-----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, TJUff77h7Uy7zyIPlILsc7SULhfMCQx4QETxj1s3SkEIzQJRjes5H0ovEVlvms7R MI1y/aVbmI87lcnSDFzzyw== 0001019687-02-001544.txt : 20020814 0001019687-02-001544.hdr.sgml : 20020814 20020814180517 ACCESSION NUMBER: 0001019687-02-001544 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02737900 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-063002.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2002 | | TRANSITION REPORT PURSUANT TO 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) (Zip Code) (909) 987-9220 (Registrant's telephone number, including area code) Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | As of August 5, 2002, there were 21,513,366 shares of the registrant's common stock, $0.0033 par value, outstanding. ================================================================================ MICROTEL INTERNATIONAL, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 INDEX PART I - FINANCIAL INFORMATION PAGE ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2002........................................................ F-1 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited)..................................... F-2 Condensed Consolidated Statements of Other Comprehensive Income for the Three and Six Months Ended June 30, 2002 and 2001 (unaudited)................ F-3 Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2002 (unaudited)................................... F-4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 (unaudited)........................................... F-5 Notes to Condensed Consolidated Financial Statements (unaudited).................. F-6 Item 2. Management's Discussion and Analysis Of Financial Condition and Results of Operations.............................................................. 2 Item 3. Quantitative and Qualitative Disclosures About Market Risk......................... 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................................. 26 Item 2. Changes in Securities and Use of Proceeds......................................... 26 Item 3. Defaults Upon Senior Securities................................................... 26 Item 4. Submission of Matters to a Vote of Security Holders............................... 26 Item 5. Other Information................................................................. 26 Item 6. Exhibits and Reports on Form 8-K.................................................. 27 Signatures .............................................................................. 27 Exhibits Filed with this Report on Form 10-Q................................................ 28
1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2002 AND DECEMBER 31, 2001 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31, ASSETS 2002 2001 --------- --------- Current assets: (unaudited) Cash and cash equivalents $ 413 $ 604 Accounts receivable, net of allowance for doubtful accounts of $154 and $226, respectively 5,640 5,627 Notes receivable 34 48 Inventories 7,516 7,433 Prepaid and other current assets 421 396 --------- --------- Total current assets 14,024 14,108 Property, plant and equipment, net 677 758 Goodwill, net 2,438 2,389 Other assets 480 433 --------- --------- $ 17,619 $ 17,688 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable, due on demand $ 2,441 $ 2,198 Notes payable 1,477 1,420 Current portion of long-term debt 507 550 Accounts payable 3,867 3,783 Accrued expenses 2,234 2,471 --------- --------- Total current liabilities 10,526 10,422 Long-term debt, less current portion 694 763 Other liabilities 367 371 --------- --------- Total liabilities 11,587 11,556 --------- --------- Convertible redeemable Series A Preferred Stock, $10,000 unit value. Authorized 200 shares; issued and outstanding 25 shares (aggregate liquidation preference of $250) 276 270 Stockholders' equity: Preferred stock, authorized 10,000,000 shares; Convertible Series B Preferred Stock, $0.01 par value; 70,363 and 150,000 shares issued and outstanding, respectively (aggregate liquidation preferences of $450 and $960, respectively) 440 938 Common stock, $0.0033 par value. Authorized 50,000,000 shares; and 21,467,000 and 20,671,000 shares issued and outstanding, respectively 71 68 Additional paid-in capital 24,853 24,358 Accumulated deficit (18,909) (18,459) Accumulated other comprehensive loss (699) (1,043) --------- --------- Total stockholders' equity 5,756 5,862 --------- --------- $ 17,619 $ 17,688 ========= =========
See accompanying notes to condensed consolidated financial statements. F-1 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- (in thousands, except per share amounts) Net sales $ 6,118 $ 7,083 $ 10,938 $ 14,548 Cost of sales 3,608 3,732 6,899 8,082 --------- --------- --------- --------- Gross profit 2,510 3,351 4,039 6,466 Operating expenses: Selling, general and administrative 1,855 2,905 3,720 5,486 Engineering and product development 259 303 497 662 --------- --------- --------- --------- Income (loss) from operations 396 143 (178) 318 Other income (expense): Interest expense (94) (105) (184) (198) Other income 19 22 23 50 --------- --------- --------- --------- Income (loss) before income taxes 321 60 (339) 170 Income tax expense 66 6 105 9 --------- --------- --------- --------- Net income (loss) $ 255 $ 54 $ (444) $ 161 ========= ========= ========= ========= Earnings (loss) per share: Net income (loss): Basic $ 0.01 $ 0.00 $ (0.02) $ 0.01 ========= ========= ========= ========= Diluted $ 0.01 $ 0.00 $ (0.02) $ 0.01 ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements.
F-2 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (UNAUDITED) Three Months Ended Six Months Ended June 30, June 30, ----------------- ------------------ 2002 2001 2002 2001 ------ ------ ------ ------ (in thousands) Net income (loss) $ 255 $ 54 $(444) $ 161 Foreign currency translation adjustment 382 (104) 344 (326) ------ ------ ------ ------ Other comprehensive income (loss) $ 637 $ (50) $(100) $(165) ====== ====== ====== ======
See accompanying notes to condensed consolidated financial statements. F-3 MICROTEL INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)
Series B Convertible Accumulated Preferred Stock Common Stock Additional Other ---------------- ------------------ Paid-in Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Income (Loss) Total ------ ------ ------ ------ ------- ------- ------------- ----- Balance at December 31, 2001 150 $ 938 20,671 $ 68 $ 24,358 $ (18,459) $ (1,043) $ 5,862 Preferred Series B conversions (80) (498) 796 3 495 -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- 344 344 Accretion of redeemable preferred stock -- -- -- -- -- (6) -- (6) Net loss -- -- -- -- -- (444) -- (444) ------------------------------------------------------------------------------------------ Balance at June 30, 2002 70 $ 440 21,467 $ 71 $ 24,853 $ (18,909) $ (699) $ 5,756 ========================================================================================== See accompanying notes to condensed consolidated financial statements.
F-4 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2002 AND 2001 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30, 2002 2001 ------ ------ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(444) $ 161 Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 149 168 Amortization of intangibles -- 195 Stock and warrants issued as compensation -- 10 Provision for doubtful account 24 -- Provision for obsolete/slow moving inventory 281 -- Changes in operating assets and liabilities: Accounts receivable (52) 121 Inventories (292) (591) Other assets (47) 219 Accounts payable and accrued expenses (157) (118) ------ ------ Cash provided by (used in) operating activities (538) 165 ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (72) (123) Cash collected on note receivable 14 50 ------ ------ Cash (used in) investing activities (58) (73) ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in notes payable and long-term debt 188 102 ------ ------ Cash provided by financing activities 188 102 ------ ------ Effect of exchange rate changes on cash 217 (418) ------ ------ Net (decrease) in cash and cash equivalents (191) (224) ------ ------ Cash and cash equivalents at beginning of period 604 756 ------ ------ Cash and cash equivalents at end of period $ 413 $ 532 ====== ====== Cash paid for: Income tax $ 13 $ 34 ====== ====== Interest $ 181 $ 186 ====== ====== See accompanying notes to condensed consolidated financial statements.
F-5 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (UNAUDITED) (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. (collectively "CXR") 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 United States, France, England and Japan and organizes itself in two product line segments: Telecommunications and Electronic Components. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated 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 accounting principles generally accepted in the United States of America. The unaudited condensed consolidated financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the financial position as of June 30, 2002 and December 31, 2001 and the results of operations and cash flows for the related interim periods ended June 30, 2002 and 2001. However, these results are not necessarily indicative of results for any other interim period or for the year. It is suggested that the accompanying condensed consolidated financial statements be read in conjunction with the Company's audited consolidated financial statements included in its 2001 annual report on Form 10-K. F-6 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2002 (UNAUDITED) (2) EARNINGS (LOSS) 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 Six Months Ended June 30, June 30, ----------------------- ------------------------ 2002 2001 2002 2001 --------- --------- --------- --------- (in thousands, except per share amounts) NUMERATOR: Net income (loss) $ 255 $ 54 $ (444) $ 161 Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 3 3 6 6 --------- --------- --------- --------- Income (loss) attributable to common stockholders $ 252 $ 51 $ (450) $ 155 ========= ========= ========= ========= DENOMINATOR: Weighted average number of common shares outstanding during the period 21,129 20,570 20,902 20,570 Incremental shares from assumed exercises or conversions of warrants, options and preferred stock 2,361 3,309 -- 3,277 --------- --------- --------- --------- Adjusted weighted average shares 23,490 23,879 20,902 23,847 ========= ========= ========= ========= Basic earnings (loss) per share $ 0.01 $ 0.00 $ (0.02) $ 0.01 ========= ========= ========= ========= Diluted earnings (loss) per share $ 0.01 $ 0.00 $ (0.02) $ 0.01 ========= ========= ========= =========
The computation of diluted loss per share for the six month period ended June 30, 2002 excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because either their effect was antidilutive due to losses incurred by the Company or such instruments had exercise prices greater than the average market price of the common shares during the periods presented. F-7 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2002 (UNAUDITED) (3) INVENTORIES Inventories consist of the following. June 30, 2002 December 31, 2001 ----------- ----------- Raw materials $2,448,000 $2,806,000 Work-in-process 3,346,000 2,879,000 Finished goods 1,722,000 1,748,000 ----------- ----------- $7,516,000 $7,433,000 =========== =========== (4) NOTES PAYABLE On April 17, 2002, the Company executed the Fourth Amendment to its August 16, 2000 Credit and Security Agreement with Wells Fargo Business Credit, Inc. The amendment increased the ceiling on the borrowing base to $400,000 during the months of January through April and $300,000 through December for each year. The financial covenants were also amended and the credit facility was extended through August 16, 2005. (5) NOTES PAYABLE, DUE ON DEMAND The Company's subsidiaries in France and in the United Kingdom have short term borrowing facilities with separate banks, which are due on demand. In 2002, one of the Company's United Kingdom subsidiaries exceeded its borrowing limit with its bank and accordingly is now subject to penalty interest at a rate of 2.0% per month on the excess borrowings. This note is due on or before September 30, 2002. There can be no assurance that the Company will be successful in extending either arrangement or finding a new source of financing. (6) INCOME TAXES The Company has recorded a provision for income taxes for the three and six months ended June 30, 2002 for the U.K. subsidiaries only, because the Company's domestic and other foreign operations have generated operating losses for both financial reporting and income tax purposes. A 100% valuation allowance has been provided on the total deferred income tax assets, as they are not more likely than not to be realized. (7) 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. F-8 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2002 (UNAUDITED) (8) Reportable Segments The Company has two reportable segments: Telecommunications and Electronic Components. The Telecommunications segment operates principally in the United States 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 United States, 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's reportable segments are comprised of operating entities offering the same or similar products to similar customers. Each segment is managed separately because each business has different customers, design, manufacturing and marketing strategies. There were no differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the amounts disclosed in the Company's audited consolidated financial statements included in its 2001 annual report on Form 10-K. Selected financial data for each of the Company's operating segments is shown below: Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 ------------- ------------- Sales to external customers: Telecommunications $ 4,436,000 $ 7,968,000 Electronic Components 6,502,000 6,580,000 ------------- ------------- $ 10,938,000 $ 14,548,000 ============= ============= Segment pretax income (loss): Telecommunications $ (770,000) $ 107,000 Electronic Components 1,372,000 1,613,000 ------------- ------------- $ 602,000 $ 1,720,000 ============= ============= June 30, 2002 December 31, 2001 ------------- ------------- Segment assets: Telecommunications $ 7,459,000 $ 8,317,000 Electronic Components 10,076,000 9,060,000 ------------- ------------- $ 17,535,000 $ 17,377,000 ============= ============= F-9 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2002 (UNAUDITED) The following is a reconciliation of the reportable segment income (loss) and assets to the Company's consolidated totals: Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 ------------- ------------- Pretax Income ------------- Total income (loss) for reportable segments $ 602,000 $ 1,720,000 Unallocated amounts: Unallocated general corporate expenses 941,000 1,550,000 ------------- ------------- Consolidated income (loss) before income taxes $ (339,000) $ 170,000 ============= ============= June 30, 2002 December 31, 2001 ------------- ------------- Assets - ------ Total assets for reportable segments $ 17,535,000 $ 17,377,000 Other assets 84,000 311,000 ------------- ------------- Total consolidated assets $ 17,619,000 $ 17,688,000 ============= ============= F-10 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2002 (UNAUDITED) (9) GOODWILL - ADOPTION OF SFAS No. 142 Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") requires disclosure of what reported income before extraordinary items and net income would have been in all periods presented, exclusive of amortization expense (including any related tax effects) recognized in those periods related to goodwill, intangible assets that are no longer being amortized, any deferred credit related to an excess over cost, equity method goodwill, and changes in amortization periods for intangible assets that will continue to be amortized (including any related tax effects). Similarly adjusted per-share amounts also must be disclosed for all periods presented. The Company initially applied SFAS No. 142 on January 1, 2002. The amortization expense and net income of the Company for the initial six-month period of application ended June 30, 2002 and the comparable period in 2001 are included in the table below. The Company recognized no extraordinary items in either of those periods.
Six Months Ended Six Months Ended June 30, 2002 June 30, 2001 ------------ ------------ Reported net income (loss): $ (444,000) $ 161,000 Add back: goodwill amortization -- 195,000 ------------ ------------ Adjusted net income excluding amortization of goodwill $ (444,000) $ 356,000 ============ ============ Reported earnings (loss) per share: Basic $ (0.02) $ 0.01 ============ ============ Diluted $ (0.02) $ 0.01 ============ ============ Amortization of goodwill - basic $ -- $ 0.01 ============ ============ Amortization of goodwill - diluted $ -- $ 0.01 ============ ============ Adjusted earnings (loss) per share Basic $ (0.02) $ 0.02 ============ ============ Diluted $ (0.02) $ 0.02 ============ ============
F-11 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 condensed consolidated financial statements and notes to financial statements included elsewhere in this document. This report and our condensed consolidated 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; 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 document 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 the following 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. Effective August 1, 2000, we acquired the assets and business operations of T-Com, a telecommunications test instruments manufacturer located in Sunnyvale, California. T-Com produced central office equipment, which is equipment that is typically employed in switching centers and network operating centers. 2 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. We retained our Monrovia, California circuit board manufacturing facility as a captive supplier of circuit boards to XET Corporation's Digitran Division in our electronic components segment. 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 -- Electronic Power Supplies Our sales are primarily in North America, Europe and Asia. Sales to customers in the telecommunications industry during the six month periods ended June 30, 2002 and June 30, 2001 were 40.6% and 54.8%, respectively, of our total net sales. The remainder of our sales were in the electronic components segment, primarily to aerospace customers, 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. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in Note 1 to our audited consolidated financial statements included in Item 8 of our annual report on Form 10-K for the year ended December 31, 2001. We believe our most critical accounting policies include inventory valuation, goodwill impairment and foreign currency translation. INVENTORIES We value our inventory at the lower of the actual cost to purchase or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. Demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. 3 In addition, the telecommunications equipment industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Also, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. IMPAIRMENT OF GOODWILL We periodically evaluate acquired businesses for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. In assessing potential impairment for goodwill, we consider these factors as well as forecasted financial performance of the acquired businesses. If forecasts are not met, we may have to record additional impairment charges not previously recognized. In assessing the recoverability of our goodwill and other intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of those respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets that were not previously recorded. On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," or SFAS No. 142, and are required to analyze our goodwill for impairment issues during the first six months of 2002, and then periodically after that time. During the six months ended June 30, 2002 and the year ended December 31, 2001, we did not record any impairment losses related to goodwill and other intangible assets. FOREIGN CURRENCY TRANSLATION We have foreign subsidiaries that together accounted for 54.6% of our net revenues, 66.3% of our assets and 68.4% of our total liabilities as of December 31, 2001 and for 60.3% of our net revenues, 69.5% of our assets and 70.8% of our total liabilities as of and for the six months ended June 30, 2002. In preparing our consolidated financial statements, we are required to translate the financial statements of our foreign subsidiaries from the currencies in which they keep their accounting records into United States dollars. This process results in exchange gains and losses which, under relevant accounting guidance, are either included within our statement of operations or as a separate part of our net equity under the caption "cumulative translation adjustment." Under relevant accounting guidance, the treatment of these translation gains or losses depends upon our management's determination of the functional currency of each subsidiary. This determination involves consideration of relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency. However, management must also consider any dependency of the subsidiary upon the parent and the nature of the subsidiary's operations. 4 If management deems any subsidiary's functional currency to be its local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included in a cumulative translation adjustment. However, if management deems the functional currency to be United States dollars, then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. If we dispose of any of our subsidiaries, any cumulative translation gains or losses would be realized into our statement of operations. If we determine that there has been a change in the functional currency of a subsidiary to United States dollars, then any translation gains or losses arising after the date of the change would be included within our statement of operations. Based on our assessment of the factors discussed above, we consider the functional currency of each of our international subsidiaries to be each subsidiary's local currency. Accordingly we had cumulative translation losses of $699,000 and $1,043,000 that were included as part of accumulated other comprehensive loss within our balance sheets at June 30, 2002 and December 31, 2001, respectively. During the six months ended June 30, 2002 and the year ended December 31, 2001, we included translation adjustments of a gain of approximately $344,000 and a loss of $312,000, respectively, under accumulated other comprehensive income and loss. If we had determined that the functional currency of our subsidiaries was United States dollars, these losses would have increased our loss for the six months ended June 30, 2002 and decreased our income for the three months ended June 30, 2002 and the three and six months ended June 30, 2001. The magnitude of these gains or losses depends upon movements in the exchange rates of the foreign currencies in which we transact business as compared to the value of the United States dollar. These currencies include the euro, the British pound and the Japanese yen. Any future translation gains or losses could be significantly higher than those we recorded for the six months ended June 30, 2002 and the year ended December 31, 2001. 5 RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 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 June 30, ----------------------------------- 2002 2001 -------------- -------------- Net sales.................................... 100.0% 100.0% Cost of sales................................ 59.0 52.7 ---------- ---------- Gross profit................................. 41.0 47.3 Selling, general and administrative expenses................................... 30.3 41.0 Engineering and product development expenses................................... 4.2 4.3 ---------- ---------- Operating income............................. 6.5 2.0 Interest expense............................. (1.5) (1.5) Other income................................. 0.2 0.3 ---------- ---------- Income before income tax expense............. 5.2 0.8 Income tax expense........................... (1.0) -- ---------- ---------- Net income................................... 4.2% 0.8% ========== ==========
NET SALES. Net sales for the three months ended June 30, 2002 decreased by $965,000 (13.6%) to $6,118,000 as compared to $7,083,000 for the three months ended June 30, 2001. Net sales of our telecommunications products and services for the three months ended June 30, 2002 declined by $1,715,000 (40.8%) to $2,481,000, as compared to $4,196,000 for the three months ended June 30, 2001. Test equipment net sales for the three months ended June 30, 2002 decreased by $1,589,000 (62.1%) to $969,000, as compared to $2,558,000 for the three months ended June 30, 2001. The sales decline resulted from a $1,081,000 reduction in sales of test equipment by CXR Telcom and a $508,000 reduction in sales of test equipment by CXR, S.A. Management believes these sales declines resulted primarily from reductions in capital spending in the three months ended June 30, 2002, as compared to capital spending in the three months ended June 30, 2001, by many of our telecommunications customers due to generally weak telecommunications markets in the United States and Europe. Also, the exclusive distribution agreement that our French subsidiary, CXR, S.A., had with Sunrise Telecom, Inc. terminated as of November 1, 2001. CXR, S.A. will continue to distribute Sunrise products under an exclusive arrangement for select customers and under a non-exclusive arrangement for other customers and also will continue to distribute other manufacturers' products. Based on this revised relationship with Sunrise Telecom, Inc., management estimates that net sales of Sunrise products will be approximately $400,000 in 2002, as compared to $1,384,000 in 2001. Consequently, we have implemented personnel and other cost reductions to reflect a plan to minimize sales efforts related to lower margin resale products and focus on sales of our own internally-built products. Net sales of our CXR HALCYON 704 series field test equipment decreased by $854,000 (51.6%) to $802,000 for the three months ended June 30, 2002, as compared to $1,656,000 for the three months ended June 30, 2001. Net sales of our T-Com central office test equipment product line declined by $228,000 (71.9%) to $89,000 for the three months ended June 30, 2002, as compared to $317,000 for the three months ended June 30, 2001, primarily due to continued weakening in the market for test equipment used in central offices and by test equipment manufacturers. 6 We believe that many of the United States telecom customers that CXR Telcom serves built networks to handle an anticipated demand for voice and data traffic that has not yet occurred. Consequently, many of these customers reduced their purchasing budgets for 2002. This has had a negative impact on CXR Telcom's sales. CXR, S.A. produces all of our transmission products and networking equipment. Despite a generally weak telecommunications market, net sales of transmission products and networking equipment produced by CXR, S.A. increased slightly by $54,000 (3.6%) to $1,540,000 for the three months ended March 31, 2002, as compared to $1,486,000 for the three months ended June 30, 2001. Total net sales by CXR, S.A., including both test equipment and transmission and networking equipment, decreased by $525,000 (27.3%) to $1,393,000 for the three months ended June 30, 2002, as compared to $1,918,000 for the three months ended June 30, 2001, primarily due to a lower sales volume of test equipment. We believe that the decreases in CXR, S.A.'s and CXR Telcom's sales relate to the overall slowdown in the telecom markets and the termination of the Sunrise Telecom contract discussed above, and that the French national and local elections in April and May 2002 may have caused a delay in purchases by major governmental customers of CXR, S.A. Net sales of our electronic components increased by $750,000 (26.0%) to $3,637,000 for the three months ended June 30, 2002, as compared to $2,887,000 for the three months ended June 30, 2001, mainly due to a $689,000 (61.2%) increase in sales of power supplies by XCEL Corporation Ltd., or XCL, due to increased rate of completion of products shipped under long-term programs. Net sales of digital switches by XET Corporation's Digitran Division declined by $447,000 (31.0%) to $994,000 in the three months ended June 30, 2002, as compared to $1,441,000 in the three months ended June 30, 2001. We expect this lower level of digital switch sales to be a temporary timing issue of shipment to orders and expect that digital switch sales will improve during the quarter ended September 30, 2002. However, sales of Digitran's subassemblies and other items increased by $523,000 (376.3%) to $662,000 for the quarter ended June 30, 2002, as compared to $139,000 in the prior year period, due to a new contract for electronic sub systems from a major aerospace company. GROSS PROFIT. Gross profit as a percentage of total net sales decreased to 41.0% for the three months ended June 30, 2002, as compared to 47.3% for the comparable period in 2001. In dollar terms, total gross profit decreased by $841,000 (25.1%) to $2,510,000 for the three months ended June 30, 2002, as compared to $3,351,000 for the comparable period in 2001. Gross profit for our telecommunications segment decreased in dollar terms by $1,071,000 (51.3%) to $1,017,000 for the three months ended June 30, 2002, as compared to $2,088,000 for the comparable period in 2001, and decreased as a percentage of net sales from 49.8% for the three months ended June 30, 2001 to 40.1% for the three months ended June 30, 2002. The decrease in gross profit as a percentage of net sales primarily was due to the substantial reduction in sales volume that increased overhead costs on a per unit basis. Gross profit for our electronic components segment increased in dollar terms by $233,000 (18.5%) to $1,494,000 for the three months ended June 30, 2002, as compared to $1,261,000 for the three months ended June 30, 2001, and decreased as a percentage of related net sales from 43.7% for the three months ended June 30, 2001 to 41.1% for the three months ended June 30, 2002. This increase primarily was due to increased sales of higher margin electronic components and sub systems by the Digitran Division. 7 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $1,050,000 (36.1%) to $1,855,000 for the three months ended June 30, 2002, as compared to $2,905,000 for the three months ended June 30, 2001. This substantial decrease in selling, general and administrative expenses was due to several factors. For example, we incurred $312,000 in legal and accounting fees during the three months ended June 30, 2001 in connection with amendments to a securities registration statement and prior periodic reports. Selling expenses were reduced by $386,000, primarily due to lower commissions on reduced sales during the three months ended June 30, 2002. Administrative costs were reduced by $125,000 in our telecommunications segment, primarily due to staff reductions at CXR Telcom. Also, due to the new accounting rules of SFAS No. 142, effective January 1, 2002 we no longer amortize goodwill. Goodwill accounted for approximately $100,000 of our amortization expense in the three months ended June 30, 2001. 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 $44,000 (14.5%) to $259,000 for the three months ended June 30, 2002, as compared to $303,000 for the comparable prior year period, reflecting the cost savings from the closure of our St. Charles, Illinois engineering facility in August 2001 and the relocation, consolidation and downsizing of that engineering function into our Fremont, California facility. OTHER INCOME AND EXPENSE. Interest expense was reduced slightly to $94,000 for the three months ended June 30, 2002 from $105,000 in the comparable period in 2001. Other income of $19,000 in the second quarter of 2002 declined slightly from $22,000 in the second quarter of 2001. INCOME TAX EXPENSE. Income tax expense for the three months ended June 30, 2002 was $66,000, as compared to $6,000 for the comparable prior year period. The majority of the increase related to the recording by XCL of a provision for U.K. income tax that was required because XCL is expected to produce taxable income for 2002 and has consumed its currently available net operating loss carryforwards. However, we are reviewing a possible legal reorganization of our U.K. subsidiaries that may provide us with a means to access additional U.K. tax net operating loss carryforwards. NET INCOME. Net income for the three months ended June 30, 2002 was $255,000, as compared to net income of $54,000 for the three months ended June 30, 2001. The major contributor to this change was the reduction in selling, general and administrative expenses discussed above. Also, cost reductions helped us to maintain our gross margins as a percentage of sales despite reduced sales volume. We took in 2001, and continue to take in 2002, various actions to reduce costs through staff reductions in our telecommunications operations in the U.S. and France and through various other methods and to more aggressively market our products. If these actions are not sufficient to reduce cash outlays below revenue levels, then we may be required to restructure or divest all or part of our telecommunications operations. 8 SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total net sales:
Six Months Ended June 30, -------------------------------------- 2002 2001 ----------------- ---------------- Net sales.................................... 100.0% 100.0% Cost of sales................................ 63.1 55.6 ---------- ---------- Gross profit................................. 36.9 44.4 Selling, general and administrative expenses................................... 34.0 37.7 Engineering and product development expenses................................... 4.5 4.5 ---------- ---------- Operating income (loss)...................... (1.6) 2.2 Interest expense............................. (1.7) (1.4) Other income................................. 0.2 0.4 ---------- ---------- Income (loss) before income tax expense.................................... (3.1) 1.2 Income tax expense........................... 1.0 0.1 ---------- ---------- Net income (loss)............................ (4.1%) 1.1% ========== ==========
NET SALES. Net sales for the six months ended June 30, 2002 decreased by $3,610,000 (24.8%) to $10,938,000 as compared to $14,548,000 for the six months ended June 30, 2001. Net sales of our telecommunications products and services for the six months ended June 30, 2002 declined by $3,532,000 (44.3%) to $4,436,000, as compared to $7,968,000 for the six months ended June 30, 2001. Test equipment net sales for the six months ended June 30, 2002 decreased by $2,957,000 (64.8%) to $1,604,000, as compared to $4,561,000 for the six months ended June 30, 2001. The sales decline resulted from a $1,813,000 reduction in sales of test equipment by CXR Telcom and a $1,144,000 reduction in sales of test equipment by CXR, S.A. Management believes these sales declines resulted primarily from reductions in capital spending in the six months ended June 30, 2002, as compared to capital spending in the six months ended June 30, 2001, by many of our telecommunications customers due to generally weak telecommunications markets in the U.S. and Europe. Also, the exclusive distribution agreement that CXR, S.A. had with Sunrise Telecom, Inc. terminated as of November 1, 2001. CXR, S.A. will continue to distribute Sunrise products under an exclusive arrangement for select customers and under a non-exclusive arrangement for other customers and also will continue to distribute other manufacturers' products. Based on this revised relationship with Sunrise Telecom, Inc., management estimates that net sales of Sunrise products will be approximately $400,000 in 2002, as compared to $1,384,000 in 2001. Consequently, we have implemented personnel and other cost reductions to reflect a plan to minimize sales efforts related to lower margin resale products and focus on sales of our own internally-built products. Net sales of our CXR HALCYON 704 series field test equipment decreased by $1,399,000 (57.4%) to $1,038,000 for the six months ended June 30, 2002, as compared to $2,437,000 for the six months ended June 30, 2001. Net sales of our T-Com central office test equipment product line declined by $413,000 (62.5%) to $248,000 for the six months ended June 30, 2002, as compared to $661,000 for the six months ended June 30, 2001, primarily due to continued weakening in the market for test equipment. 9 We believe that many of the U.S. telecom customers that CXR Telcom serves built networks to handle an anticipated demand for voice and data traffic that has not yet occurred. Consequently, many of these customers reduced their purchasing budgets for 2002. This has had a negative impact on CXR Telcom's sales. CXR, S.A., our French subsidiary, produces all of our transmission products and networking equipment. Net sales of transmission products and networking equipment produced by CXR, S.A. decreased by $471,000 (15.3%) to $2,615,000 for the six months ended March 31, 2002, as compared to $3,086,000 for the six months ended June 30, 2001, primarily because of the weak telecom market. Total net sales by CXR, S.A., including both test equipment and transmission and networking equipment, decreased by $1,499,000 (35.5%) to $2,728,000 for the six months ended June 30, 2002, as compared to $4,227,000 for the six months ended June 30, 2001. We believe that the decreases in CXR, S.A.'s and CXR Telcom's sales relate to the overall slowdown in the telecom markets and the termination of the Sunrise Telecom contract discussed above, and that the French national and local elections in April and May 2002 may have caused a delay in purchases by major governmental customers of CXR, S.A. Net sales of our electronic components decreased slightly by $78,000 (1.2%) to $6,502,000 for the six months ended June 30, 2002, as compared to $6,580,000 for the six months ended June 30, 2001. Sales of power supplies by XCL increased by $504,000 (18.1%) to $3,287,000 in the six months ended June 30, 2002, as compared to $2,783,000 in the prior year period due to an increased rate of completion of products shipped under long-term programs. Sales of digital switches manufactured by the Digitran Division declined by $1,096,000 (31.9%) to $2,337,000 in the six months ended June 30, 2002, as compared to $3,433,000 in the six months ended June 30, 2001. We expect this lower level of digital switch sales to be a temporary timing issue of shipment to orders and expect that digital switch sales will improve during the quarter ended September 30, 2002. However, XET Corporation increased its sales of subassemblies by $523,000 to (376.3%) to $662,000 in the current period as compared to $139,000 in the first half of 2001 due to a new contract for electronic sub systems from a major aerospace company Based on our backlog, we anticipate improvement in net sales for both the Digitran Division and XCL in the third quarter of 2002. GROSS PROFIT. Gross profit as a percentage of total net sales decreased to 36.9% for the six months ended June 30, 2002, as compared to 44.4% for the comparable period in 2001. In dollar terms, total gross profit decreased by $2,427,000 (37.5%) to $4,039,000 for the six months ended June 30, 2002, as compared to $6,466,000 for the comparable period in 2001. Gross profit for our telecommunications segment decreased in dollar terms by $1,970,000 (56.7%) to $1,507,000 for the six months ended June 30, 2002, as compared to $3,477,000 for the comparable period in 2001, and decreased as a percentage of net sales from 43.6% for the six months ended June 30, 2001 to 34.0% for the six months ended June 30, 2002. The decrease in gross profit as a percentage of net sales primarily was due to the substantial reduction in sales volume that increased overhead costs on a per unit basis. Gross profit for our electronic components segment decreased in dollar terms by $457,000 (15.3%) to $2,532,000 for the six months ended June 30, 2002, as compared to $2,989,000 for the six months ended June 30, 2001, and decreased as a percentage of related net sales from 45.4% for the six months ended June 30, 2001 to 38.9% for the six months ended June 30, 2002. This decrease primarily was the result of reduced profit margins in connection with lower production volumes by XET Corporation's Digitran Division due to the completion in the first quarter of 2001 of a product mix that carried a higher than average gross profit margin. 10 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $1,766,000 (32.2%) to $3,720,000 for the six months ended June 30, 2002, as compared to $5,486,000 for the six months ended June 30, 2001. This substantial decrease in selling, general and administrative expenses was due to several factors. For example, we incurred $452,000 in legal and accounting fees during the six months ended June 30, 2002 in connection with amendments to a securities registration statement and prior periodic reports. Selling expenses were reduced by $562,000 in our telecommunications segment due to lower commissions on reduced sales and reduced costs during the six months ended June 30, 2002. Administrative costs were reduced by $265,000 in our telecommunications segment primarily due to staff reductions at CXR Telcom. We reduced selling general and administrative expense in our electronic components group by $196,000 due to cost reductions. Also, due to the new accounting rules of SFAS No. 142, effective January 1, 2002 we no longer amortize goodwill. Goodwill accounted for $195,000 of our amortization expense in the six months ended June 30, 2001. 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 $165,000 (24.9%) to $497,000 for the six months ended June 30, 2002, as compared to $662,000 for the comparable prior year period, reflecting the cost savings from the closure of our St. Charles, Illinois engineering facility in August 2001 and the relocation, consolidation and downsizing of that engineering function into our Fremont, California facility. OTHER INCOME AND EXPENSE. Interest expense was reduced to $184,000 for the six months ended June 30, 2002 from $198,000 in the comparable period in 2001 due to lower interest rates. Other income of $23,000 in the second quarter of 2002 declined from $50,000 in the second quarter of 2001. INCOME TAX EXPENSE. Income tax expense for the six months ended June 30, 2002 was $105,000, as compared to $9,000 for the comparable prior year period. The majority of the increase related to the recording by XCL of a provision for U.K. income tax that was required because XCL is expected to produce taxable income for 2002 and has consumed its currently available net operating loss carryforwards. However, we are reviewing a possible legal reorganization of our U.K. subsidiaries that may provide us with a means to access additional U.K. tax net operating loss carryforwards. NET INCOME (LOSS). Net loss for the six months ended June 30, 2002 was $444,000, as compared to net income of $161,000 for the six months ended June 30, 2001. The major cause of this change was the reduction in sales of our telecommunications segment below the level needed to cover fixed costs. We took in 2001, and continue to take in 2002, various actions to reduce costs through staffing reductions in our telecommunications operations in the U.S. and France and through various other methods and to more aggressively market our products. If these actions are not sufficient to reduce cash outlays below revenue levels, then we may be required to restructure or divest all or part of our telecommunications operations. LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 2002 and the year ended December 31, 2001, we funded our operations primarily through revenue generated from our operations and through our lines of credit with Wells Fargo Business Credit, Inc. and various foreign banks. As of June 30, 2002, we had working capital of $3,498,000, an accumulated deficit of $18,909,000, an accumulated other comprehensive loss of $699,000, $413,000 in cash and cash equivalents and $5,640,000 of accounts receivable. As of December 31, 2001, we had working capital of $3,686,000, an accumulated deficit of $18,459,000 an accumulated other comprehensive loss of $1,043,000, $604,000 in cash and cash equivalents and $5,627,000 of accounts receivable. 11 Cash used in our operating activities totaled $538,000 for the six months ended June 30, 2002, as compared to $165,000 of cash provided by our operating activities for the comparable period in 2001. This decrease in cash provided by our operations during the six months ended June 30, 2002 primarily resulted from lower collections due to lower sales, especially during the first three months of 2002. Cash used in our investing activities totaled $58,000 for the six months ended June 30, 2002, as compared to $73,000 for the six months ended June 30, 2001. Included in the results for the six months ended June 30, 2002 are $72,000 of fixed asset purchases. Cash provided by financing activities totaled $188,000 for the six months ended June 30, 2002, as compared to $102,000 for the comparable period in 2001, primarily due to increases in bank debt. On August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting as guarantor, obtained a credit facility extension and modification from Wells Fargo Business Credit, Inc. In April 2002, the maturity date of the facility was extended by two years to August 16, 2005. As of April 17, 2002, the 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. On June 30, 2002, the interest rate was the prime rate (then 4.75%) plus 1%, subject to a minimum interest charge of $13,500 per month. These figures reflect the reduction of the annual interest rate from the prime rate plus 2% and the reduction of the minimum interest charge from $15,000 per month that we achieved as of April 1, 2001 because we met or exceeded certain performance-based goals for 2000. The balance outstanding at June 30, 2002 was $1,477,000 on the revolving loan and $164,000 on the term loan, and we had available to us $142,000 of additional borrowings under the revolving loan. The credit facility contains restrictive financial covenants that are set by mutual agreement of us and our lender each year. At June 30, 2002, we were in compliance with such covenants. Our foreign subsidiaries have 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 $2,378,000, $844,000 and zero dollars, respectively, on June 30, 2002. Of the total $2,378,000 balance owed to Lloyds Bank, $1,746,000 was owed by XCEL Corporation Limited under an overdraft credit facility and $632,000 was owed by XCEL Power Systems Limited under a term facility. Due to a rapid expansion in sales, XCEL Corporation Limited exceeded the borrowing limit contained in its overdraft credit facility with Lloyds Bank at June 30, 2002. As a result, at the election of Lloyds Bank the excess amount will accrue interest at the rate of two percent (2%) per month. XCEL Corporation Limited's overdraft credit facility is for an amount up to approximately $1,600,000 and XCEL Power System Limited's term loan credit facility is for an amount up to approximately $800,000. Although amounts owing under the overdraft credit facility are due and payable no later than September 30, 2002, Lloyds Bank, as is typical in the U.K., has the right to demand payment in full at any time prior to September 30, 2002. Our French subsidiary, CXR, S.A., has credit facilities with several lenders totaling up to approximately $844,000 in the aggregate. Each credit facility has a specified repayment term. However, each lender, as is typical in France, has the right to demand payment in full at any time prior to the scheduled maturity date of a particular credit facility. Although neither Lloyds Bank nor any of the lenders to CXR, S.A. have indicated a desire to demand immediate payment of all outstanding principal and interest balances on their respective credit facilities, Lloyds Bank has advised our U.K. subsidiaries that they no longer wish to continue to finance our U.K. subsidiaries over the long term. Accordingly, we are in the process of seeking alternative financing sources in 12 the U.K. Similarly, CXR, S.A. has been advised by its lenders that because CXR, S.A. has experienced a substantial reduction in revenue, the lenders are contemplating a reduction in the total available credit. As a result, we are in the process of seeking alternative financing sources in France. We cannot assure you that the various lenders to our U.K. and/or French subsidiaries will not seek immediate payment of all amounts owed by them under their respective credit facilities or seek to terminate any of the existing credit facilities. Similarly, we cannot assure you that if either of these events were to occur we would be successful in obtaining the required replacement financing for our operations in the U.K. and/or France or, if we were able to obtain such financing, that the financing would occur on a timely basis, would be on acceptable terms and would be sufficient to allow us to maintain our business operations in the U.K. and/or France. Accordingly, any of these actions on the part of any of the lenders to our U.K. and/or French subsidiaries could have a material adverse impact upon our results of operations and cash flows. Our backlog is substantial and was $14,886,000 as of June 30, 2002, up from $14,885,000 as of December 31, 2001, despite higher shipments of our XCL subsidiary. Our backlog as of June 30, 2002 was 95.1% related 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 4.9% related to our telecommunications business, which business tends to 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. During the six months ended June 30, 2002 and the year ended December 31, 2001, 40.6% and 53.9%, respectively, of our sales were to customers in the telecommunications industry. We experienced 44.3% and 5.6% declines in our telecommunications segment sales in the six months ended June 30, 2002 and the year ended December 31, 2001, respectively, as compared to the comparable prior year periods. We believe this decline primarily was due to a general business decline experienced by many of our telecommunications customers. We anticipate a decline in our telecommunications segment sales in 2002 as compared to 2001. We cannot predict the duration or severity of the telecommunications market downturn or the extent to which the downturn will continue to negatively affect our ability to sell our products and services to customers in the telecommunications industry. A further reduction in sales would reduce our accounts receivable balances, which in turn would have an adverse effect on our financial position by reducing the amount of cash available under our lines of credit. We took various actions to reduce costs in 2001 and are reducing costs further through staff reductions and other cost-reducing actions in the first half of 2002. These actions are intended to reduce the cash outlays of our telecommunications segment to match its revenue rate. If these actions are not sufficient to reduce cash outlays below revenue levels, then we may restructure or divest all or part of our telecommunications operations. 13 The following table outlines payments due from us or our subsidiaries under our lines of credit and other significant contractual obligations over the next five years, exclusive of interest:
PAYMENTS DUE BY PERIOD ---------------------- CONTRACTUAL (IN THOUSANDS) OBLIGATIONS AT JUNE 30, 2002 2002 2003 2004 2005 2006 THERE-AFTER TOTAL ------------- ---- ---- ---- ---- ---- ----------- ----- Line of Credit (Domestic) $ 1,477 $ $ $ $ $ $ 1,477 Line of Credit (U.K.) 1,746 1,746 Overdraft (France) 695 695 Term Loan (Domestic) 137 26 163 Term Loan (U.K.) 153 146 146 146 42 633 Term Loan (France) 37 56 56 149 Capitalized Lease Obligations 62 56 20 138 Other Promissory Notes 118 118 Operating Leases 393 158 97 1 649 -------- ------ ------ ------ ------ ---------- -------- $ 4,818 $ 442 $ 319 $ 147 $ 42 $ $ 5,768
In conjunction with our cost reductions, 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, 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 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. 14 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. IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board, or the FASB, finalized FASB Statements No. 141, "Business Combinations," or SFAS No. 141, and No. 142, "Goodwill and Other Intangible Assets," or SFAS No. 142. SFAS No. 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 No. 141 also requires that we recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS No. 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 No. 142 that we reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS No. 141. SFAS No. 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS No. 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 No. 142. SFAS No. 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 initially were recognized. SFAS No. 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 No. 142. Our previous business combinations were accounted for using the purchase method. As of June 30, 2002 and December 31, 2001, the net carrying amount of goodwill was $2,438,000 and $2,389,000, respectively. Amortization expense related to goodwill during the six months ended June 30, 2002 and the year ended December 31, 2001 was zero dollars and $345,000, respectively. Our adoption of SFAS No. 141 and SFAS No. 142 has not materially impacted 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 our consolidated financial statements beginning January 1, 2002. The implementation of SFAS No. 144 did not have a material impact on our consolidated financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS 146 addresses accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. We do not expect the adoption of this statement to have a material effect on our financial statements. 15 EURO CONVERSION Our operating subsidiaries located in France and the U.K. had combined net sales from operations approximating 56.6% of our total net sales for the six months ended June 30, 2002. Net sales from the French subsidiary participating in the euro conversion were 24.9% of our net sales for the six months ended June 30, 2002. 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. IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST OR MAINTAIN AN INVESTMENT IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT. THE ECONOMIC DOWNTURN IN THE TELECOMMUNICATIONS EQUIPMENT MARKET CONTINUES TO NEGATIVELY AFFECT OUR TELECOMMUNICATIONS SEGMENT SALES, WHICH SALES ACCOUNTED FOR SUBSTANTIAL PORTIONS OF OUR REVENUES IN THE SIX MONTHS ENDED JUNE 30, 2002 AND THE YEAR ENDED DECEMBER 31, 2001. During the six months ended June 30, 2002 and the year ended December 31, 2001, 40.6% and 53.9% of our sales, respectively, were to customers in the telecommunications industry. We experienced 44.3% and 5.6% declines in our telecommunications segment sales in the six months ended June 30, 2002 and the year ended December 31, 2001, respectively. We believe these declines primarily were due to a general business decline experienced by many of our telecommunications customers. We anticipate a decline in our telecommunications segment sales in 2002 as compared to 2001. We cannot predict the duration or severity of the telecommunications market downturn or the extent to which the downturn will continue to negatively affect our ability to sell our products and services to customers in the telecommunications industry. A further reduction in sales would reduce our accounts receivable balances, which in turn would have an adverse effect on our financial position by reducing cash availability under our lines of credit. We are taking various actions, including staff reductions, to reduce cash outlays of our telecommunications segment. However, if the downturn is long-lasting and severe, we may need to continue to downsize or to restructure, sell or discontinue all or part of our telecommunications operations, which would negatively impact our business, prospects, financial condition, results of operations and cash flows. OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT OUR BUSINESS IF DEMAND IS REDUCED. During the six months ended June 30, 2002 and the year ended December 31, 2001, the sale of telecommunications equipment and related services accounted for 40.6% and 53.9%, respectively, of our total sales, and the sale of electronic components accounted for 59.4% and 46.1%, 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 16 quantities of telecommunications equipment they desire to purchase from us, and if we are able and willing to fill those orders, 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. MOST OF THE CREDIT FACILITIES OF OUR U.K. AND FRENCH SUBSIDIARIES ARE PAYMENT-ON-DEMAND FACILITIES THAT MAY BE TERMINATED AT ANY TIME. IF ANY OF THESE LENDERS WERE TO DEMAND IMMEDIATE PAYMENT OF ALL OUTSTANDING OBLIGATIONS AND/OR TERMINATE THE EXISTING CREDIT FACILITY OR FACILITIES, OUR BUSINESS WOULD SUFFER. XCEL Corporation Limited has an overdraft credit facility of up to approximately $1,600,000 and XCEL Power Systems Limited has a term loan credit facility of up to approximately $800,000. Although amounts owing under the overdraft credit facility are due and payable no later than September 30, 2002, the lender has the right to demand payment in full at any time prior to September 30, 2002. CXR, S.A. has credit facilities with several lenders totaling up to approximately $844,000 in the aggregate. Each credit facility has a specified repayment term. However, each lender has the right to demand payment in full at any time prior to the scheduled maturity date of a particular credit facility. The lender to our U.K. subsidiaries has advised our U.K. subsidiaries that they no longer wish to continue to finance our U.K. subsidiaries over the long term. Similarly, CXR, S.A. has been advised by its lenders that they are contemplating a reduction in the total available credit. We cannot assure you that the various lenders to our U.K. and/or French subsidiaries will not seek immediate payment of all amounts owed by them under their respective credit facilities or seek to terminate any of the existing credit facilities. Similarly, we cannot assure you that if either of these events were to occur we would be successful in obtaining the required replacement financing for our operations in the U.K. and/or France or, if we were able to obtain such financing, that the financing would occur on a timely basis, would be on acceptable terms and would be sufficient to allow us to maintain our business operations in the U.K. and/or France. Accordingly, any of these actions on the part of any of the lenders to our U.K. and/or French subsidiaries could have a material adverse impact upon our results of operations and cash flows. 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. 17 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 from us products, such as many of our digital switches and all of our custom power supplies, 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. 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, our Executive Vice President, Graham Jefferies and our Senior Vice President and Chief Financial Officer, Randolph Foote. 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. Mr. Foote joined us in October 1999, and we have relied upon his skills in financial reporting, accounting and tax matters in addition to his skills in the analysis of potential acquisitions and general corporate administration. Consequently, the loss of Mr. Oliva, Mr. Jefferies, Mr. Foote 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 each of our executive officers, those agreements are of limited duration and are subject to early termination by the officers under some circumstances. 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. 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 reduce our competitiveness, revenues, profit margins or market share. 18 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 June 30, 2002, we had $14,886,000 in backlog orders for our products. These 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, we cannot assure you 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. 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 55% of our net sales for the year ended December 31, 2001. We currently anticipate that foreign sales will account for a similar proportion of our net sales for the year ended December 31, 2002. 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. IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR MAKE STRATEGIC ACQUISITIONS OR ALLIANCES, OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER. Our business strategy includes growth through acquisitions, strategic alliances and original equipment manufacturer resale agreements, among other arrangements, 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 or other opportunities and integrating acquired products and businesses requires a significant amount of management time and skill. Acquisitions and alliances may also require us to expend a substantial amount of cash or other resources, not only as a result of the direct expenses involved in the acquisition transaction or the creation of the alliance, 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 make strategic acquisitions, alliances or other arrangements due to our inability to identify appropriate targets, allies or arrangements, to raise the necessary funds, particularly while our stock price is low, or to manage the difficulties or costs involved in the acquisitions, alliances or arrangements, our long-term competitive positioning could suffer. 19 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. In fact, during the six months ended June 30, 2002, the high and low closing sale prices of a share of our common stock were $0.40 and $0.16, respectively. The market price of our common stock may continue to fluctuate in response to the following factors, many of which are beyond our control: 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. 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. 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, the recent general decline in telecommunications market activity and other changes affecting the telecommunications industry, including consolidations and restructuring of United States and foreign telephone companies, 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 or permanently to the extent our customers are acquired by or combined with companies that are and choose to remain customers of our competitors. In addition, the cyclical nature of the telecommunications business due to the budgetary cycle of 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. 20 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. 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. 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. 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 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 affect on us. 21 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. 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. BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY 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 22 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 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. 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 August 5, 2002, we had outstanding 21,513,366 shares of common stock, substantially all 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 August 5, 2002, we also had outstanding options, warrants and preferred stock that were exercisable for or convertible into 4,870,048 shares of common stock, nearly all of which shares of common stock were registered for resale by the holders of the options, warrants and preferred stock. 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. Our common stock trades under the symbol "MCTL" on the NASD's OTC Bulletin Board(R). Because our stock trades on the OTC Bulletin Board(R) 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 were outstanding as of August 5, 2002. In addition, 150,000 shares have been designated as Series B Preferred Stock, 65,733.7 of which were outstanding as of August 5, 2002. 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 23 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. 24 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 the lender's base rate, which exposes us to risk of earnings loss due to changes in such interest rates. The following table provides information about our 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. The symbol "E" represents Euribor plus a variable margin. Balances are as of December 31, 2001.
FAIR THERE- VALUE LIABILITIES 2002 2003 2004 2005 2006 AFTER TOTAL 12/31/01 ----------- ---- ---- ---- ---- ---- ---- ----- -------- Line of Credit (Domestic) $1,420 $1,420 $1,420 Average Interest Rate P+1% Line of Credit (U.K.) $1,665 $1,665 $1,665 Average Interest Rate B+2.5% Overdraft (France) $ 533 $ 533 $ 533 Average Interest Rate E Term Loan (Domestic) $ 137 $ 95 $ 232 $ 232 Average Interest Rate P+1% P+1% Term Loan (U.K.) $ 146 $ 146 $ 146 $ 146 $ 81 $ 665 $ 665 Average Interest Rate B+2.5% B+2.5% B+2.5% B+2.5% B+2.5% Term Loan (France) $ 30 $ 30 $ 30 $ 90 $ 90 Average Interest Rate 7.25%
25 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 In April and May 2002, we issued an aggregate of 756,742 shares of common stock upon conversion of 75,674.2 shares of Series B Preferred Stock held by four individuals and three entities. Exemption from the registration provisions of the Securities Act of 1933 for the transactions described above is claimed under Section 4(2) of the Securities Act of 1933, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide. 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. 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits --- -------- Number Description ------ ----------- 10.1 Fourth Amendment to Credit and Security Agreement dated as of April 17, 2002 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. 99.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002 (b) Reports on Form 8-K --- ------------------- None. 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: August 14, 2002 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) 27 EXHIBITS FILED WITH THIS REPORT ON FORM 10-Q Number Description ------ ----------- 10.1 Fourth Amendment to Credit and Security Agreement dated as of April 17, 2002 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. 99.1 Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002 28 EX-10.1 3 microtel_10q-ex101.txt Exhibit 10.1 FOURTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Fourth Amendment to Credit and Security Agreement (the "AMENDMENT"), dated as of April 17, 2002, is made by and between CXR TELECOM CORPORATION, a Delaware corporation ("CXR") and XET CORPORATION, a New Jersey corporation ("XET") (CXR and XET 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, that certain Second Amendment to Credit and Security Agreement dated as of November 29, 2000 and that certain Third Amendment to credit and Security Agreement dated as of September 20, 2001 (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 fourth 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) CXR BORROWING BASE. Subsection (b)(ii) of the definition of "CXR BORROWING BASE" as set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(ii) the lesser of (A) $400,000 from January 1 of each year through April 30 of each year and $300,000 from May 1 of each year through December 31 of each year, minus the aggregate outstanding sum of the Revolving Advances to XET based upon its Eligible Inventory, or (B) the sum of twenty-five percent (25%) of the Eligible Inventory of CXR consisting or raw materials plus forty percent (40%) of the Eligible Inventory of CXR consisting of finished goods, and minus" (b) XET BORROWING BASE. Subsection (b)(ii) of the definition of "XET BORROWING BASE" as set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(ii) the lesser of (A) $400,000 from January 1 of each year through April 30 of each year and $300,000 from May 1 of each year through December 31 of each year, minus the aggregate outstanding sum of the Revolving Advances to CXR based upon its Eligible Inventory, or (B) twenty-five percent (25%) of the Eligible Inventory of XET consisting or raw materials, and minus" 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 DEFT SERVICE COVERAGE RATIO. The Borrower will maintain a Debt Service Coverage Ratio, on a consolidated basis (based on the Debt Service Coverage Ratio of XET and CXR only), measured quarterly on a year to date basis, of not less than the ration set forth opposite each period below: Minimum Debt ------------ QUARTER ENDING SERVICE COVERAGE RATIO -------------- ---------------------- March 31, 2002 1.00:1.0 June 30, 2002 1.00:1.0 September 30, 2002 1.00:1.0 December 31, 2002 and each quarter-end thereafter 1.50:1.0" (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, (i) of not less than Five Million Eight Hundred Sixty One Thousand Dollars ($5,861,000) for the fiscal year ending December 31, 2001 and (ii) of not less than Seven Million Dollars ($5,860,000) for the fiscal year ending December 31,2002." (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 NET INCOME. The Borrower will maintain its Net Income after corporate allocations, on a consolidated basis (based on Net Income of XET and CXR only), measured quarterly on a year to date basis, of not less than the amount set forth opposite the applicable date: -2- Minimum Cumulative DATE NET INCOME ---- ----------------- March 31, 2002 ($500,000) June 30, 2002 ($300,000) September 30, 2002 $50,000 December 31, 2002 $500,000" 4. MATURITY DATE. The definition of "MATURITY DATE" as set forth in Section 2.8 of the Credit Agreement is herby extended and shall now be August 16, 2005. 5. 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. 6. EFFECTIVENESS OF THIS AMENDMENT. Lender must have 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. 7. REPRESENTATIONS AND WARRANTIES. The Borrower hereby, represents and warrants to the Lender as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of the 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 bylaws of the Borrower, or (ii) result in a breach of or constitute a default under any indenture or ban 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. -3- (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 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 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. 10. 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 Lendor, 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 exist in his favor at the tune of executing the release, which if known by him might have materially affected his settlement with the debtor." 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. -4- 11. 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 or 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. 12. 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: ASSISTANT VICE PRESIDENT Title: VICE PRESIDENT/CHIEF FINANCIAL ------------------------------ --------------------------------- OFFICER --------------------------------- XET CORPORATION By: /S/ RANDOLPH D. FOOTE ----------------------------------- Name: RANDOLPH D. FOOTE ---------------------------------- Title: VICE PRESIDENT/CHIEF FINANCIAL --------------------------------- OFFICER --------------------------------- -5- ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS ------------------------------------------ The undersigned guarantor of the indebtedness of CXR Telcom Corporation and XET Corporation (collectively, the "BORROWERS") to Wells Fargo Business Credit, Inc. (the "LENDER") pursuant to a Guaranty dated as of August 16, 2000 ("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 its obligations to the Lender pursuant to the terms of the 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 the Guaranty for all of the Borrowers' present and future indebtedness to the Lender. MICROTEL INTERNATIONAL INC. By: /S/ RANDOLPH D. FOOTE --------------------------------------------- Name: RANDOLPH D. FOOTE ------------------------------------------- Title: VICE PRESIDENT/CHIEF FINANCIAL OFFICER ------------------------------------------ -6- EX-99.1 4 microtel_10q-ex991.txt EXHIBIT 99.1 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report on Form 10-Q of MicroTel International, Inc. (the "Company") for the quarterly period ended June 30, 2002 (the "Report"), the undersigned hereby certifies in his capacity as Chief Executive Officer of the Company, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2002 By: /s/ CARMINE T. OLIVA -------------------------- Carmine T. Oliva Chief Executive Officer In connection with the quarterly report on Form 10-Q of MicroTel International, Inc. (the "Company") for the quarterly period ended June 30, 2002 (the "Report"), the undersigned hereby certifies in his capacity as Chief Financial Officer of the Company, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2002 By: /s/ RANDOLPH D. FOOTE ------------------------- Randolph D. Foote Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----