-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Do10VmZNIegtXTBmib8iAcwnz6HuSa38NeGy75THfbCO+FAtk0iDKqJZ+tpoqmzZ zXd729HE7+zLve2z3MZVOw== 0001019687-01-501088.txt : 20020410 0001019687-01-501088.hdr.sgml : 20020410 ACCESSION NUMBER: 0001019687-01-501088 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROTEL INTERNATIONAL INC CENTRAL INDEX KEY: 0000854852 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 770226211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10346 FILM NUMBER: 1785466 BUSINESS ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: ONTARIO STATE: CA ZIP: 91730 BUSINESS PHONE: 9099879220 MAIL ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: ONTARIO STATE: CA ZIP: 91730 FORMER COMPANY: FORMER CONFORMED NAME: CXR CORP DATE OF NAME CHANGE: 19920703 10-Q 1 microtel_10q-093001.txt ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2001 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ 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.) 9485 HAVEN AVENUE, SUITE 100 RANCHO CUCAMONGA, CALIFORNIA 91730 (Address of Principal Executive Offices) (909) 987-9220 (Issuer's Telephone Number, Including Area Code) NOT APPLICABLE (Former Name, Former Address And Former Fiscal Year, if Changed Since Last Report) Indicated by check 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of November 9, 2001, there were 20,670,703 shares of the issuer's common stock, $.0033 par value, outstanding. ================================================================================
ITEM 1. FINANCIAL STATEMENTS. Consolidated Condensed Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000............................................................. 2 Consolidated Condensed Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2001 and 2000 (unaudited)............... 3 Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 (unaudited)........................................... 4 Notes to Consolidated Condensed Financial Statements (unaudited)........................ 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................ 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........................................................................ 27 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS.................................................................. 29 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................... 29 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................... 29 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................ 29 ITEM 5. OTHER INFORMATION.................................................................. 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 30 SIGNATURES ................................................................................... 31
1 ITEM 1. FINANCIAL STATEMENTS. MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
September 30, December 31, 2001 2000 ------------- ------------- ASSETS (unaudited) Cash and cash equivalents $ 437 $ 756 Accounts receivable - net 5,631 7,440 Notes receivable 53 130 Inventories 7,514 6,298 Other current assets 411 750 ------------- ------------- Total current assets 14,046 15,374 Property, plant and equipment-net 710 809 Goodwill-net 2,644 2,737 Other assets 538 564 ------------- ------------- $ 17,938 $ 19,484 ============= ============= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Notes payable $ 2,746 $ 3,661 Current portion of long-term debt 591 614 Accounts payable 4,718 5,222 Accrued expenses 2,871 3,082 Net liability of discontinued operations -- 15 ------------- ------------- Total current liabilities 10,926 12,594 Long-term debt, less current portion 783 282 Other liabilities 369 542 ------------- ------------- Total liabilities 12,078 13,418 Convertible redeemable preferred stock, $10,000 unit value. Authorized 200 shares; issued and outstanding 25 shares (aggregate liquidation preference of $250) 267 259 Stockholders' equity: Convertible Series B Preferred stock, $0.01 par value. Authorized 10,000,000 shares; 150,000 shares issued and outstanding (aggregate liquidation preference of $960) 938 938 Common stock, $.0033 par value. Authorized 50,000,000 shares; 20,571,000 and 20,570,000 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively 68 68 Additional paid-in capital 24,317 24,307 Accumulated deficit (18,903) (18,775) Accumulated other comprehensive loss (827) (731) ------------- ------------- Total stockholders' equity 5,593 5,807 ------------- ------------- $ 17,938 $ 19,484 ============= ============= See accompanying notes to consolidated condensed financial statements. 2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (in thousands, except per share amounts) Net sales $ 6,345 $ 6,871 $ 20,893 $ 19,559 Cost of sales 3,853 $ 3,080 11,935 10,646 --------- --------- --------- --------- Gross profit 2,492 3,791 8,958 8,913 Operating expenses: Selling, general and administrative 2,457 2,431 7,943 6,826 Engineering and product development 235 277 897 773 --------- --------- --------- --------- Income (loss) from operations (200) 1,083 118 1,314 Other income (expense): Interest expense (113) (126) (311) (321) Other income 33 177 83 382 --------- --------- --------- --------- Income (loss) from continuing operations before income taxes (280) 1,134 (110) 1,375 Income tax expense 1 2 10 13 --------- --------- --------- --------- Income (loss) from continuing operations (281) 1,132 (120) 1,362 --------- --------- --------- --------- Discontinued operations: Loss from operations of discontinued segment -- (68) -- (219) Loss on disposal of discontinued segment, including provision for phase out period of $158 in 2000 periods -- (634) -- (634) --------- --------- --------- --------- -- (702) -- (853) --------- --------- --------- --------- Net income (loss) (281) 430 (120) 509 --------- --------- --------- --------- Other comprehensive income (loss): Changes in unrealized gain in marketable securities -- (78) -- -- Foreign currency translation adjustment 230 (217) (96) (435) --------- --------- --------- --------- Total comprehensive income (loss) $ (51) $ 135 $ (216) $ 74 ========= ========= ========= ========= Earnings (loss) per share: Continuing operations: Basic $ (0.01) $ 0.06 $ (0.01) $ 0.07 ========= ========= ========= ========= Diluted $ (0.01) $ 0.05 $ (0.01) $ 0.06 ========= ========= ========= ========= Discontinued operations: Basic $ -- $ (0.04) $ -- (0.05) ========= ========= ========= ========= Diluted $ -- $ (0.03) $ -- (0.04) ========= ========= ========= ========= Net income (loss): Basic $ (0.01) $ 0.02 $ (0.01) $ 0.02 ========= ========= ========= ========= Diluted $ (0.01) $ 0.02 $ (0.01) $ 0.02 ========= ========= ========= ========= See accompanying notes to consolidated condensed financial statements. 3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, ------------- 2001 2000 -------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (120) $ 509 Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 272 230 Amortization of intangibles 303 207 Stock and warrants issued as compensation 10 110 Gain on sale of fixed assets -- (43) Gain on sale of Wi-LAN, Inc. stock -- (197) Other noncash items -- 648 Net change in operating assets of discontinued operations -- 658 Changes in operating assets and liabilities: Accounts receivable 1,818 1,179 Inventories (1,205) (986) Other assets 366 (58) Accounts payable and accrued expenses (903) (2,903) -------- -------- Cash provided by (used in) operating activities 541 (646) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from note receivable 77 -- Net purchases of property, plant and equipment (84) (15) Cash received for sale of DTS stock -- 520 Proceeds from sale of fixed assets -- 43 Proceeds from sale of Wi-LAN, Inc. stock -- 918 Acquisition of T-Com, LLC assets -- (83) Investment in Belix Ltd. companies -- (592) -------- -------- Cash provided by (used in) investing activities (7) 791 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in notes payable and long-term debt (772) 330 Proceeds from exercise of warrants and employee stock options -- 88 -------- -------- Cash provided by (used in) financing activities (772) 418 -------- -------- Effect Of Exchange Rate Changes (81) (349) -------- -------- Net Increase (Decrease) In Cash and Cash Equivalents (319) 214 -------- -------- Cash and Cash Equivalents At Beginning Of Period 756 480 -------- -------- Cash and Cash Equivalents At End Of Period $ 437 $ 694 ======== ======== Cash paid for: Income taxes $ 34 $ 13 ======== ======== Interest $ 304 $ 245 ======== ======== See accompanying notes to consolidated condensed financial statements. 4
MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the "Company") operates through three wholly-owned subsidiaries: CXR Telcom Corporation, CXR, S.A. and XET Corporation, formerly XIT Corporation ("XET"). CXR Telcom Corporation and CXR, S.A. design, manufacture and market electronic telecommunication test equipment and transmission and network access products. XET and its subsidiaries design, manufacture and market digital switches and power supplies. The Company conducts its operations out of various facilities in the U.S., France, England and Japan and organizes itself in two product line segments: telecommunications and electronic components. In October 2000, the Company decided to discontinue its circuits segment operations. At that time, the circuits segment operations consisted of XCEL Etch Tek, a wholly-owned subsidiary, and XCEL Circuits Division ("XCD"), a division of XET. XCEL Etch Tek was offered for sale and sold in November 2000. XCD, predominantly a captive supplier of printed circuit boards to the electronic components segment, has been retained and is now included in the electronic components segment. Accordingly, all prior financial information related to the circuits segment operations has been presented as discontinued operations in the accompanying consolidated condensed financial statements. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated condensed financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the financial position as of September 30, 2001 and December 31, 2000 and the results of operations and cash flows for the related interim periods ended September 30, 2001 and 2000. 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 Amendment No. 2 to its 2000 Annual Report on Form 10-K. 5 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (2) EARNINGS PER SHARE The following table illustrates the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- (in thousands, except per share amounts) NUMERATOR: Net income (loss) $ (281) $ 430 $ (120) $ 509 Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 3 23 9 69 --------- --------- --------- --------- Net income (loss) attributable to common stockholders $ (284) $ 407 $ (129) $ 440 ========= ========= ========= ========= DENOMINATOR: Weighted average number of common shares outstanding during the period 20,571 20,537 20,570 19,141 Incremental shares from assumed conversions of warrants, options and preferred stock -- 1,921 -- 2,206 --------- --------- --------- --------- Adjusted weighted average shares 20,571 22,458 20,570 21,347 ========= ========= ========= ========= Basic earnings (loss) per share $ (0.01) $ 0.02 $ (0.01) $ 0.02 ========= ========= ========= ========= Diluted earnings (loss) per share $ (0.01) $ 0.02 $ (0.01) $ 0.02 ========= ========= ========= =========
The computation of diluted loss per share for the three and nine month periods ended September 30, 2001 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 in 2001 or because such instruments had exercise prices greater than the average market price of the common shares during the periods presented. (3) INVENTORIES Inventories consist of the following. September 30, 2001 December 31, 2000 ------------------ ----------------- Raw materials $ 2,949,000 $ 2,777,000 Work-in-process 2,917,000 1,914,000 Finished goods 1,648,000 1,607,000 ------------ ------------ $ 7,514,000 $ 6,298,000 ============ ============ 6 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (4) NOTES PAYABLE The domestic credit facility agreement with Wells Fargo Business Credit, Inc. contains restrictive financial and non-financial covenants that were revised effective September 20, 2001. As of September 30, 2001, the Company was in compliance with such covenants. (5) COMMITMENTS AND CONTINGENCIES 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 may not be predictable because of considerable uncertainties that may 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. The Internal Revenue Service is currently examining the Company's 1997 federal income tax return, the effect of which examination cannot be determined at this time. (6) REPORTABLE SEGMENTS The Company has two reportable segments: telecommunications and electronic components. The telecommunications 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 electronic components segment operates in the U.S., European and Asian markets and designs, manufactures and markets primarily digital switches and power supplies. 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. 7 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 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 Amendment No. 2 to its 2000 Annual Report on Form 10-K. Selected financial data for each of the Company's operating segments is shown below:
Three months Three months Nine months Nine months ended ended ended ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Sales to external customers: Telecommunications $ 3,483,000 $ 3,487,000 $11,451,000 $10,680,000 Electronic Components 2,862,000 3,384,000 9,442,000 8,879,000 ------------ ------------ ------------ ------------ $ 6,345,000 $ 6,871,000 $20,893,000 $19,559,000 ============ ============ ============ ============ Segment pretax profits: Telecommunications $ 53,000 $ 422,000 $ 180,000 $ 468,000 Electronic Components 322,000 1,137,000 1,969,000 2,232,000 ------------ ------------ ------------ ------------ $ 375,000 $ 1,559,000 $ 2,149,000 $ 2,700,000 ============ ============ ============ ============
Sept. 30, December 31, 2001 2000 ------------- ------------- Segment assets: Telecommunications $ 8,009,000 $ 9,901,000 Electronic Components 9,233,000 8,876,000 ------------- ------------- $ 17,242,000 $ 18,777,000 ============= =============
The following is a reconciliation of the reportable segment income and (loss) from continuing operations and assets to the Company's consolidated totals:
Three months Three months Nine months Nine months ended ended ended ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Pretax income - ------------- Total income for reportable $ 375,000 $ 1,559,000 $ 2,149,000 $ 2,700,000 segments Unallocated amounts: Gain on sale of -- 197,000 -- 197,000 Wi-LAN, Inc. stock Warranty reserve reversal -- 110,000 -- 110,000 Unallocated general corporate expenses (655,000) (732,000) (2,259,000) (1,632,000) ------------ ------------ ------------ ------------ Consolidated income before income taxes $ (280,000) $ 1,134,000 $ (110,000) $ 1,375,000 ============ ============ ============ ============
Sept. 30, December 31, 2001 2000 ------------- ------------- Assets ------ Total assets for reportable segments $ 17,242,000 $ 18,777,000 Other assets 696,000 707,000 ------------- ------------- Total consolidated assets $ 17,938,000 $ 19,484,000 ============= =============
8 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (7) NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No. 142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of September 30, 2001, the net carrying amount of goodwill was $2,643,000. Amortization expense during the nine-month period ended September 30, 2001 was $303,000. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. In October 2001, the FASB issued FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with our consolidated condensed financial statements and notes to financial statements included elsewhere in this report. This report and our consolidated condensed financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation: o the projected growth in the telecommunications and electronic components markets; o our business strategy for expanding our presence in these markets; o anticipated trends in our financial condition and results of operations; o the impact of the continuing threat of terrorism and the responses to such threat by military, government, businesses and the public; and o our ability to distinguish ourselves from our current and future competitors. We do not undertake to update, revise or correct any forward-looking statements. The information contained in this report is not a complete description of our business or the risks associated with an investment in our common stock. Before deciding to buy or maintain a position in our common stock, you should carefully review and consider the various disclosures we made in this report, and in our other materials filed with the Securities and Exchange Commission that discuss our business in greater detail and that disclose various risks, uncertainties and other factors that may affect our business, results of operations or financial condition. Any of the factors described above or in the "Risk Factors" section below could cause our financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. OVERVIEW We previously organized our operations in three business segments: o Instrumentation and Test Equipment; o Components and Subsystem Assemblies; and o Circuits. In an effort to focus our attention and working capital on our telecommunications test instruments and our transmission and network access products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc. in April 1998 and sold substantially all of the assets of HyComp, Inc., a manufacturer of hybrid circuits, in April 1999. 10 In October 2000, we decided to discontinue our circuits segment. On November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material circuit board business and was a division of our wholly-owned subsidiary, XET Corporation (formerly XIT Corporation). We intend to retain our small Monrovia, California circuit board manufacturing facility primarily as a captive supplier of circuit boards to XET Corporation's Digitran Division. Effective August 1, 2000, we acquired the assets and business operations of T-Com, LLC, or T-Com, a telecommunications test instrument manufacturer located in Sunnyvale, California. T-Com produced central office equipment, which is equipment that is typically employed in switching and network operating centers. Through our three direct wholly-owned operating subsidiaries, XET Corporation, CXR Telcom Corporation, or CXR Telcom, and CXR, S.A., and through the divisions and subsidiaries of our subsidiaries, we presently design, manufacture, assemble, and market products and services in the following two material business segments: o Telecommunications -- Telecommunications Test Instruments (analog and digital test instruments used in the installation, maintenance, management and optimization of public and private communication networks) -- Transmission and Network Access Products (range of products for accessing public and private networks for the transmission of data, voice and video) o Electronic Components (digital switches and electronic power supplies) Our sales are primarily in North America, Europe and Asia. In the first three quarters of 2001, approximately 55% of our sales were to customers in the telecommunications industry, and the remainder of our sales were to aerospace, military contractors and industrial customers. Revenues are recorded when products are shipped if shipped FOB shipping point or when received by the customer if shipped FOB destination. 11 RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total net sales:
THREE MONTHS ENDED SEPTEMBER 30, --------------------- 2001 2000 --------- --------- Net sales ........................................... 100.0% 100.0% Cost of sales ....................................... 60.7 44.8 --------- --------- Gross profit ........................................ 39.3 55.2 Selling, general and administrative expenses ........ 38.8 35.4 Engineering and product development expenses ........ 3.7 4.0 --------- --------- Operating income .................................... (3.2) 15.8 Interest expense .................................... (1.8) (1.8) Other expense ....................................... 0.6 2.5 --------- --------- Income from continuing operations before income taxes (4.4) 16.5 Income taxes ........................................ -- -- --------- --------- Income from continuing operations ................... (4.4) 16.5 Loss from discontinued operations ................... -- (1.0) --------- --------- Gain (loss) on disposal of discontinued segment ..... -- (9.2) --------- --------- Net income .......................................... (4.4)% 6.3% --------- =========
CONTINUING OPERATIONS NET SALES. Net sales for the three months ended September 30, 2001 decreased by $526,000 (7.7%) to $6,345,000, as compared to $6,871,000 for the three months ended September 30, 2000. Net sales of our telecommunications products for the three months ended September 30, 2001 remained approximately unchanged at $3,483,000, as compared to $3,487,000 for the comparable period in 2000. Net sales of our U.S.-based telecom operation of CXR Telcom for the three months ended September 30, 2001 decreased by $443,000 (21.2%) to $1,643,000, as compared to $2,086,000 for the comparable period in 2000. This decrease was partially due to a $423,000 reduction in net sales of our CXR HALCYON 704 series test equipment and a $474,000 reduction in sales of T-Com central office test equipment. These reductions were partially offset by a $309,000 increase in net U.S. sales of our transmission products and a $146,000 increase in service and other revenues. Net sales of our French subsidiary, CXR, S.A., for the three months ended September 30, 2001 increased by $439,000 (31.3%) to $1,840,000 as compared to $1,401,000 for the comparable prior year period. This increase was primarily due to a $364,000 increase in net sales of transmission equipment and a $148,000 increase in net sales of test equipment. These increases were offset with a $73,000 reduction in net sales for the Networking Division due to its closure. Net sales of electronic components for the three months ended September 30, 2001 decreased by $522,000 (15.5%) to $2,862,000, as compared to $3,384,000 for the comparable period in 2000. The decrease primarily was due to a decline in sales of electronic switches by the Digitran Division of our subsidiary, XET Corporation, in Rancho Cucamonga, California. The Digitran Division's net sales decreased $842,000 (44.7%) to $1,040,000 in the three months ended September 30, 12 2001 from $1,882,000 in the prior year period. The decrease was due to the completion of the BAE Systems order earlier this year, which order contributed $504,000 to sales in the third quarter of 2000. This decrease was offset by a $245,000 (19.9%) increase in net sales of power supplies of our U.K. subsidiary, XCEL Corporation, Ltd., or XCL, as measured in U.S. dollars, which net sales increased from $1,229,000 for the three months ended September 30, 2000 to $1,474,000 for the three months ended September 30, 2001. In addition, our Japanese subsidiary, XCEL Japan Ltd., or XJL, increased its sales by $86,000 (36.4%) to $322,000 for the three months ended September 30, 2001 from $236,000 for the comparable period in 2000. GROSS PROFIT. Gross profit as a percentage of total net sales decreased to 39.3% for the three months ended September 30, 2001, as compared to 55.2% for the comparable period in 2000. In dollar terms, total gross profit decreased by $1,299,000 (34.3%) to $2,492,000 for the three months ended September 30, 2001, as compared to $3,791,000 for the comparable period in 2000. Gross profit for our telecommunications segment decreased in dollar terms by $465,000 (24.2%) to $1,459,000 for the three months ended September 30, 2001, as compared to $1,924,000 for the comparable period in 2000, and decreased as a percentage of net sales from 55.2% in 2000 to 41.9% in 2001. The decrease in gross profit as a percentage of net sales was due primarily to the decrease in sales of telecommunication test instruments which increased per unit costs. In addition, sales of transmissions products increased, which products generally carry a lower gross profit margin than test equipment. Gross profit for our electronic components segment decreased in dollar terms by $834,000 (44.7%) to $1,033,000 for the three months ended September 30, 2001, as compared to $1,867,000 for the comparable period in 2000, and decreased as a percentage of related net sales from 55.2% in 2000 to 36.1% in 2001. This percentage decrease was primarily the result of the completion of the BAE Systems order that provided a substantial contribution to gross margin in the third and fourth quarters of 2000 but was completed in the first quarter of 2001 so that there was no contribution from this contract in the current quarter. The decrease was offset by improved gross margins at XCL in the U.K. as a result of an increase in sales of custom military power supply units, or PSUs, in relation to the PSUs sold in the commercial market. For the quarter ended September 30, 2001, custom PSU sales increased to 74.5% of the total PSUs sold, as compared to 61.5% in the three-month period ended September 30, 2000. The custom military PSUs carry higher margins than the commercial PSUs. XCL's gross margin improved from 28.1% of net sales in the third quarter of 2000 to 30.4% of net sales in the current three-month period. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased slightly by $26,000 (0.1%) to $2,457,000 for the three-month period ended September 30, 2001, as compared to $2,431,000 for the comparable period in 2000. These expenses included approximately $156,000 of legal and accounting expenses for non-routine SEC filings in the three-month period ended September 30, 2001. However, this is the last quarter in which we expect to incur such expenses. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our telecommunications segment. These expenses decreased by $42,000 (15.2%) to $235,000 for the three months ended September 30, 2001, as compared to $277,000 for the comparable prior year period. The decrease primarily was due to the closure of our St. Charles, Illinois engineering facility and the layoff of four engineers. Engineering functions have been transferred to the Fremont, California facility. 13 OTHER INCOME AND EXPENSE. Interest expense decreased to $113,000 for the three months ended September 30, 2001, from $126,000 in the comparable period in 2000 due to lower debt balances. Other income of $33,000 in the third quarter of 2001 declined from $177,000 in the third quarter of 2000 primarily because we recorded a $197,000 gain on the sale of Wi-LAN, Inc. common stock in the three months ended September 30, 2000. NET INCOME OR LOSS. Net loss for the three months ended September 30, 2001 was $281,000 as compared to net income from continuing operations of $1,132,000 for the prior year period. The current period loss included expenses of approximately $156,000 for non-routine SEC filings and $72,000 in severance pay related to staff reductions. The net income of the prior year period included a $197,000 gain from the sale of Wi-LAN, Inc. common stock and a $116,000 gain related to the settlement of a warranty claim from the sale of our former subsidiary, HyComp, Inc. DISCONTINUED OPERATIONS As a result of our decision to discontinue our last remaining material circuits subsidiary in October 2000, our circuits segment has been accounted for as discontinued operations. We reported a net loss from discontinued operations of $702,000 for the three months ended September 30, 2000. Net sales, gross profit and selling, general and administrative expenses for our circuits business for the three months ended September 30, 2000 were $690,000, $51,000 and $147,000, respectively. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total net sales:
NINE MONTHS ENDED SEPTEMBER 30, 2001 2000 -------- -------- Net sales.............................................. 100.0% 100.0% Cost of sales.......................................... 57.1 54.4 -------- -------- Gross profit........................................... 42.9 45.6 Selling, general and administrative expenses........... 38.0 34.9 Engineering and product development expenses........... 4.3 4.0 -------- -------- Operating income....................................... 0.6 6.7 Interest expense....................................... (1.5) (1.7) Other income........................................... 0.3 2.0 -------- -------- Income from continuing operations before income taxes.. (0.6) 7.0 Income taxes........................................... -- -- -------- -------- Income from continuing operations...................... (0.6) 7.0 Loss from discontinued operations...................... -- (1.1) Gain (loss) on disposal of discontinued segment........ -- (3.3) -------- -------- Net income............................................. (0.6)% 2.6% ======== ========
14 CONTINUING OPERATIONS NET SALES. Net sales for the nine months ended September 30, 2001 increased by $1,334,000 (6.8%) to $20,893,000, as compared to $19,559,000 for the nine months ended September 30, 2000. Net sales of our telecommunications products for the nine months ended September 30, 2001 increased by $771,000 (7.2%) to $11,451,000, as compared to $10,680,000 for the comparable period in 2000. Net sales of our U.S.-based telecom operation of CXR Telcom for the nine months ended September 30, 2001 increased by $590,000 (12.3%) to $5,384,000, as compared to $4,794,000 for the comparable period in 2000. This increase was mainly due to a $203,000 increase in service revenues and a $187,000 increase in net sales of T-Com, LLC products that were acquired effective August 2000 with the acquisition of T-Com. CXR Telcom sales of CXR HALCYON 704 series test equipment increased by $150,000 (4.9)% in the first three quarters of 2001 as compared to the comparable prior year period. Net sales of our transmission and original equipment manufactured test instruments by CXR, S.A. for the nine months ended September 30, 2001 increased by $181,000 (3.1%) to $6,067,000, as compared to $5,886,000 for the comparable prior year period. This increase would have been 7.9% if not for the decline in the value of the French Franc in relation to the value of the U.S. dollar in the nine months ended September 30, 2001 as compared to their relative values for the nine months ended September 30, 2000. The major reasons for the increase in CXR, S.A.'s sale were a $719,000 increase in net sales of transmission equipment and a $248,000 increase in net sales of test equipment. These increases were partially offset by a $783,000 reduction of networking products sales due to the closure of the Networking Division last year. Net sales of our electronic components for the nine months ended September 30, 2001 increased by $563,000 (6.3%) to $9,442,000, as compared to $8,879,000 for the comparable period in 2000, primarily due to a $899,000 increase in sales of XCL, our U.K. subsidiary. This increase in net sales was primarily due to an increase in deliveries of outstanding contracts of power supplies. Also contributing to the increase in sales of our electronic components segment was XJL, our Japanese subsidiary, which increased its sales in the nine months ended September 30, 2001 by $118,000 (17.2%) to $803,000, as compared to $685,000 for the comparable prior year period. This increase was offset by a $430,000 decrease in XET's sales primarily due to a decline in shipments of digital switches under its contract with BAE Systems, Canada due to the completion of that contract in the first quarter of this year. GROSS PROFIT. Gross profit as a percentage of total net sales decreased to 42.9% for the nine months ended September 30, 2001, as compared to 45.6% for the comparable period in 2000. In dollar terms, total gross profit increased slightly by $45,000 (0.5%) to $8,958,000 for the nine months ended September 30, 2001, as compared to $8,913,000 for the comparable period in 2000. Gross profit for our telecommunications segment increased in dollar terms by $171,000 (3.6%) to $4,936,000 for the nine months ended September 30, 2001, as compared to $4,765,000 for the comparable period in 2000, and decreased as a percentage of net sales from 44.6% in 2000 to 43.1% in 2001. Gross profit for our electronic components segment decreased in dollar terms by $126,000 (3.0%) to $4,022,000 for the nine months ended September 30, 2001, as compared to $4,148,000 for the comparable period in 2000, and decreased as a percentage of related net sales from 46.7% in 2000 to 42.6% in 2001. This decrease was primarily the result of the completion of the BAE Systems, Canada contract in the first quarter of this year, which contract had provided for sales of higher margin products and contributed to higher sales in the prior 15 year and the first quarter of this year at XET's Digitran Division in Rancho Cucamonga, California. This decrease was partially offset by the improved profit margins in connection with higher production volumes and a higher margin product mix at XCL in the U.K., which contributed to a $564,000 increase in gross profit. Also, XJL's gross profit margin increased by $44,000. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $1,117,000 (16.4%) to $7,943,000 for the nine-month period ended September 30, 2001, as compared to $6,826,000 for the comparable period in 2000. The increase was primarily due to increases of $705,000 in legal and accounting fees, $107,000 of compensation expenses, and $296,000 of administrative expenses at CXR Telcom due to the consolidation of the business acquired with the acquisition of T-Com, LLC. The legal and accounting fees in the first three quarters of 2001 include approximately $608,000 incurred in connection with non-routine Securities and Exchange Commission filings. However, we do not expect to incur any further such expenses. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our telecommunications segment. These expenses increased by $124,000 (16.0%) to $897,000 for the nine months ended September 30, 2001, as compared to $773,000 for the comparable prior year period, reflecting new product development activities. This increase primarily was due to the addition of engineering staff during the earlier part of the year which was partially offset by layoffs in August 2001 and the closure of the St. Charles, Illinois engineering facility. OTHER INCOME AND EXPENSE. Interest expense decreased to $311,000 for the nine months ended September 30, 2001 from $321,000 in the comparable period in 2000. Other income of $83,000 in the first three quarters of 2001 declined from $381,000 in the first three quarters of 2000 primarily because in the nine-month period ended September 30, 2000 we recorded a $197,000 gain on the sale of stock of Wi-LAN, Inc. and the reversal of a warranty reserve of $116,000 for a warranty settlement related to sales made by the Company's former subsidiary, HyComp, Inc., which was sold in April 1999. NET INCOME OR LOSS. Net loss for the nine months ended September 30, 2001 was $120,000 as compared to net income from continuing operations of $1,362,000 for the prior year period. The current nine-month period loss included expenses of approximately $608,000 for non-routine SEC filings and $72,000 in severance pay related to staff reductions. The net income of the prior year period included a $197,000 gain from the sale of Wi-LAN, Inc. common stock. DISCONTINUED OPERATIONS As a result of our decision to discontinue our last remaining material circuits subsidiary in October 2000, our circuits segment has been accounted for as discontinued operations. We reported a net loss from discontinued operations of $853,000 for the nine months ended September 30, 2000. Net sales, gross profit and selling, general and administrative expenses for our circuits business for the nine months ended September 30, 2000 were $2,088,000, $166,000 and $454,000, respectively. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 2001, we funded our operations primarily through revenue generated from our operations and through our line of credit with Wells Fargo Business Credit, Inc. As of September 30, 2001, we had working capital of $3,120,000, up 12.2% from working capital of 16 $2,780,000 as of December 31, 2000, an accumulated deficit of $18,903,000 and an accumulated other comprehensive loss of $827,000. As of September 30, 2001, we had $437,000 in cash and cash equivalents and $5,631,000 of accounts receivable. As of December 31, 2000, we had an accumulated deficit of $18,775,000, $756,000 in cash and cash equivalents and $7,440,000 of accounts receivable. Cash provided by our operating activities totaled $541,000 for the nine months ended September 30, 2001. Cash used by operations for the nine months ended September 30, 2000 was $646,000. This increase in cash provided by operations during the nine months ended September 30, 2001 resulted primarily from collection of accounts receivable, offset by increase in inventory and payments of accounts payable. Cash used in our investing activities totaled $7,000 for the nine months ended September 30, 2001 as compared to cash provided by our investing activities of $791,000 for the nine months ended September 30, 2000. We are currently installing an enterprise resource planning system software that we acquired under a capital lease in order to improve efficiencies. Included in the 2000 results are $520,000 from the sale of shares of common stock we held in Digital Transmission Systems, Inc. and $918,000 from the sale of shares of common stock we held in Wi-LAN, Inc. and usages of $592,000 and $83,000 for the purchases of the Belix Ltd. companies in the U.K. and T-Com, respectively. Cash used in financing activities totaled by $772,000 for the nine months ended September 30, 2001, as compared to cash provided by financing activities of $418,000 for the nine months ended September 30, 2000, primarily due to our payments against our bank debt, which reduced the balances of our notes payable. On June 23, 2000, our credit facility with our previous lender, Congress Financial Corporation, or Congress Financial, expired while we were out of compliance with the adjusted net worth covenant of this facility. Congress Financial extended this facility through August 14, 2000. On August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting as guarantor, obtained a credit facility from Wells Fargo Business Credit, Inc. This facility provides for a revolving loan of up to $3,000,000 secured by our inventory and accounts receivable and a term loan in the amount of $687,000 secured by our machinery and equipment. As a condition of extending this credit facility to our subsidiaries, Wells Fargo Business Credit, Inc. required our President and Chief Executive Officer, Carmine Oliva, to personally guaranty a portion of our indebtedness under the facility. On January 26, 2001, Mr. Oliva was released from this guaranty. The initial annual interest rate on both portions of the credit facility was the prime rate plus 2%. The facility contains a performance-based interest reduction feature. Based upon our 2000 financial performance, we obtained a reduction in the interest rate to the prime rate plus 1% effective April 1, 2001. The loan, however, requires a minimum interest charge of $13,500 per month. The balance outstanding under this credit facility was $1,128,000 on September 30, 2001. There was $281,000 of additional borrowings available as of September 30, 2001. The credit facility expires on August 16, 2003. Our foreign subsidiaries have obtained credit facilities with Lloyds Bank in England, Banc National du Paris, Societe General and Banque Hervet in France and Johan Tokyo Credit Bank in Japan. The balances outstanding under our U.K., France and Japan credit facilities were $731,000, $645,000, and $0, respectively, on September 30, 2001. Our backlog is substantial and has increased to $14,542,000 as of September 30, 2001, an increase of 16.3%, as compared to $12,500,000 as of December 31, 2000. Our backlog as of September 30, 2001 is related approximately 95% to our electronic components business, which business tends to provide us with long lead times for our manufacturing processes due to the custom nature of the products, and 5% to our telecommunications business, which business tends to 17 deliver standard products from stock as orders are received. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog. We believe that current and future available capital resources, revenues generated from operations, and other existing sources of liquidity, including the credit facilities we and our subsidiaries have with Wells Fargo Business Credit, Inc., Lloyds Bank in England, and Banc National du Paris and Banque Hervet in France, will be adequate to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. If, however, our capital requirements or cash flow vary materially from our current projections or if unforeseen circumstances occur, we may require additional financing. Deteriorating global economic conditions and the effects of ongoing military actions against terrorists may cause prolonged declines in investor confidence in and accessibility to capital markets. Our failure to raise capital, if needed, could restrict our growth, limit our development of new products or hinder our ability to compete. LEGAL PROCEEDINGS There are no material legal proceedings pending against us (see Note 5 to the Consolidated Condensed Financial Statements included elsewhere in this report). EFFECTS OF INFLATION The impact of inflation and changing prices has not been significant on the financial condition or results of operations of either us or our operating subsidiaries. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board, or FASB, finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No. 142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that we recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires upon adoption of SFAS 142 that we reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that we identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires us to complete a transitional goodwill impairment test six months from the date of adoption. We are also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. 18 Our previous business combinations were accounted for using the purchase method. As of September 30, 2001, the net carrying amount of goodwill was $2,643,000. Amortization expense during the nine-month period ended September 30, 2001 was $303,000. Currently, we are assessing but have not yet determined how the adoption of SFAS 141 and SFAS 142 will impact our financial position and results of operations. In October 2001, the FASB issued FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," or SFAS 144. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. EURO CONVERSION Our operating subsidiaries located in France and the United Kingdom have combined net sales from operations approximating 51% of our total net sales for the nine months ended September 30, 2001. Net sales from the French subsidiary participating in the Euro conversion were 29% of our net sales for the nine months ended September 30, 2001. We continue to review the impact of the Euro conversion on our operations. Our European operations took steps to ensure their capability of entering into Euro transactions. No material changes to information technology and other systems are necessary to accommodate these multiple currency transactions because such systems already were capable of using multiple currencies. While it is difficult to assess the competitive impact of the Euro conversion on our European operations, at this time we do not foresee any material impediments to our ability to compete for orders from customers requesting pricing using the new exchange rate. Since we have no significant direct sales between our United States and European operations, we regard exchange rate risk as nominal. RISK FACTORS An investment in our common stock involves a high degree of risk. You should consider, among other things, the following factors carefully before deciding to purchase or hold any shares of our common stock. WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT THAT MAY CONTINUE IN THE FUTURE AND THAT MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS. We incurred significant net operating losses in the year ended December 31, 1999 and recorded a net operating profit in the year ended December 31, 2000. We realized a net loss of approximately $4.6 million for the twelve months ended December 31, 1999. For the twelve months ended December 31, 2000, we recorded net income of $1.0 million. For the nine months ended September 30, 2001, we recorded a net loss of $120,000. Our accumulated deficit and accumulated other comprehensive loss through September 30, 2001 were approximately $18,903,000 and $827,000, respectively, and as of that date we had a total stockholders' equity of approximately $5,593,000. There is no assurance that we will attain or continue to maintain profitable operations in the future. If we are unable to do so, there may be a material adverse effect on our cash flows, which could cause us to violate covenants under our credit facility and could impede our ability to raise capital through debt or equity financing to 19 the extent we may need it for our continued operations or for planned expansion. Consequently, future losses may have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT FOREIGN CURRENCY THAT MUST BE CONVERTED INTO UNITED STATES DOLLARS FOR INCLUSION IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT, EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF OPERATIONS. We have established and acquired international subsidiaries that prepare their balance sheets in the relevant foreign currency. In order to be included in our consolidated financial statements, these balance sheets are converted, at the then current exchange rate, into United States dollars, and the statements of operations are converted using weighted average exchange rates for the applicable period. Accordingly, fluctuations of the foreign currencies relative to the United States dollar could have an effect on our consolidated financial statements. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. Sales of our products and services to customers located outside of the United States accounted for approximately 53% of our net sales for the year ended December 31, 2000 and approximately 54% of our net sales for the nine months ended September 30, 2001. We currently anticipate that foreign sales will account for a similar proportion of our net sales for the year ended December 31, 2001. However, because historically the majority of our currency exposure has related to financial statement translation rather than to particular transactions, we do not intend to enter into, nor have we historically entered into, forward currency contracts or hedging arrangements in an effort to mitigate our currency exposure. MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US. IN ORDER TO COMPETE SUCCESSFULLY, WE MUST KEEP PACE WITH OUR COMPETITORS IN ANTICIPATING AND RESPONDING TO THE RAPID CHANGES INVOLVING THE ELECTRONIC COMPONENTS AND TELECOMMUNICATIONS INDUSTRIES. Our future success will depend upon our ability to enhance our current products and services and to develop and introduce new products and services that keep pace with technological developments, respond to the growth in the telecommunications and electronic components markets in which we compete, encompass evolving customer requirements, provide a broad range of products and achieve market acceptance of our products. Many of our existing and potential competitors have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than we do. Our lack of resources relative to our competitors may cause us to fail to anticipate or respond adequately to technological developments and customer requirements or to experience significant delays in developing or introducing new products and services. These failures or delays could cause us to reduce our competitiveness, revenues, profit margins or market share. OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT OUR BUSINESS IF DEMAND IS REDUCED. During the year ended December 31, 2000 and the nine months ended September 30, 2001, the sale of telecommunications equipment and related services accounted for approximately 56% and 55%, respectively, of our total sales, and the sale of electronic components accounted for approximately 44% and 45%, respectively, of our total sales. In many cases we have long-term contracts with our telecommunications and electronic components customers that cover the general terms and conditions of our relationships with them but that do not include long-term purchase orders or commitments. Rather, our customers issue purchase orders requesting the quantities of telecommunications equipment they desire to purchase from us, and if we are able and willing to fill those orders, 20 then we fill them under the terms of the contracts. Accordingly, we cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of a reduced demand for our products that could result from a general economic downturn, from changes in the telecommunications and electronic components industries, including the entry of new competitors into the market, from the introduction by others of new or improved technology, from an unanticipated shift in the needs of our customers, or from other causes. IF WE ARE UNABLE TO FULFILL BACKLOG ORDERS DUE TO CIRCUMSTANCES INVOLVING US OR ONE OR MORE OF OUR SUPPLIERS OR CUSTOMERS, OUR ANTICIPATED RESULTS OF OPERATIONS AND CASH FLOWS WILL SUFFER. As of September 30, 2001, we had approximately $14,542,000 in backlog orders for our products, which orders were due in large part to the long lead times associated with our electronic components products. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. However, there can be no assurance that we will be successful in fulfilling orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog. OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR PRODUCTS FROM OUTSIDE SUPPLIERS. The major components of our products include circuit boards, microprocessors, chipsets and memory components. Most of these components are available from multiple sources. However, we currently obtain some components used in our products from single or limited sources. Some modem chipsets used in our data communications products have been in short supply and are frequently on allocation by semiconductor manufacturers. We have, from time to time, experienced difficulty in obtaining some components. We do not have guaranteed supply arrangements with any of our suppliers, and there can be no assurance that our suppliers will continue to meet our requirements. Further, disruption in transportation services as a result of the terrorist attacks in the United States on September 11, 2001 and further enhanced security measures in response to the attacks may cause some increases in costs and timing for both our receipt of components and shipment of products to our customers. If our existing suppliers are unable to meet our requirements, we could be required to alter product designs to use alternative components or, if alterations are not feasible, we could be required to eliminate products from our product line. Shortages of components could not only limit our product line and production capacity but also could result in higher costs due to the higher costs of components in short supply or the need to use higher cost substitute components. Significant increases in the prices of components could have a material adverse effect on our results of operations because our products compete on price, and therefore we may not be able to adjust product pricing to reflect the increases in component costs. Also, an extended interruption in the supply of components or a reduction in their quality or reliability would have a material adverse effect on our financial condition and results of operations by impairing our ability to timely deliver quality products to our customers. Delays in deliveries due to shortages of components or other factors may result in cancellation by our customers of all or part of their orders. Although customers who purchase products from us, such as many of our digital switches, that are not readily available from other sources would be less likely than other customers of ours to cancel their orders due to production delays, we cannot assure you that cancellations will not occur. 21 IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR COMPLETE STRATEGIC ACQUISITIONS, OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER. Our business strategy includes growth through acquisitions that we believe will improve our competitive capabilities or provide additional market penetration or business opportunities in areas that are consistent with our business plan. Identifying and pursuing strategic acquisition opportunities and integrating acquired products and businesses requires a significant amount of management time and skill. Acquisitions may also require us to issue equity securities that could result in dilution to existing stockholders and to expend a substantial amount of cash or other resources, not only as a result of the direct expenses involved in the acquisition transaction but also as a result of ongoing research and development activities that may be required to maintain or enhance the long-term competitiveness of acquired products, particularly those products marketed to the rapidly evolving telecommunications industry. If we are unable to complete strategic acquisitions due to our inability to identify appropriate targets, to raise the necessary funds, particularly while our stock price is low, or to manage the difficulties or costs involved in the acquisitions, our long-term competitive positioning could suffer. WE RELY HEAVILY ON OUR MANAGEMENT, AND THE LOSS OF THEIR SERVICES COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS. Our success is highly dependent upon the continued services of key members of our management, including our Chairman of the Board, President and Chief Executive Officer, Carmine T. Oliva, and our Executive Vice President, Graham Jefferies. Mr. Oliva co-founded XET Corporation and has developed personal contacts and other skills that we rely upon in connection with our financing, acquisition and general business strategies. Mr. Jefferies is a long-time employee of MicroTel who we have relied upon in connection with our United Kingdom acquisitions and who fulfills significant operational responsibilities in connection with our foreign and domestic operations. Consequently, the loss of Mr. Oliva, Mr. Jefferies or one or more other key members of management could have a material adverse effect on us. Although we have entered into employment agreements with several key employees, we have not entered into any employment agreement with any of our executive officers other than with Mr. Oliva, Mr. Jefferies and our Senior Vice President and Chief Financial Officer, Randolph Foote. We maintain key-man life insurance on Mr. Oliva and Mr. Jefferies. However, we cannot assure you that we will be able to maintain this insurance in effect or that the coverage will be sufficient to compensate us for the loss of the services of Mr. Oliva or Mr. Jefferies. THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO FLUCTUATE OR DECLINE. Our quarterly operating results have varied significantly in the past and will likely continue to do so in the future due to a variety of factors, many of which are beyond our control. Fluctuations in our operating results may result from a variety of factors. For example, changes affecting the telecommunications industry, including consolidations and restructuring of United States and foreign telephone companies, can cause our sales to decrease or increase. Our sales may increase if we obtain new customers as a result of the consolidations or restructurings. However, our sales may decrease, either temporarily to the extent we have difficulty collecting monies due from our customers who are in the process of reorganizing, or permanently to the extent our customers are acquired by or combined with companies that are and choose to remain customers of our competitors. 22 In addition, the cyclical nature of the telecommunications business due to the budgetary cycle of the regional Bell operating companies, or RBOCs, has had and will continue to have for the foreseeable future a significant impact on our quarterly operating results. RBOCs generally obtain approval for their annual budgets during the first quarter of each calendar year. If an RBOC's annual budget is not approved early in the calendar year or is insufficient to cover its desired purchases for the entire calendar year, we are unable to sell products to the RBOC during the period of the delay or shortfall. Due to these factors and other factors, including changes in general economic conditions, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful in predicting future performance. If our operating results do not meet the expectations of investors, our stock price may fluctuate or decline. BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS, MISAPPROPRIATION OF THESE RIGHTS COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION. Our future success will be highly dependent on proprietary technology, particularly in our telecommunications business. However, we do not hold any patents and we currently rely on a combination of contractual rights, copyrights, trademarks and trade secrets to protect our proprietary rights. Our management believes that because of the rapid pace of technological change in the industries in which we operate, the legal intellectual property protection for our products is a less significant factor in our success than the knowledge, abilities and experience of our employees, the frequency of our product enhancements, the effectiveness of our marketing activities and the timeliness and quality of our support services. Consequently, we rely to a great extent on trade secret protection for much of our technology. However, there can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors or customers will not independently develop comparable or superior technologies or obtain unauthorized access to our proprietary technology. Our financial condition would be adversely impacted if we were to lose our competitive position due to our inability to adequately protect our proprietary rights as our technology evolves. BECAUSE WE MAY HAVE INADVERTENTLY FAILED TO COMPLY WITH THE FEDERAL TENDER OFFER RULES, WE COULD FACE SIGNIFICANT LIABILITIES WHICH, IN TURN, COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION. During 1998 and 1999 we modified the terms of some of our outstanding warrants and the terms of our Series A Preferred Stock. These transactions may have been subject to the federal tender offer rules which would have required us to make filings with the Securities and Exchange Commission and to conduct our activities in a manner prescribed by the tender offer rules. We did not make any of these filings nor did we comply with the other requirements of the tender offer rules. Although we believe that our activities surrounding the modifications to our warrants and Series A Preferred Stock are not subject to the federal tender offer rules, the Securities and Exchange Commission, as well as those security holders who participated in the modification transactions, may disagree with us. If that were to happen, we may be subject to fines by the Securities and Exchange Commission and may be required by the Securities and Exchange Commission and/or the security holders to rescind the transactions. The dollar amount of any fines and the costs associated with rescission, including the related legal and accounting costs, are difficult for us to quantify, yet they could be significant. If they are significant, our financial condition would be adversely impacted. IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE COULD FACE SIGNIFICANT LIABILITIES. We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used in our circuit board manufacturing processes. Any failure to comply with present and 23 future regulations could subject us to future liabilities or the suspension of production. These regulations could also require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. We may also from time to time be subject to lawsuits with respect to environmental matters. The extent of our liability under any suit is not determinable and may have a material adverse effect on us. IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING GOVERNMENT AND INDUSTRY STANDARDS AND REGULATIONS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS. We design our products to comply with a significant number of industry standards and regulations, some of which are evolving as new technologies are deployed. In the United States, our telecommunications products must comply with various regulations defined by the United States Federal Communications Commission, or FCC, and Underwriters Laboratories as well as industry standards established by Telcordia Technologies, Inc., formerly Bellcore, and the American National Standards Institute. Internationally, our telecommunications products must comply with standards established by the European Committee for Electrotechnical Standardization, the European Committee for Standardization, the European Telecommunications Standards Institute, telecommunications authorities in various countries as well as with recommendations of the International Telecommunications Union. The failure of our products to comply, or delays in compliance, with the various existing and evolving standards could negatively impact our ability to sell our products. THE LIMITATION ON OUR USE OF NET OPERATING LOSS CARRYFORWARDS MAY NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS AND CASH FLOWS. We have substantial net operating loss, or NOL, carryforwards for federal and state tax purposes. Because of our ownership changes resulting from a merger in 1997, our use of these NOL carryforwards to offset future taxable income will be limited. To the extent we are unable to fully use these NOL carryforwards to offset future taxable income, we will be subject to income taxes on future taxable income, which will negatively impact our results of operations and cash flows. OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK. The market prices of securities of technology-based companies, especially telecommunications electronics companies, currently are highly volatile. The market price of our common stock has fluctuated significantly in the past. The market price of our common stock may continue to exhibit significant fluctuations in response to the following factors, many of which are beyond our control: o variations in our quarterly operating results; o changes in market valuations of similar companies and stock market price and volume fluctuations generally; o economic conditions specific to the telecommunications electronics industry; o announcements by us or our competitors of new or enhanced products, technologies or services or significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments; o regulatory developments; o additions or departures of key personnel; and o future sales of our common stock or other securities. 24 The price at which you purchase shares of common stock may not be indicative of the price of our stock that will prevail in the trading market. You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you. Moreover, in the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITIES IN OUR STOCK MAY BE REDUCED. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on Nasdaq). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell these securities to persons other than established customers and "accredited investors" must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares. WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT BE AVAILABLE TO US ON ACCEPTABLE TERMS OR AT ALL. IF WE OBTAIN FINANCING THROUGH THE ISSUANCE OF EQUITY SECURITIES, FURTHER DILUTION TO EXISTING STOCKHOLDERS MAY RESULT. WE MAY BE REQUIRED TO OBTAIN FINANCING THROUGH ARRANGEMENTS THAT MAY REQUIRE US TO RELINQUISH RIGHTS OR CONTROL TO SOME OF OUR PROPRIETARY TECHNOLOGIES. Our future capital requirements will depend upon many factors, including the magnitude of our sales and marketing efforts, the development of new products and services, possible future strategic acquisitions, the progress of our research and development efforts and the status of competitive products and services. We believe that current and future available capital resources will be adequate to fund our operations for the foreseeable future. However, to the extent we are in need of any additional financing, there can be no assurance that any additional financing will be available to us on acceptable terms, or at all. Deteriorating global economic conditions and the effects of ongoing military actions against terrorists may cause prolonged declines in investor confidence in and accessibility to capital markets. If we raise additional funds by issuing equity securities, further dilution to the existing stockholders may result. If adequate funds are not available, we may be required to delay, scale back or eliminate portions of our operations and product development and marketing efforts or to obtain funds through arrangements with partners or others that may require us to relinquish rights to some of our technologies or potential products, services or other assets. Accordingly, the inability to obtain financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect our ability to fund our continued operations and our product development and marketing efforts that historically have contributed significantly to our competitiveness. 25 SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC SALE COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO RAISE ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES. As of November 9, 2001, we had outstanding 20,670,703 shares of common stock, 20,570,703 of which shares were either unrestricted, registered for resale under the Securities Act of 1933, or eligible for resale without registration under Rule 144 of the Securities Act of 1933. As of November 9, 2001, we also had outstanding options, warrants and preferred stock that were exercisable for or convertible into 6,314,930 shares of common stock. Of these, 1,594,924 shares of common stock underlying options, 1,956,756 shares of common stock underlying warrants and 2,763,250 shares of common stock underlying preferred stock were registered for resale. Sales of a substantial number of shares of our common stock in the public market, or the perception that sales could occur, could adversely affect the market price for our common stock. Any adverse effect on the market price for our common stock could make it difficult for us to sell equity securities at a time and at a price that we deem appropriate. BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK. Until May 12, 1999, our common stock was quoted on the Nasdaq SmallCap Market. We were unable to maintain the minimum bid price of $1.00 per share and our stock was delisted from that market. Since May 13, 1999, our common stock has been traded under the symbol "MCTL" on the NASD's OTC Bulletin Board. Because our stock trades on the OTC Bulletin Board rather than on a national securities exchange, you may find it difficult to either dispose of, or to obtain quotations as to the price of, our common stock. OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF MICROTEL, POSSIBLY PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR SHARES. Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights of those shares, without any further vote or action by our stockholders. Of these shares, 200 have been designated as Series A Preferred, of which 25 are currently outstanding. In addition, 150,000 shares have been designated as Series B Preferred Stock, all of which are currently outstanding. The rights of the holders of our common stock are subject to the rights of the holders of our currently outstanding preferred stock and will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, which would delay, defer or prevent a change in control of MicroTel. Furthermore, preferred stock may have other rights, including economic rights senior to the common stock, and, as a result, the issuance of preferred stock could adversely affect the market value of our common stock. THE ANTI-TAKEOVER EFFECTS OF DELAWARE LAW COULD ADVERSELY AFFECT THE PERFORMANCE OF OUR STOCK. Section 203 of the General Corporation Law of Delaware prohibits us from engaging in business combinations with interested stockholders, as defined by statute. These provisions may have the effect of delaying or preventing a change in control of MicroTel without action by our stockholders, even if a change in control would be beneficial to our stockholders. Consequently, these provisions could adversely affect the price of our common stock. 26 WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF TERRORISM AND THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND THE PUBLIC MAY HAVE ON OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS. The recent terrorist attacks in the United States, which have brought devastation to many people and shaken consumer confidence, have disrupted commerce throughout the world. The continuing threat of terrorism in the United States and other countries and heightened security measures, as well as current and any future military action in response to such threat, may cause significant disruption to the global economy, including widespread recession. To the extent that such disruptions result in a general decrease in spending that could decrease demand for our current and planned products and services, in our inability to effectively market, manufacture or ship our products and services, or in financial or operational difficulties for various vendors on which we rely, our business and results of operations could be materially and adversely affected. We are unable to predict whether the continuing threat of terrorism or the responses to such threat will result in any long-term commercial disruptions or whether such terrorist activities or responses will have any long-term material adverse effect on our business, prospects, financial condition, results of operations and cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have established and acquired international subsidiaries that prepare their balance sheets in the relevant foreign currency. In order to be included in our consolidated financial statements, these balance sheets are converted, at the then current exchange rate, into United States dollars, and the statements of operations are converted using weighted average exchange rates for the applicable period. Accordingly, fluctuations of the foreign currencies relative to the United States dollar could have an effect on our consolidated financial statements. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. However, because historically the majority of our currency exposure has related to financial statement translation rather than to particular transactions, we do not intend to enter into, nor have we historically entered into, forward currency contracts or hedging arrangements in an effort to mitigate our currency exposure. A substantial portion of our notes payable and long-term debt have variable interest rates based on the prime interest rate and/or lender's base rate, which exposes us to risk of earnings loss due to changes in such interest rates. 27 The following table provides information about our domestic and foreign debt obligations that are sensitive to changes in interest rates. All dollars are in thousands. The symbol "P" represents the prime rate. The symbol "B" represents lender's base rate. Balances are as of December 31, 2000.
FAIR VALUE LIABILITIES 2001 2002 2003 2004 2005 THEREAFTER TOTAL 12/31/00 ----------- ---- ---- ---- ---- ---- ---------- ----- -------- Line of Credit $1,798 $1,798 $1,798 (domestic) Average Interest P+ 1% Rate Line of Credit $1,377 $1,377 $1,377 (Foreign) Average Interest B+ 2.5% Rate Term Loan $137 $137 $83 $8 $5 $370 $370 Average Interest P+ 2% P+ 2% P+ 2% P+ 2% P+ 2% Rate
28 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. We are not a party to any material pending legal proceedings. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Recent Sales of Unregistered Securities --------------------------------------- None. Dividends --------- To date we have not paid dividends on our common stock. Our line of credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash dividends on our common stock. The certificates of designations related to our Series A Preferred Stock and Series B Preferred Stock provide that shares of those series of preferred stock are not entitled to receive cash dividends. We currently intend to retain future earnings to fund the development and growth of our business and, therefore, do not anticipate paying cash dividends on our common stock within the foreseeable future. Any future payment of dividends on our common stock will be determined by our board of directors and will depend on our financial condition, results of operations, contractual obligations and other factors deemed relevant by the our board of directors. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM 5. OTHER INFORMATION. None. 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits -------- 10.1 Amended and Restated 2000 Stock Option Plan (#)(1) 10.2 Employment Agreement dated as of July 2, 2001 between MicroTel International, Inc. and Randolph D. Foote (#)(1) 10.3 Employment Agreement dated as of January 1, 2001 between MicroTel International, Inc. and Graham Jefferies (#)(1) 10.4 First Amendment to Credit and Security Agreement dated as of September 29, 2000 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. 10.5 Second Amendment to Credit and Security Agreement dated as of November 29, 2000 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. 10.6 Third Amendment to Credit and Security Agreement dated as of September 20, 2001 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. - ----------- (#) Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit. (1) Incorporated by reference to Post-Effective Amendment No. 1 to the MicroTel International, Inc. Registration Statement on Form S-1 (Registration Statement No. 333-63024). (b) Reports on Form 8-K ------------------- None. 30 SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICROTEL INTERNATIONAL, INC. Dated: November 13, 2001 By: /S/ CARMINE T. OLIVA --------------------------------------------- Carmine T. Oliva, Chairman of the Board, Chief Executive Officer (principal executive officer) and President By: /S/ RANDOLPH D. FOOTE --------------------------------------------- Randolph D. Foote, Chief Financial Officer (principal financial and accounting officer) 31 INDEX TO EXHIBITS Exhibit No. Description ----------- ----------- 10.4 First Amendment to Credit and Security Agreement dated as of September 29, 2000 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. 10.5 Second Amendment to Credit and Security Agreement dated as of November 29, 2000 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. 10.6 Third Amendment to Credit and Security Agreement dated as of September 20, 2001 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. 32 EX-10.4 3 microtel_ex10-4.txt EXHIBIT 10.4 FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of September 29, 2000, is made by and among CXR TELCOM CORPORATION, a Delaware corporation ("CXR") and XIT CORPORATION, a New Jersey corporation ("XIT" and together with CXR, the "Borrowers"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). RECITALS The Borrower and the Lender have entered into a Credit and Security Agreement dated as of August 16, 2000 (the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. CXR now desires to purchase substantially all of the assets of T-Com, LLC, a Delaware limited liability company ("T-Com"), free and clear of liens, in consideration of the issuance by MicroTel to T-Com of 150,000 Series B Convertible Preferred Shares of MicroTel and Warrants exercisable for 250,000 shares of MicroTel common stock, all pursuant to the terms and conditions of that certain Asset Purchase Agreement, effective September 1, 2000, among MicroTel, CXR and T-Com (the "Purchase Agreement"). The Borrower has requested that Lender consent to the Purchase Agreement, which the Lender is willing to do pursuant to the terms and conditions set forth herein. AMENDMENT NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. CONSENT TO THE PURCHASE AGREEMENT. For the purposes of Section 7.7 of the Credit Agreement, Lender hereby consents to the Purchase Agreement and the transactions contemplated thereby. 3. ACCOUNTS AND INVENTORY OF T-COM. The Accounts and Inventory purchased by CXR from T-Com shall be included in the Eligible Accounts and Eligible Inventory of CXR, to the extent (and only to the extent) provided in the definitions of "Eligible Accounts" and "Eligible Inventory" in Section 1.1 of Credit Agreement, subject to the satisfaction of each of the following conditions: (a) Lender shall have completed its audit of T-Com with results satisfactory to Lender; and (b) CXR shall have purchased the assets of T-Com, free and clear of liens, in accordance with the Purchase Agreement, and Lender shall have received such documents as it may require to evidence such purchase. 4. NO OTHER CHANGES. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any Advance thereunder. 5. AMENDMENT FEE. The Borrowers shall pay the Lender as of the date hereof a fully earned, non-refundable fee in the amount of $5,000 in consideration of the Lender's execution of this Amendment. 6. CONDITIONS PRECEDENT. This Amendment shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The Acknowledgment and Agreement of Guarantors set forth at the end of this Amendment, duly executed by each Guarantor; (b) Payment of the fee described in Paragraph 5 hereof; and (c) Such other matters as the Lender may require. 7. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and warrant to the Lender as follows: (a) The Borrowers have all requisite power and authority to execute this Amendment and to perform all of their obligations hereunder, and this Amendment has been duly executed and delivered by the Borrowers and constitutes the legal, valid and binding obligation of the Borrowers, enforceable in accordance with its terms; (b) The execution, delivery and performance by the Borrowers of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrowers, or the articles of incorporation or by-laws of the Borrowers, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which it or its properties may be bound or affected; and (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 8. REFERENCES. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby, and any and all references in the other Loan Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 9. NO WAIVER. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 2 10. RELEASE. Each Borrower, hereby, and each Guarantor by signing the Acknowledgment and Agreement of Guarantors set forth below, absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which such Borrower or such Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 11. COSTS AND EXPENSES. Each Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, each Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. Each Borrower hereby agrees that the Lender may, at any time from time to time in its sole discretion and without further authorization by such Borrower, make a Revolving Advance to such Borrower under the Credit Agreement, or apply the proceeds of any such Revolving Advance, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under Paragraph 5 hereof. 12. MISCELLANEOUS. This Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC. CXR TELECOM CORPORATION By: /S/ VINCENT L. MADDELA By: /S/ RANDOLPH D. FOOTE --------------------------------- --------------------------- Name: VINCENT L. MADDELA Name: RANDOLPH D. FOOTE -------------------------- -------------------- Title: ASST. VICE PRESIDENT Title: VP - CFO -------------------------- -------------------- XET CORPORATION By: /S/ RANDOLPH D. FOOTE --------------------------- Name: RANDOLPH D. FOOTE -------------------- Title: VP - CFO -------------------- 3 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS The undersigned, each a guarantor of the indebtedness of CXR Telcom Corporation and XIT Corporation (collectively, the "Borrowers") to Wells Fargo Business Credit, Inc. (the "Lender") pursuant to a separate Guaranty each dated as of August 16, 2000 (each, a "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 10 of the Amendment) and execution thereof; (iii) reaffirms his or its obligations to the Lender pursuant to the terms of his or its Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrowers, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under his or its Guaranty for all of the Borrowers' present and future indebtedness to the Lender. /S/ CARMINE T. OLIVA ------------------------------------ CARMINE T. OLIVA MICROTEL INTERNATIONAL, INC. By: /S/ RANDOLPH D. FOOTE -------------------------------- Name: Randolph D. Foote Its: VP/CFO 4 EX-10.5 4 microtel_ex10-5.txt EXHIBIT 10.5 SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of November 29, 2000, is made by and among XIT CORPORATION, a New Jersey corporation, CXR TELCOM CORPORATION ("CXR" and together with XIT, the "Borrowers"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"). RECITALS -------- The Borrowers and the Lender have entered into a Credit and Security Agreement dated as of August 16, 2000, as amended (the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. XIT desires to sell certain tangible and other assets of one of its divisions, XCEL Etch-Tek (the "XET Division") to Bryan Fuller, Tama-Lee Mapalo and Etch-Tek Electronics Corporation ("collectively referred to as "Buyer") pursuant to the terms and conditions of that certain Asset Purchase Agreement dated as of November 15, 2000, among XIT, MicroTel International, Inc. and Buyer (the "Purchase Agreement") for the sale price of $310,000, with $260,000 in cash due upon closing and a $50,000 note due in 1 year at the interest rate of 8% per annum (the "Note"). The Borrowers have requested that Lender consent to the Purchase Agreement, which the Lender is willing to do pursuant to the terms and conditions set forth herein. AMENDMENT --------- NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. AMENDMENTS TO CREDIT AGREEMENT. (a) With respect to clause (i) of the definition of "Eligible Accounts" in Section 1.1 of the Credit Agreement, those Accounts generated in the XET Division that are unpaid 60 days or more after the invoice date shall not be deemed Eligible Accounts. The age requirement for eligibility of Accounts not generated in the XET Division shall continue to be less than 90 days after invoice date, as set forth in clause (i). (b) With respect to clause (xi) of the definition of "Eligible Accounts" in Section 1.1 of the Credit Agreement, if 10% or more of the total amount due under those Accounts generated in the XET Division that are owed by an account debtor is ineligible under clauses (i), (ii) or (ix) of such definition, then all of the Accounts generated in the XET Division that are owed by such account debtor shall not be deemed Eligible Accounts. The cross-age requirement for eligibility of Accounts not generated in the XET Division shall continue to be less than 25%, as set forth in clause (xi). 3. CONSENT TO THE PURCHASE AGREEMENT. For the purposes of Section 7.6 of the Credit Agreement, Lender hereby consents to the Purchase Agreement and the transactions contemplated thereby, provided that on the closing thereof, the cash portion of the purchase price thereunder is remitted to Lender for application to the Revolving Advances and the original of the Note is delivered to Lender and duly endorsed to the order of Lender. 4. CONDITIONS PRECEDENT. This Amendment shall be effective when the Lender shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lender in its sole discretion: (a) The Acknowledgment and Agreement of Guarantors set forth at the end of this Amendment, duly executed by each Guarantor; and (b) Such other matters as the Lender may require. 5. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby represent and warrant to the Lender as follows: The Borrowers have all requisite power and authority to execute this Amendment and to perform all of their obligations hereunder, and this Amendment has been duly executed and delivered by the Borrowers and constitutes the legal, valid and binding obligation of the Borrowers, enforceable in accordance with its terms; The execution, delivery and performance by the Borrowers of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrowers, or the articles of incorporation or by-laws of the Borrowers, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which it or its properties may be bound or affected; and All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 6. REFERENCES. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby, and any and all references in the other Loan Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 7. NO WAIVER. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 8. RELEASE. Each Borrower, hereby, and each Guarantor by signing the Acknowledgment and Agreement of Guarantors set forth below, absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of 2 any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which such Borrower or such Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 9. COSTS AND EXPENSES. Each Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, each Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. Each Borrower hereby agrees that the Lender may, at any time from time to time in its sole discretion and without further authorization by such Borrower, make a Revolving Advance to such Borrower under the Credit Agreement, or apply the proceeds of any such Revolving Advance, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under Paragraph 5 hereof. 12. MISCELLANEOUS. This Amendment and the Acknowledgment and Agreement of Guarantors may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC. CXR TELECOM CORPORATION By: /S/ VINCENT L. MADDELA By: /S/ RANDOLPH D. FOOTE --------------------------------- --------------------------- Name: VINCENT L. MADDELA Name: RANDOLPH D. FOOTE -------------------------- -------------------- Title: ASST. VICE PRESIDENT Title: VP - CFO -------------------------- -------------------- XET CORPORATION By: /S/ RANDOLPH D. FOOTE --------------------------- Name: RANDOLPH D. FOOTE -------------------- Title: VP - CFO -------------------- 3 ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS The undersigned, each a guarantor of the indebtedness of CXR Telcom Corporation and XIT Corporation (collectively, the "Borrowers") to Wells Fargo Business Credit, Inc. (the "Lender") pursuant to a separate Guaranty each dated as of August 16, 2000 (each, a "Guaranty"), hereby (i) acknowledges receipt of the foregoing Amendment; (ii) consents to the terms (including without limitation the release set forth in paragraph 8 of the Amendment) and execution thereof; (iii) reaffirms his or its obligations to the Lender pursuant to the terms of his or its Guaranty; and (iv) acknowledges that the Lender may amend, restate, extend, renew or otherwise modify the Credit Agreement and any indebtedness or agreement of the Borrowers, or enter into any agreement or extend additional or other credit accommodations, without notifying or obtaining the consent of the undersigned and without impairing the liability of the undersigned under his or its Guaranty for all of the Borrowers' present and future indebtedness to the Lender. /S/ CARMINE T. OLIVA ------------------------------------ CARMINE T. OLIVA MICROTEL INTERNATIONAL, INC. By: /S/ RANDOLPH D. FOOTE -------------------------------- Name: Randolph D. Foote Its: VP/CFO 4 EX-10.6 5 microtel_ex10-6.txt EXHIBIT 10.6 THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Third Amendment to Credit and Security Agreement (the "AMENDMENT"), dated as of September 20, 2001, is made by and between CXR TELECOM CORPORATION, a Delaware corporation ("CXR") and XET CORPORATION, a New Jersey corporation ("XET") (CXR and XIT shall collectively be referred to herein as the "BORROWER"), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "LENDER"). RECITALS -------- The Borrower and the Lender have entered into a Credit and Security Agreement dated as of August 16, 2000 as amended by that certain First Amendment to Credit and Security Agreement dated as of September 29, 2000 and that certain Second Amendment to Credit and Security Agreement dated as of November 29, 2000 (the "CREDIT AGREEMENT"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Lender is willing to amend the Credit Agreement pursuant to the terms and conditions set forth herein. The Borrower is entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of the Lender's rights or remedies as set forth in the Credit Agreement is being waived or modified by the terms of this Amendment. NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. DEFINED TERMS. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. AMENDMENTS TO ARTICLE I - DEFINITIONS (a) Section 1.1 of the Credit Agreement is hereby amended and restated to include the following definitions: "BOOK NET WORTH" means the aggregate of the common and preferred stockholders' equity in the Borrower, determined in accordance with GAAP. "NET INCOME" means the fiscal year-to-date after-tax net income from continuing operations as determined in accordance with GAAP. 3. AMENDMENTS TO ARTICLE VI - BORROWER'S AFFIRMATIVE COVENANTS (a) MINIMUM DEBT SERVICE COVERAGE RATIO. Section 6.12 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 6.12 MINIMUM DEBT SERVICE COVERAGE RATIO. The Borrower will maintain a Debt Service Coverage Ratio, measured quarterly on a consolidated basis, of not less than 1.00 to 1.00 during each fiscal quarter for the fiscal year ending December 31, 2001." (b) MINIMUM BOOK NET WORTH. Section 6.13 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 6.13 MINIMUM BOOK NET WORTH. The Borrower will cause MicroTel and its subsidiaries to maintain a Book Net Worth, on a consolidated basis, of not less than Six Million Two Hundred Fifty Thousand Dollars ($6,250,000) for the fiscal year ending December 31, 2001." (c) MINIMUM CUMULATIVE NET INCOME. Section 6.14 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Section 6.14 MINIMUM CUMULATIVE NET INCOME. The Borrower will maintain its Cumulative Net Income, on a consolidated basis, of not less than the amount set forth opposite the applicable date: Minimum Cumulative ------------------ Date Net Income ---- ---------- March 31, 2001 $200,000 June 30, 2001 $250,000 September 30, 2001 $150,000 December 31, 2001 $125,000" (d) Section 6.15 of the Credit Agreement is hereby deleted in its entirety. 4. NO OTHER CHANGES. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any Advance or Letter of Credit thereunder. 5. EFFECTIVENESS OF THIS AMENDMENT. Lender must have received the following items, in form and content acceptable to Lender, before this Amendment is effective and before Lender is required to extend any credit to Borrower as provided for by this Amendment. (a) AMENDMENT. This Amendment fully executed in a sufficient number of counterparts for distribution to Lender and Borrower. (b) CONSENT. The Consent attached to this Amendment, fully executed in a sufficient number of counterparts for distribution to Lender and Borrower. (c) REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth herein and in the Credit Agreement must be true and correct. (d) OTHER REQUIRED DOCUMENTATION. All other documents and legal matters in connection with the transaction contemplated by this Amendment shall have been delivered or executed or recorded and shall be in form and substance satisfactory to Lender. 6. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lender as follows: 2 (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 7. REFERENCES. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Loan Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 8. NO WAIVER. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Loan Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment. 9. RELEASE. The Borrower, and Guarantor by signing the Acknowledgment and Agreement of Guarantor set forth below, each hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. It is the intention of the parties in executing this release that the same shall be effective as a bar to each and every claim, demand and cause of action specified and in furtherance of this intention each waives and relinquishes all rights and benefits under Section 1542 of the Civil Code of the State of California, which provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him might have materially affected his settlement with the debtor." 3 The parties acknowledge that each may hereafter discover facts different from or in addition to those now known or believed to be true with respect to such claims, demands, or causes of action and agree that this instrument shall be and remain effective in all respects notwithstanding any such differences or additional facts 10. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Credit Agreement, the Loan Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lender may, at any time from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 11. MISCELLANEOUS. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BUSINESS CREDIT, INC., CXR TELECOM CORPORATION a Minnesota corporation By: /S/ VINCENT L. MADDELA By: /S/ RANDOLPH D. FOOTE --------------------------------- --------------------------- Name: VINCENT L. MADDELA Name: RANDOLPH D. FOOTE -------------------------- -------------------- Title: ASST. VICE PRESIDENT Title: VP - CFO -------------------------- -------------------- XET CORPORATION By: /S/ RANDOLPH D. FOOTE --------------------------- Name: RANDOLPH D. FOOTE -------------------- Title: VP - CFO -------------------- 4 -----END PRIVACY-ENHANCED MESSAGE-----