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in exchange
for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a
publicly traded company on the Toronto Exchange. The Wi-LAN common
stock had a market value of $720,000 on the date of the transaction.
The Company is restricted from selling the Wi-LAN stock until July 7,
2000 due to Toronto exchange rules that restrict sales of stock
obtained in an acquisition related transaction. As of March 31, 2000
the value of the Company's Wi-Lan shares had increased in value by
$461,000 to $1,181,000. The increase in value has been reflected in the
carrying value of the investment and the other comprehensive income or
loss line of the equity section in the balance sheet. The Wi-LAN
investment is shown in the current asset section of the balance sheet
as short-term investments.
-8-
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MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(6) WARRANT EXCHANGE OFFER
During the first quarter of 2000, the Company offered to
holders of warrants with an exercise price of one dollar or more and
ranging as high as $3.79 the opportunity to exchange their warrants
with new warrants for one half the number of shares at one half the
exercise price of the original warrants. Neither the expiration dates,
nor any other terms of the warrants, were changed as a result of this
offer. The offer was available to all warrant holders with exercise
prices of one dollar or more including Carmine T. Oliva, the Company's
President and Chairman of the Board, and the two other directors. The
primary reason for the offer was to reduce the quantity of shares
allocated to warrants so that the Company would have sufficient
authorized stock for its needs until an increase in the authorized
stock could be voted on by the stockholders as part of the year 2000
Annual Meeting of Stockholders.
The offers and acceptances were finalized by April 10, 2000.
Shares represented by warrants were reduced by 1,787,000 shares and
this reduction would serve to reduce the dilution of future earnings
per share since fewer shares could be outstanding. An $87,000 expense
was recorded in the first quarter of 2000 for the difference in fair
value of the new warrants as compared to previous warrants at the date
of acceptance.
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MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS
The Company has three reportable segments: Instrumentation and
Test Equipment, 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 Company has disposed of the majority of its Circuits segment
business operations and 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, design, manufacturing and marketing strategies.
There were no differences in the basis of segmentation or in
the basis of measurement of segment profit or loss from the amounts
disclosed in the Company's consolidated financial statements included
in its 1999 Annual Report on Form 10-K.
Selected financial data for each of the Company's operating
segments is shown below.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
SALES TO EXTERNAL CUSTOMERS:
Instruments $ 3,553,000 $ 3,708,000
Components 2,264,000 2,918,000
Circuits 669,000 884,000
------------ ------------
$ 6,486,000 $ 7,510,000
============ ============
INTERSEGMENT SALES:
Instruments $ -- $ --
Components 73,000 60,000
Circuits -- 181,000
------------ ------------
$ 73,000 $ 241,000
============ ============
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MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(7) REPORTABLE SEGMENTS (CONTINUED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
SEGMENT PRETAX PROFITS
Instruments $ (95,000) $ (781,000)
Components 467,000 512,000
Circuits (111,000) (387,000)
------------ ------------
$ 261,000 $ (656,000)
============ ============
MARCH 31, MARCH 31,
2000 1999
------------ ------------
SEGMENT ASSETS
Instruments $ 7,113,000 $ 9,439,000
Components 5,127,000 7,133,000
Circuits 1,457,000 2,421,000
------------ ------------
$13,697,000 $18,993,000
============ ============
The following is a reconciliation of the reportable segment
loss and assets to the Company's consolidated totals.
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
Total income (loss) for reportable segments $ 261,000 $ (656,000)
Unallocated amounts:
Gain on sale of assets of subsidiary -- 331,000
Equity in earnings of unconsolidated
affiliates -- 540,000
Unallocated general corporate expenses (344,000) (1,182,000)
------------ ------------
Consolidated loss before income taxes $ (83,000) $ (967,000)
============ ============
MARCH 31, MARCH 31,
2000 1999
------------ ------------
Assets
------
Total assets for reportable segments $13,697,000 $18,993,000
Other assets 1,844,000 2,584,000
------------ ------------
Total consolidated assets $15,541,000 $21,577,000
============ ============
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MICROTEL INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(8) SUBSEQUENT EVENT
On April 17, 2000, the Company finalized its acquisition of
Belix Company, Ltd., ("Belix") including its two subsidiaries. The
Company purchased the capital stock of Belix for $790,000 cash,
assumption of debt of Belix of $575,000 and an earn-out for the former
stockholders based on future sales. Belix is located in England, U. K.
and is in the business of manufacturing power supplies for various
applications. It will be integrated into the Company's existing power
supply producer, XCEL Power Systems, Ltd. A charge for severance and
other consolidation costs will likely be incurred in the second
quarter. Belix' tangible assets consist primarily of accounts
receivable, inventories and fixed assets.
MICROTEL INTERNATIONAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD," "BELIEVE" AND SIMILAR
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL
TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS
STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. PROSPECTIVE INVESTORS, READERS
OR OTHER USERS OF THIS REPORT ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS
ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND
UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED
WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS.
RESULTS OF OPERATIONS
NET SALES
Consolidated net sales for the first quarter of 2000 decreased by
approximately $1,024,000 or 13.6% compared with the same period in the prior
year. This decrease in sales was primarily comprised of:
o The sale of the Company's HyComp, Inc. ("HyComp") subsidiary.
o A reduction in the sales of the Company's U. K. based
component business.
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The table below sets forth the composition of consolidated net sales by
business segment, separately identifying the operations of HyComp for the three
months ended March 31, 2000 and 1999.
VARIANCE
MARCH 31, MARCH 31, INCREASE/
2000 1999 (DECREASE)
Segment (DOLLARS IN THOUSANDS) PERCENT
- ------- ------------ ------------ ------------ ------------
Instruments $ 3,553 $ 3,708 $ (155) (4.2)%
Components 2,264 2,918 (654) (22.4)%
Circuits 669 428 241 56.3%
HyComp (sold 3/31/99) -- 456 (456) (100.0)%
------------ ------------ ------------ ------------
Total Sales $ 6,486 $ 7,510 $ (1,024) (13.6)%
============ ============ ============ ============
Instrument sales were down slightly by 4.2% in the first quarter of
2000 compared to the first quarter of 1999. Management believes this decrease
was partially due to reduced orders of test equipment by U. S. telecom customers
in late 1999 due to Y2K concerns which was a one time non recurring event.
Orders for test equipment have since improved beyond expectation. The reduction
in test equipment sales was offset by improved sales of transmission products.
The increase in U. S. transmission sales was the result of major product
qualification efforts in the latter half of 1999 which had been underway for
almost a year with Pacific Bell and GTE. Sales of transmission and modem
equipment from the Company's facility in France in the current quarter were
slightly below the first quarter of 1999 due to lower than usual sales in
January. This was expected as the sales for this facility in December 1999 were
unusually high which had the affect of shifting sales that would otherwise have
normally been shipped in January into December.
Component sales declined 22.4% to $2,264,000 in the first quarter of
2000 from $2,918,000 in the first quarter of 1999. The U. S. component operation
incurred a 9% sales decrease in the current quarter compared to the first
quarter of 1999 due to a decrease in switch sales. The majority of the sales
decline in this segment is due to a short term delay in the release of
production for certain contracts at the Company's U. K. facility for power
supplies. This resulted in a 28.5% sales decrease in the first quarter of 2000
from the first quarter of 1999 for the U. K. facility.
Excluding the effect of HyComp, Inc., which was sold March 31, 1999,
sales for the Circuit sector increased 56.3% to $669,000 in the current quarter
from $428,000 in the first quarter of 1999. The increase in sales was the result
of a successful effort to replace the Circuit segment's sales to other
facilities of the Company with sales to unrelated third parties at higher
prices. Unit sales were up 4% in the first quarter of 2000 from the comparable
prior year period.
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GROSS PROFIT
The composition of consolidated gross profit by business segment and
the percentages of related net sales are as follows for the three months ended
March 31, 2000 and 1999.
MARCH 31, MARCH 31,
2000 1999
---- ----
Segment (DOLLARS IN THOUSANDS)
- -------
Instruments and
Test Equip. $ 1,351 38.0% $ 1,452 39.2%
Components 947 41.8% 1,083 37.1%
Circuits 75 11.2% (68) (15.8)%
HyComp (sold 3/31/99) -- -- 139 30.5%
------------ ------------
Total Gross Profit $ 2,373 36.6% $ 2,606 34.7%
============ ============
Gross profit for the Instrumentation and Test Equipment segment
declined slightly in the current quarter compared to the prior year period. The
U. S. facility reduced its manufacturing costs considerably and with a slightly
reduced sales level was able to increase its gross margin to 39% of sales in the
first quarter of 2000 as compared to 32.8% of sales in the first quarter of 1999
due to reducing headcount, subletting part of its facility and reorganizing.
This improvement in margin was more than offset with a reduction in margin at
the French facility to 37% of sales in the current period from 42.9% of sales in
the prior year period. The French facility's margin was reduced because of the
lower exchange rate of the Euro and French Franc to the U. S. dollar, causing
their importation of manufacturing components and resale items from the U. S. to
be more costly in their local currency and thereby reducing the margins.
Overall, the components segment was able to increase its gross profit
margin to 41.8% of sales in the current quarter from 37.1% of sales in the first
quarter of last year even though sales declined for this segment by 22.4% for
the same comparison periods. Although the gross margin increased as a percentage
of sales, the gross margin declined to $947,000 in the first quarter of 2000
from $1,083,000 in the first quarter of 1999. The U. S. facility has produced a
substantial increase in its margin performance for the current period by
increasing its gross margin percentage of sales to 57.3% in the current quarter
from 43% in the comparable prior year quarter. This improvement was accomplished
by support personnel reductions and moving from the Ontario, California facility
to the smaller and more efficient Rancho Cucamonga, California facility. The
improvement of the gross margin in the U. S. facility was offset by the
reduction in gross margin in the U. K. facility in actual and percentage terms
because of the reduction in volume causing less absorption of overhead due to
the temporary delay in the placement of production releases for previously
awarded contracts.
Excluding the effect of HyComp, Inc., which was sold March 31, 1999,
the gross margin for the circuits segment improved to $75,000, or 11.2% of sales
in the first quarter of 2000 from a negative $68,000, or a negative 15.8% of
sales in the first quarter of 1999. This improvement was accomplished by
reducing personnel and making higher unit priced sales as well as a slight
increase in unit volume.
-14-
<PAGE>
OPERATING EXPENSES
Operating expenses for the three months ended March 31, 2000 and 1999
were comprised of the following:
MARCH 31, MARCH 31,
2000 1999
------------ ------------
Commissions $ 205 $ 250
Other selling 745 937
------------ ------------
Total selling expense 950 1,187
General & administrative expense 1,262 2,529
------------ ------------
Total selling, general & administrative $ 2,212 $ 3,716
============ ============
Engineering & product development $ 243 $ 558
============ ============
Total selling expense as a percentage of net sales decrease to 14.6%
from 15.8% for the three months ended March 31, 2000 and 1999, respectively,
primarily due to cost reductions at CXR Telcom in Fremont, California.
Commissions as a percentage of net sales remained relatively stable at 3.2 % in
the first quarter of 2000 and 3.3% in the first quarter of 1999.
General and Administrative Expenses ("G&A") declined to $1,262,000 or
19.5% of net sales in the current quarter from $2,529,000 or 33.7% of net sales
in the first quarter of 1999. After adjusting for $715,000 of non-recurring
charges in the first quarter of 1999, G&A expenses have been reduced by $552,000
or 30.4% in the current quarter from the prior year quarter. The Company reduced
G&A expenses dramatically by transferring the administrative functions of CXR
Telcom to the corporate office in May 1999 and did so with a reduced corporate
staff. Additional savings in G&A were achieved through closely monitoring and
reducing such expenses at the divisional level and the corporate level.
Engineering and product development costs were incurred by the
Instrumentation and Test Equipment segment in the first quarters of 2000 and
1999. In the first quarter of 1999, $32,000 of such expenses were recorded in
the Circuits segment by HyComp, Inc. which was sold March 31, 1999. Engineering
and product development costs were $243,000 or 3.7% of net sales in the current
quarter which is a $315,000 reduction from the $558,000 or 7.4% of net sales
recorded for the first quarter of 1999. The reduction is primarily due to the
elimination of the CXR Telcom engineering effort in Fremont, California and the
consolidation of such engineering efforts in the St. Charles, Illinois facility.
This reorganization has reduced costs and improved the efficiency of the product
development process. The engineering and product development costs will focus on
the Instrumentation and Test Equipment segment and will focus on bringing new
products to the market in order to improve the Company's competitive position in
this segment.
OTHER INCOME AND EXPENSE
In January 2000, the Company sold all of its interest in digital
Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc. of Alberta, Canada in
exchange for $520,000 and 28,340 shares of Wi-LAN, Inc. common stock, which is
traded on the Toronto, Ontario stock exchange. The market value of the acquired
common stock of Wi-LAN, Inc. was approximately $720,000 on the date of the
transaction. The Company's decision to sell the DTS stock was due to (1) the
investment in DTS not providing expected benefits and (2) the Company's need to
increase liquidity and working capital.
-15-
<PAGE>
In the first quarter of 1999, the Company recorded $536,000 of equity
in earnings for DTS and $331,000 gain on the sale of HyComp. No expenses or
income related to either DTS or HyComp were incurred in the first quarter of
2000 and none are expected to be incurred in the future. Interest expense was
reduced to $96,000 in the current period from $119,000 in the prior year due to
lower average loan balances. Income taxes are not material due to U. S. loss
carryforwards.
SUBSEQUENT EVENT
On April 17, 2000, the Company finalized its acquisition of Belix
Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased
the capital stock of Belix for $790,000 cash, assumption of debt of Belix of
$575,000 and an earn-out for the former stockholders based on future sales.
Belix is located in England, U. K. and is in the business of manufacturing power
supplies for various applications. It will be integrated into the Company's
existing power supply producer, XCEL Power Systems, Ltd. Belix' tangible assets
consist primarily of accounts receivable, inventories and fixed assets. A charge
for severance and other consolidation costs will likely be recorded in the
second quarter of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash of $36,000 was generated from operations during the first quarter
of 2000 as compared to a cash usage from operations of $151,000 in the first
quarter of 1999. The primary source of cash from operations was the collection
of receivables which reduced the balance of receivables to $5,544,000 as of
March 31, 2000 as compared to $6,519,000 as of December 31, 1999. The primary
usage of cash from operations was the reduction in accounts payable by $647,000
in the first quarter of 2000. The Company generated net cash of $154,000 for the
first quarter of 2000 compared to a net cash usage of $210,000 in the first
quarter of prior year. The Company received $520,000 cash from the sale of its
DTS stock which was primarily used to pay down debt. Cash used to reduce debt
was $282,000 in the first quarter of 2000.
On January 7, 2000, the Company sold all of its interest in the common
stock of Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc., a public
company based in Alberta, Canada. As consideration, the Company received
$520,000 in cash and 28,340 shares of Wi-LAN common stock valued at
approximately $720,000 at the time of the transaction. The Company used the cash
to pay down debt. In conjunction with the transaction, the Company's lender,
Congress Financial Corporation ("Congress"), agreed to waive certain defaults of
the loan agreement relating to a $350,000 overdraft the Company was required to
pay down by September 22, 1999 and eliminated the requirement of a $350,000
target reserve. The target reserve was a funding requirement to pay down the
principal of the term loan by $350,000 in addition to the regular monthly
principal payments secured by the Wi-LAN stock.
Due to rules of the Toronto Stock exchange, where Wi-LAN, Inc. stock
trades, the Company is prohibited from selling its interest in the Wi-LAN, Inc.
stock for six months after acquisition because the stock was acquired in a
transaction related to the sale or purchase of a company. However, the Company's
lender did increase the Company's borrowing availability by $400,000 on February
29, 2000 by providing an authorized overdraft.
-16-
<PAGE>
The financing facility provided by Congress expires on June 23, 2000.
Congress has informed management that it will not renew the loans and such loans
will be due and payable on that day. The Company is actively pursuing
replacement financing and has already received one proposal from a prospective
lender and expects other additional proposals. If the Company is unable to
secure alternative financing by the date of the expiration of the Congress
financing facility, the Company may not be able to continue its domestic
operations.
The Company continues to suffer from a shortage of cash. However, with
the recent efforts in cost cutting, reorganizing in the Instrument and Test
Equipment segment, the improvement in recent orders and improved operating
performance and cash flows, management believes the Company's cash situation,
though serious, has improved substantially since the fourth quarter of 1999.
LEGAL PROCEEDINGS
- -----------------
There are no material legal proceedings pending against the Company
(see Note 4 to the Consolidated Condensed Financial Statements included
elsewhere herein).
YEAR 2000
- ---------
To date, the Company experienced no material effects related to
computer operations and the arrival of the year 2000 as of the date of this
report. Management does not expect any disruptions due to the year 2000 as
management believes all its current systems are year 2000 compliant.
EFFECTS OF INFLATION
- --------------------
The impact of inflation and changing prices has not been significant on
the financial condition or results of operations of either the Company or its
various operating subsidiaries.
EURO CONVERSION
- ---------------
The Company has operating subsidiaries located in France and the U.K.
with combined net sales from these operations approximating 48% of total Company
net sales for the first quarter of 2000. Net sales from the French subsidiary
participating in the Euro conversion were 34% of the Company's net sales for the
first quarter of 2000. 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.
-17-
<PAGE>
OUTLOOK FOR THE COMPANY
The Company's overall strategy is to expand its Instrumentation and
Test Equipment segment through the acquisition and/or development of new
products, product lines and/or separate operating companies. Concurrently, the
Company continues to evaluate existing lower-margin or loss operations elsewhere
throughout the Company, with a view toward divestment so as to redirect capital
to the higher margin Instrumentation and Test Equipment segment. In addition,
the Company will continue to seek to maximize short to intermediate term
profitability on existing maturing product lines in all segments through price
increases and lower operating costs. The Company has completed its transfer of
production of its U. S. transmission and modem product lines from its CXR Telcom
Fremont facility to its French subsidiary, CXR, S. A. This transfer will improve
the manufacturing efficiency and sales effort of these product lines as they
will now be centralized in one location.
CXR Telcom has released a new universal ADSL/xDSL facility test set
incorporating IEEE 23 tone test technique that should result in a significant
increase in the sales of its 704A universal test set. Also, CXR, S. A. has
introduced in Europe its new high speed mSDSL multirate modem. This new Fastline
2000 modem varies its transmission rate to provide maximum performance over
single pair copper wires. In the Component segment, XIT's Digitran Division has
achieved recertification by the U. S. government's Defense Supply center to
manufacture the Digitran patented family of Binary Coded Digital switches for
the government's Qualified Parts List. In April 2000, CXR Telcom received a
contract from the Federal Aviation Agency for the Halcyon 704A-400 combination
test unit that is expected to provide $8,000,000 in revenue over a three year
period.
The Company's XCEL Power Systems, Ltd. ("XPS") in the U. K. acquired
Belix, Ltd. ("Belix") on April 17, 2000. Belix manufactures power supplies as
does XPS. The combined entity is expected to double its sales compared to its
sales before the acquisition. Belix is expected to be profitable in its first
year as part of the Company's U. K. operations.
In the U. S. Instrumentation and Test Equipment segment, the recent
completion of mergers of various Regional Bell Operating Companies is beginning
to produce new opportunities. The consolidation of Southwest Bell and Pacific
Bell is now complete and release of equipment purchases has once again returned
to traditional levels. Although the NYNEX and Bell Atlantic merger had initially
created some uncertainty and delayed capital equipment purchases, this merger,
now complete, has afforded the Company the opportunity to provide the combined
entity with the Company's newer test equipment products. Domestic sales of
transmission products have expanded with the introduction of Remote Access
Server products for Internet applications as well as for other transmission
products for billing and voice mail applications which are currently being sold
to SBC Communications, GTE and others. Additionally, in-house efforts are being
directed toward developing software that will allow the recently acquired test
equipment products to be marketed in both Europe and Latin America.
The Company expects its profit and cash flow to continue to improve in
subsequent quarters of 2000.
-18-
<PAGE>
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.
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, 2000.
(b) Reports on Form 8-K:
None.
-19-
<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 15, 2000 /S/ Carmine T. Oliva
--------------------------------------------
Carmine T. Oliva
Chief Executive Officer
(Principal Executive Officer)
/S/ Randolph D. Foote
--------------------------------------------
Randolph D. Foote
Chief Financial Officer
(Principal Accounting and Financial Officer)
-20-
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