-----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, UI9GScagwDo4c3dmf3uCiMvqqDu0SrctP17zXNzynm7ebVJjNeBrfJNw6aK16OwG +WIJsw9qN8ETgd7I/eZ0uA== 0001019687-03-001657.txt : 20030814 0001019687-03-001657.hdr.sgml : 20030814 20030814075926 ACCESSION NUMBER: 0001019687-03-001657 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 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: 03843316 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-063003.txt ================================================================================ U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2003 or | | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission File Number 1-10346 MICROTEL INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 77-0226211 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 9485 HAVEN AVENUE, SUITE 100 RANCHO CUCAMONGA, CALIFORNIA 91730 (Address of Principal Executive Offices) (909) 987-9220 (Registrant's Telephone Number, Including Area Code) NOT APPLICABLE (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that 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 | | Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes | | No |X| As of August 11, 2003, there were 23,427,324 shares of the issuer's common stock, $0.0033 par value, outstanding. ================================================================================ MICROTEL INTERNATIONAL, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002.............................. F-1 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002 (unaudited)........ F-2 Condensed Consolidated Statements of Other Comprehensive Income for the Three and Six Months Ended June 30, 2003 and 2002 (unaudited).. F-3 Condensed Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2003 (unaudited)..................... F-4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 (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......................................................... 17 ITEM 4. CONTROLS AND PROCEDURES............................................. 17 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS................................................... 18 ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS........................... 18 ITEM 3. DEFAULTS UPON SENIOR SECURITIES..................................... 18 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 18 ITEM 5. OTHER INFORMATION................................................... 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................... 19 SIGNATURES .................................................................. 20 EXHIBITS FILED WITH THIS FORM 10-Q........................................... 21 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2003 AND DECEMBER 31, 2002 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) June 30, December 31, 2003 2002 ASSETS --------- --------- Current assets: (unaudited) Cash and cash equivalents $ 513 $ 254 Accounts receivable, net of allowance for doubtful accounts of $150 and $130, respectively 5,290 5,356 Inventories 6,978 7,505 Prepaid and other current assets 492 343 --------- --------- Total current assets 13,273 13,458 Property, plant and equipment, net 346 588 Goodwill, net of accumulated amortization of $1,055 and $1,050, respectively 2,369 2,346 Other assets 544 394 --------- --------- $ 16,532 $ 16,786 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 2,952 $ 3,475 Current portion of long-term debt 246 318 Accounts payable 3,460 3,897 Accrued expenses 1,965 1,807 --------- --------- Total current liabilities 8,623 9,497 Long-term debt, less current portion 907 927 Other liabilities 314 348 --------- --------- Total liabilities 9,844 10,772 --------- --------- Convertible redeemable Series A Preferred Stock, $10,000 unit value. Authorized 200 shares; issued and outstanding 0 shares and 25 shares, respectively (aggregate liquidation preferences of $0 and $250, respectively) -- 282 Stockholders' equity: Preferred stock, authorized 10,000,000 shares; Convertible Series B Preferred Stock, $0.01 par value; issued and outstanding 1,000 shares and 64,000 shares, respectively (aggregate liquidation preferences of $8 and $410, respectively) 7 400 Common stock, $0.0033 par value. Authorized 50,000,000 shares; issued and outstanding 23,427,000 and 21,535,000, respectively 77 71 Additional paid-in capital 25,593 24,900 Accumulated deficit (18,644) (19,042) Accumulated other comprehensive loss (345) (597) --------- --------- Total stockholders' equity 6,688 5,732 --------- --------- $ 16,532 $ 16,786 ========= =========
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, 2003 AND 2002 (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands, except per share amounts) Net sales $ 6,834 $ 6,118 $ 12,502 $ 10,938 Cost of sales 4,005 3,608 7,532 6,899 --------- --------- --------- --------- Gross profit 2,829 2,510 4,970 4,039 Operating expenses: Selling, general and administrative 1,918 1,855 3,616 3,720 Engineering and product development 246 259 467 497 --------- --------- --------- --------- Income (loss) from operations 665 396 887 (178) Other income (expense): Interest expense (117) (94) (213) (184) Other income (47) 19 (61) 23 --------- --------- --------- --------- Income (loss) before income taxes 501 321 613 (339) Income tax expense 142 66 210 105 --------- --------- --------- --------- Net income (loss) $ 359 $ 255 $ 403 $ (444) ========= ========= ========= ========= Earnings (loss) per share: Net income (loss): Basic $ 0.02 $ 0.01 $ 0.02 $ (0.02) ========= ========= ========= ========= Diluted $ 0.02 $ 0.01 $ 0.02 $ (0.02) ========= ========= ========= ========= See accompanying notes to condensed consolidated financial statements. F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 2003 2002 2003 2002 ------ ------ ------ ------ (in thousands) Net income (loss) $ 359 $ 255 $ 403 $(444) Other comprehensive income (loss) net of tax: Foreign currency translation adjustment 224 382 252 344 ------ ------ ------ ------ Comprehensive income (loss) $ 583 $ 637 $ 655 $(100) ====== ====== ====== ====== See accompanying notes to condensed consolidated financial statements. F-3 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2003 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
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, 2002 64 $ 400 21,535 $ 71 $ 24,900 $ (19,042) $ (597) $ 5,732 Preferred Series A conversions -- -- 1,263 4 283 -- -- 287 Preferred Series B conversions (63) (393) 629 2 391 -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- 252 252 Accretion of redeemable preferred stock -- -- -- -- -- (5) -- (5) Warrants issued for services -- -- -- -- 19 -- -- 19 Net profit -- -- -- -- -- 403 -- 403 --------- --------- --------- --------- --------- ----------- ------------ --------- Balance at June 30, 2003 1 $ 7 23,427 $ 77 $ 25,593 $ (18,644) $ (345) $ 6,688 ========= ========= ========= ========= ========= =========== ============ ========= See accompanying notes to condensed consolidated financial statements. F-4
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES SIX MONTHS ENDED JUNE 30, 2003 AND 2002 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, 2003 2002 ------------ ------------ (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 403 $ (444) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and amortization 167 149 Provision for doubtful account 40 24 Provision for obsolete/slow moving inventory 317 281 Warrants issued for services 19 Changes in operating assets and liabilities: Accounts receivable 17 (52) Inventories 174 (292) Other assets (213) (47) Accounts payable and accrued expenses (312) (157) ------------ ------------ Cash provided by (used in) operating activities 612 (538) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (2) (72) Cash collected on note receivable 6 14 ------------ ------------ Cash provided by (used in) investing activities 4 (58) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in notes payable and long-term debt (616) 188 ------------ ------------ Cash provided by (used in) financing activities (616) 188 ------------ ------------ Effect of exchange rate changes on cash 259 217 Net increase (decrease) in cash and cash equivalents 259 (191) Cash and cash equivalents at beginning of period 254 604 ------------ ------------ Cash and cash equivalents at end of period $ 513 $ 413 ============ ============ Cash paid for: Income tax $ 33 $ 13 ============ ============ Interest $ 210 $ 181 ============ ============ See accompanying notes to condensed consolidated financial statements.
F-5 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2003 AND 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 Telcom"), CXR, S.A.S. ("CXR France") and XET Corporation, formerly XIT Corporation ("XET"). XET and its subsidiaries design, develop, manufacture and market digital and rotary switches and power supplies and subsystem assemblies. CXR Telcom and CXR France design, develop, manufacture and market transmission and network access products and communications test equipment. 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: electronic components and communications equipment. 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. 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, 2003 and December 31, 2002 and the results of operations and cash flows for the related interim periods ended June 30, 2003 and 2002. However, these results are not necessarily indicative of results for any other interim period or for the year ending December 31, 2003. 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 2002 annual report on Form 10-K. STOCK-BASED COMPENSATION In December 2002, the Financial Accounting Standards Board ("FASB") issued FASB Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation expense for stock options is measured as the excess, if any, of the estimate of the market value of our stock at the date of the grant over the amount an employee must pay to acquire the stock. The Company has adopted the disclosure provisions of SFAS No. 148 for its financial reports. F-6 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2003 AND 2002 (UNAUDITED) Because this standard involves disclosures only, the adoption of this standard did not have a material impact on the Company's results of operations, financial position or liquidity. The following table sets forth the net income (loss), net income (loss) available for common stockholders and earnings (loss) per share amounts for the periods presented as if the Company had elected the fair value method of accounting for stock options for all periods presented: Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2003 2002 2003 2002 -------- -------- -------- -------- (in thousands, except per share amounts) Net income (loss) As reported $ 359 $ 255 $ 403 $ (444) Pro forma $ 346 $ 247 $ 380 $ (460) Net income (loss) available for common stockholders (less accretion of preferred stock) As reported $ 357 $ 252 $ 398 $ (450) Pro forma $ 344 $ 244 $ 375 $ (466) Basic earnings (loss) per share As reported $ 0.02 $ 0.01 $ 0.02 $ (0.02) Pro forma $ 0.02 $ 0.01 $ 0.02 $ (0.02) Diluted earnings (loss) per share As reported $ 0.02 $ 0.01 $ 0.02 $ (0.02) Pro forma $ 0.01 $ 0.01 $ 0.02 $ (0.02) The above calculations include the effects of all grants in the periods presented. Because options often vest over several years and additional awards are made each year, the results shown above may not be representative of the effects on net income (loss) in future periods. The calculations were based on a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 93%; risk-free interest rate of 2%-3%; expected lives of 7 years. F-7 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2003 AND 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, -------------------- -------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands, except per share amounts) NUMERATOR: Net income (loss) $ 359 $ 255 $ 403 $ (444) Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 2 3 5 6 --------- --------- --------- --------- Income (loss) attributable to common stockholders $ 357 $ 252 $ 398 $ (450) ========= ========= ========= ========= DENOMINATOR: Weighted average number of common shares outstanding during the period 21,865 21,129 21,705 20,902 Incremental shares from assumed exercises or conversions of warrants, options and preferred stock 1,643 2,361 1,753 -- --------- --------- --------- --------- Adjusted weighted average shares 23,508 23,490 23,458 20,902 ========= ========= ========= ========= Basic earnings (loss) per share $ 0.02 $ 0.01 $ 0.02 $ (0.02) ========= ========= ========= ========= Diluted earnings (loss) per share $ 0.02 $ 0.01 $ 0.02 $ (0.02) ========= ========= ========= =========
The computation of diluted loss per share for the six-months ended June 30, 2002 excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was antidilutive due to losses incurred by the Company or such instruments had exercise prices greater than the average market price of the common shares during the periods presented. As of June 30, 2002, there were 440,000 shares of common stock underlying options and warrants that were anti-dilutive and 2,305,000 shares of common stock underlying shares of convertible preferred stock. F-8 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2003 AND 2002 (UNAUDITED) (3) INVENTORIES Inventories consist of the following. June 30, 2003 December 31, 2002 ----------- ----------- Raw materials $2,524,000 $2,904,000 Work-in-process 2,758,000 2,988,000 Finished goods 1,696,000 1,613,000 ----------- ----------- $6,978,000 $7,505,000 =========== =========== (4) REPORTABLE SEGMENTS The Company has two reportable segments: electronic components and communications equipment. The electronic components segment operates in the United States, European and Asian markets and designs, manufactures and markets digital switches and power supplies. The communications equipment segment operates principally in the United States and European markets and designs, manufactures and distributes voice and data transmission and networking equipment and communications test instruments. The Company evaluates performance based upon profit or loss from operations before income taxes, exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. There were no intersegment sales during the six-month periods ended June 30, 2003 and 2002. 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 2002 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, 2003 June 30, 2002 ------------- ------------- Sales to external customers: Electronic Components $ 7,849,000 $ 6,502,000 Communications Equipment 4,653,000 4,436,000 ------------- ------------- $ 12,502,000 $ 10,938,000 ============= ============= Segment pretax profits (losses) Electronic Components $ 1,659,000 $ 1,372,000 Communications Equipment (33,000) (770,000) ------------- ------------- $ 1,626,000 $ 602,000 ============= ============= F-9 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2003 AND 2002 (UNAUDITED) June 30, 2003 December 31, 2002 ------------- ------------- Segment assets Electronic Components $ 9,719,000 $ 9,445,000 Communications Equipment 6,713,000 6,773,000 ------------- ------------- $ 16,432,000 $ 16,218,000 ============= ============= 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, 2003 June 30, 2002 ----------- ----------- Pretax Income Total income for reportable segments $1,626,000 $ 602,000 Unallocated amounts: Unallocated general corporate expenses 1,013,000 941,000 ----------- ----------- Consolidated income (loss) before income taxes $ 613,000 $ (339,000) =========== =========== June 30, 2003 December 31, 2002 ------------- ------------- Assets Total assets for reportable segments $ 16,432,000 $ 16,218,000 Other assets 100,000 568,000 ------------- ------------- Total consolidated assets $ 16,532,000 $ 16,786,000 ============= ============= (5) NEW CXR FRANCE CREDIT FACILITY As of June 30, 2003, CXR France had credit facilities with several lenders with balances totaling up to approximately $873,000 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. Because CXR France has experienced a substantial reduction in revenue, some of its lenders have made reductions in the total available credit. Banque Hervet reduced availability to $78,000 from $159,000 effective December 31, 2002. On February 10, 2003, Societe Generale notified CXR France that CXR France had to pay back its credit line balance by April 30, 2003. Societe Generale agreed to an alternative pay back schedule for the full balance owed as of March 31, 2003 so that $54,000 was due by May 31, 2003 and another $54,000 was due by June 30, 2003. The overdraft loan from Societe Generate has been paid off in accordance with the bank's demand. There is a $12,000 balance outstanding that will be paid off upon the collection of certain receivables. Accordingly, the Company sought alternative financing sources in France to replace all of the lenders to the Company's French operations. On April 8, 2003, CXR France obtained a credit facility from IFN Finance. The new credit line is for a maximum of $1,371,000, based on the exchange rate in effect at June 30, 2003 for the conversion of euros into United F-10 MICROTEL INTERNATIONAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JUNE 30, 2003 AND 2002 (UNAUDITED) States dollars. This is an increase over the total of credit lines that CXR France has with its other banks. The IFN Finance facility will replace the several smaller credit lines. The IFN Finance facility is secured by accounts receivable and carries an annual interest rate of 1.6 percentage points above the French "T4M" rate. The French T4M rate was 2.2103% as of June 30, 2003. Funds that become available under the new IFN Finance credit line as new accounts receivables develop are being used to retire the existing CXR France debt. (6) NEW ACCOUNTING PRONOUNCEMENTS New accounting pronouncements are discussed under the heading "Impacts of New Accounting Pronouncements" beginning on page 14 of this report. (7) INCOME TAXES The effective tax rate for the three-month period ended June 30, 2003 differed from the United States federal statutory rate due to the fact that the majority of taxes accrued were at U.K. tax rates on U.K. source income. Also, certain domestic net operating losses were incurred without a tax benefit having been recorded. The effective tax rate for the six-month period ended June 30, 2003 was also affected by these factors, although the resultant effective tax rate was similar to the United States federal statutory rate. (8) PREFERRED STOCK CONVERSIONS During the three months ended June 30, 2003, holders of Series A Preferred Stock converted 25 shares of Series A Preferred Stock into 1,263,250 shares of common stock, and holders of Series B Preferred Stock converted 58,728.65 shares of Series B Preferred Stock into 587,286 shares of common stock. Each share of Series A Preferred Stock was convertible into 50,530 shares of common stock, and each share of Series B Preferred Stock was convertible into 10 shares of common stock. (9) GOODWILL The balance of goodwill on the Company's balance sheet fluctuates from period to period due to the application of foreign currency translation to United States dollars in calculating the balance of goodwill of our foreign subsidiaries. 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 report. 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 or contraction in the electronic components and communications equipment markets in which we operate; o our business strategy for expanding, maintaining or contracting 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. In particular, you should review our annual report on Form 10-K for the year ended December 31, 2002, and the "Risk Factors" we included in that report. Any of the factors described above 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 Through our three wholly-owned operating subsidiaries, XET Corporation, CXR Telcom and CXR France, and through the divisions and subsidiaries of those subsidiaries, we design, develop, manufacture, assemble, and market products and services in the following two material business segments: o Electronic Components -- digital and rotary switches -- electronic power supplies -- subsystem assemblies F-12 o Communications Equipment -- transmission and network access products -- communications test instruments Our sales are primarily in North America, Europe and Asia. Revenues are recorded when products are shipped if shipped FOB shipping point or when received by the customer if shipped FOB destination. Sales to customers in the electronic components segment, primarily to defense and aerospace customers, defense contractors and industrial customers, were 59.1%, 46.1% and 44.1% of our total net sales for the years 2002, 2001 and 2000, respectively, and 62.8% of our total net sales during the six months ended June 30, 2003. Sales of communications equipment and related services, primarily to telecommunications equipment customers, were 40.9%, 53.9% and 55.8% of our total net sales during 2002, 2001 and 2000, respectively, and 37.2% of our total net sales during the six months ended June 30, 2003. We experienced a 37.2% decline in our communications equipment segment sales during 2002. We believe this decline primarily was due to a general business downturn experienced by many of our telecommunications customers, the disruption caused by the French political elections in 2002 and our decision to discontinue the resale in Europe of test equipment not manufactured by us. As a result of the general business downturn, we experienced significant reductions in sales and gross profit as well as changes in our product mix. Consequently, we have shifted our overall focus toward growing our electronic components business. However, we also plan to continue working to improve the growth and performance of our communications equipment business, particularly customer premises transmission and network access products. During the six months ended June 30, 2003, our electronic components segment improved its sales and profits as compared to the six months ended June 30, 2002. Our communications equipment segment improved its sales and reduced its loss in the six months ended June 30, 2003. The improvement was related to CXR France, which serves mainly our telecommunications customer premises equipment in Europe and the United States. CXR France's 31.9% increase in sales was almost completely offset by a 38.3% decline in sales at CXR Telcom in Fremont, California. CXR Telcom mainly sells to telecommunications carrier companies in the United States. In the first half of 2003, we reduced costs at CXR Telcom by laying off a substantial portion of its work force and began to increase our sources of test equipment components from Asian manufacturers that produce the components for lower prices than we previously paid to our former suppliers. We have reduced costs in our communications equipment segment and lowered the breakeven point both in our United States and French operations through various cost-cutting methods, such as using Asian contract manufacturers, reducing facility rent expense and downsizing our administrative office in Paris, France. We anticipate these cost-cutting efforts will improve our bottom line performance in this segment if we are able to achieve at least the same sales levels we achieved in 2002. However, 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 adversely affect our financial position by reducing cash availability under our lines of credit. 3 As mentioned above, we have taken various actions, including staffing reductions as recently as February 2003, to reduce cash outlays of our communications equipment segment. However, if the downturn is long-lasting and more severe, we may need to continue to downsize or to restructure, sell or discontinue all or part of our communications equipment operations, which would negatively impact our business, prospects, financial condition, results of operations and cash flows. CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in the notes to the consolidated financial statements that are included in our annual report on Form 10-K for the year ended December 31, 2002. We believe our most critical accounting policies include inventory valuation, foreign currency translation and goodwill impairment. INVENTORY VALUATION 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 quantity of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, the communications 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. FOREIGN CURRENCY TRANSLATION We have foreign subsidiaries that together accounted for 62.1% of our net revenues, 72.3% of our assets and 74.7% of our total liabilities as of and for the year ended December 31, 2002, and 72.6% of our net revenues, 76.4% of our assets and 74.8% of our total liabilities as of and for the six months ended June 30, 2003. 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." 4 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. 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 the subsidiary's 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 $597,000 and $345,000 that were included as part of accumulated other comprehensive loss within our balance sheets at December 31, 2002 and June 30, 2003, respectively. During the year ended December 31, 2002 and the six months ended June 30, 2003, we included translation adjustments of gains of approximately $446,000 and $252,000, respectively. If we had determined that the functional currency of our subsidiaries was United States dollars, these gains or losses would have decreased or increased our loss for the year ended December 31, 2002 and our net profit for the six months ended June 30, 2003. 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 year ended December 31, 2002 and the six months ended June 30, 2003. 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 of 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 were required to analyze our goodwill for impairment issues by June 30, 2002, and then at least annually after that date. During the year ended December 31, 5 2002 and the six months ended June 30, 2003, we did not record any impairment losses related to goodwill and other intangible assets. RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 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, ------------------ 2003 2002 ------ ------ Net sales ..................................... 100.0% 100.0% Cost of sales ................................. 58.6 59.0 ------ ------ Gross profit .................................. 41.4 41.0 Selling, general and administrative expenses .................................... 28.1 30.3 Engineering and product development expenses .................................... 3.6 4.2 ------ ------ Operating income .............................. 9.7 6.5 Interest expense .............................. (1.7) (1.5) Other income (expense) ........................ (0.7) 0.2 ------ ------ Income before income tax expense .............. 7.3 5.2 Income tax expense ............................ 2.0 1.0 ------ ------ Net income .................................... 5.3% 4.2% ====== ====== NET SALES. Net sales for the three months ended June 30, 2003 increased by $716,000 (11.7%) to $6,834,000 as compared to $6,118,000 for the three months ended June 30, 2002. Net sales of our electronic components for the three months ended June 30, 2003 increased by $741,000 (20.4%) to $4,378,000 as compared to $3,637,000 for the three months ended June 30, 2002. Net sales of power supplies by XCEL Corporation, Ltd., our U.K. subsidiary that manufactures power supplies and wound components, for the three months ended June 30, 2003 increased by $929,000 (51.2%) to $2,743,000 as compared to $1,814,000 for the three months ended June 30, 2002 due to an increase in the number of products shipped under long-term programs. We anticipate that during the remainder of 2003 we will experience similar increases in sales of power supplies as compared to 2002. Sales of digital switches manufactured by our Digitran Division for the three months ended June 30, 2003 increased by $469,000 (47.2%) to $1,463,000 as compared to $994,000 for the three months ended June 30, 2002. The increase in sales of digital switches was a result of increased orders, which we believe was primarily due to increases in sales of spare parts and increased demand due to the war in Iraq. Sales of electronic subsystem assemblies were negligible in the current period as compared to $662,000 in the quarter ended June 30, 2002 because of the completion of a contract. Net sales of our communications equipment products and services for the three months ended June 30, 2003 remained relatively unchanged at $2,456,000 as compared to $2,481,000 for the comparable prior year period. However, CXR France increased sales by $311,000 (22.3%) to $1,705,000 in the current period as compared to $1,394,000 in the prior year period. The increase was the result of a substantial improvement in sales by CXR France of transmission and network access equipment, which improvement exceeded a decline in sales of test equipment by CXR Telcom. CXR France produces all of our transmission products 6 and network access equipment. Net sales of transmission products and network access equipment produced by CXR France for the three months ended June 30, 2003 increased slightly by $50,000 (3.5%) to $1,491,000 as compared to $1,441,000 for the three months ended June 30, 2002 primarily because the prior year sales were negatively affected by the political elections in France, which we believe caused a slow down in purchasing activity in the first half of 2002. Test equipment net sales for the three months ended June 30, 2003 decreased by $352,000 (36.3%) to $617,000 as compared to $969,000 for the three months ended June 30, 2002. The sales decrease resulted from a reduction in orders from telecommunication customers in the United States, which we believe was primarily due to the weak telecom market. Net sales of our CXR HALCYON 704 series field test equipment decreased by $243,000 (30.3%) to $559,000 as compared to $802,000 for the three months ended June 30, 2002. The CXR HALCYON product line experienced a decrease in sales primarily due to the continued slowdown in the capital expenditures of telecommunications service providers. The service providers released their capital budgets later in the year and at reduced levels. We are responding to this industry downturn by reducing costs and developing a strategy to seek new business development in other industries that are not suffering from the telecommunications downturn, such as utilities, construction and government. We have begun to receive orders from certain non-telecom customers, such as utilities and government agencies, as a result of our efforts to expand our markets. 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 and 2003. This has had a negative impact on CXR Telcom's sales. We have seen recent improvement in orders at CXR Telcom but do not know if such improvement will be a continuing trend or only a temporary change. GROSS PROFIT. Gross profit as a percentage of total net sales increased to 41.4% for the three months ended June 30, 2003 as compared to 41.0% for the comparable period in 2002. In dollar terms, total gross profit increased by $319,000 (12.7%) to $2,829,000 as compared to $2,510,000 for the three months ended June 30, 2002. Gross profit for our electronic components segment increased in dollar terms by $232,000 (15.5%) to $1,726,000 for the three months ended June 30, 2003 as compared to $1,494,000 for the three months ended June 30, 2002, and decreased as a percentage of related net sales to 39.4% for the three months ended June 30, 2003 from 41.1% for the three months ended June 30, 2002. This decrease was primarily due to a higher portion of power supply sales in relation to the total electronic component sales. Power supplies generally carry a lower gross margin than digital switches. However, sales of power supplies by XCEL Power Systems resulted in an improved gross margin at XCEL Power Systems of 29.5% in the current period as compared to 24.8% in the prior year period. Digital switches had a slightly lower gross margin of 56.8% in the current period due to product mix as compared to the 61.5% gross margin in the second quarter of 2002. Gross profit for our communications equipment segment increased in dollar terms by $85,000 (8.4%) to $1,102,000 for the three months ended June 30, 2003 as compared to $1,017,000 for the comparable period in 2002, and increased as a percentage of net sales to 44.8% for the three months ended June 30, 2003 from 40.1% for the three months ended June 30, 2002. The increase in gross profit as a percentage of net sales primarily was due to the increase in sales volume at CXR France and cost reductions, which helped reduce costs on a per 7 unit basis. This increase in gross margin more than offset the reduced gross margin of CXR Telcom that declined to 44.6% from 54.6% in the prior year period due primarily to lower sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three months ended June 30, 2003 increased slightly by $63,000 (3.4%) to $1,918,000 as compared to $1,855,000 for the three months ended June 30, 2002. However, selling, general and administrative expenses decreased as a percentage of total net sales, to 28.1% of net sales during the three months ended June 30, 2003 from 30.3% of net sales during the comparable period in 2002. The slight increase in these expenses was due primarily to a $108,000 increase in electronic component segment administrative and selling expenses due to additional staffing. These increases were partially offset by a $157,000 decrease in such expenses at our communication equipment units primarily due to staffing reductions. We will continue to seek cost reductions, but most of the major cost reductions have been implemented for the current business levels. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our communications equipment segment and XET Corporation's Digitran Division. These expenses remained relatively constant at $246,000 for the three months ended June 30, 2003 as compared to $259,000 for the three months ended June 30, 2002. OTHER INCOME AND EXPENSE. Interest expense increased by $23,000 (24.5%) to $117,000 for the three months ended June 30, 2003 from $94,000 for the three months ended June 30, 2002. Other expense was $47,000 for the three months ended June 30, 2003 as compared to other income of $19,000 for the three months ended June 30, 2002 primarily due to miscellaneous charges and credits. INCOME TAX EXPENSE. Income tax expense for the three months ended June 30, 2003 was $142,000 as compared to $66,000 for the comparable prior year period. The majority of the increase related to the recording by XCEL Power Systems of a provision for U.K. income tax that was required because XCEL Power Systems is expected to produce greater taxable income for 2003 than in 2002 and has consumed its net operating loss carryforwards. NET INCOME. Net income increased by $104,000 (40.8%) to $359,000 for the three months ended June 30, 2003 as compared to $255,000 for the comparable prior year period. The largest contributions to this positive change were the increases in net sales of CXR France and XCEL Power Systems, which improved their operating profits by $338,000 and $308,000, respectively. The benefits of these improvements were partially offset by reductions in operating earnings of XET Corporation's Digitran Division, which experienced a $251,000 decline in operating earnings. 8 SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 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, ------------------ 2003 2002 ------ ------ Net sales ..................................... 100.0% 100.0% Cost of sales ................................. 60.2 63.1 ------ ------ Gross profit .................................. 39.8 36.9 Selling, general and administrative expenses .................................... 28.9 34.0 Engineering and product development expenses .................................... 3.8 4.5 ------ ------ Operating income (loss) ....................... 7.1 (1.6) Interest expense .............................. (1.7) (1.7) Other income (loss) ........................... (0.5) 0.2 ------ ------ Income (loss) before income tax expense ....... 4.9 (3.1) Income tax expense ............................ 1.7 1.0 ------ ------ Net income (loss) ............................. 3.2% (4.1)% ====== ====== NET SALES. Net sales for the six months ended June 30, 2003 increased by $1,564,000 (14.3%) to $12,502,000 as compared to $10,938,000 for the six months ended June 30, 2002. Net sales of our electronic components for the six months ended June 30, 2003 increased by $1,347,000 (20.7%) to $7,849,000 as compared to $6,502,000 for the six months ended June 30, 2002. Net sales of power supplies by XCEL Corporation, Ltd. for the six months ended June 30, 2003 increased by $1,565,000 (47.6%) to $4,852,000 as compared to $3,287,000 for the six months ended June 30, 2002 due to an increase in the number of products shipped under long-term programs. We anticipate that during the remainder of 2003 we will continue to experience increases in sales of power supplies as compared to 2002. Sales of digital switches manufactured by our Digitran Division for the six months ended June 30, 2003 increased by $360,000 (15.4%) to $2,697,000 as compared to $2,337,000 for the six months ended June 30, 2002. The increase in sales of digital switches was primarily a result of increases in orders for spare parts that we believe was mainly due to the war in Iraq. Sales of electronic subsystem assemblies were $110,000 in the current period as compared to $662,000 in the first half of 2002 due to the completion of a contract in 2002. Net sales of our communications equipment products and services for the six months ended June 30, 2003 increased by $217,000 (4.9%) to $4,653,000 as compared to $4,436,000 for the six months ended June 30, 2002. The increase was the result of a substantial improvement in sales by CXR France of transmission, network access equipment, and services which improvement exceeded a decline in sales of test equipment by CXR France and CXR Telcom. We decided to terminate the resale of test equipment by CXR France in 2002 and now have only residual sales of these products. Transmission and network access equipment sales for the six months ended June 30, 2003 increased by $684,000 (26.2%) to $3,299,000 as compared to $2,615,000 for the prior year period. Test equipment net sales for the six months ended June 30, 2003 decreased by $696,000 (43.4%) to $908,000 as compared to $1,604,000 for the six months ended June 30, 2002. The sales decrease resulted from a reduction in orders from telecommunication customers in the United States, which we believe was primarily due to the weak telecom market and CXR France's discontinuation of test equipment resales. CXR France produces all of our transmission products and network access equipment. Total net sales by CXR France, including both test equipment and transmission and networking equipment, increased by $871,000 (31.9%) to $3,599,000 as compared to $2,728,000 for the six months ended June 30, 2002 primarily because we terminated the resale of test equipment in Europe and the prior year sales were negatively affected by the political elections in France, which we believe caused a slow down in purchasing activity in the first half of 2002. Net sales of our CXR HALCYON 704 series field test equipment decreased by $338,000 (32.6%) to $700,000 as compared to $1,038,000 for the six months ended June 30, 2002 primarily due to the poor telecom market. The CXR HALCYON product line experienced a decrease in sales mainly due to the continued slowdown in the capital expenditures of telecommunications service providers. 9 The service providers released their capital budgets later in the year and at reduced levels. We have responded to this industry downturn by reducing costs and developing a strategy to seek new business development in other industries that are not suffering from the telecommunications downturn, such as utilities, construction and government. 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 and 2003. This has had a negative impact on CXR Telcom's sales. We have seen recent improvement in orders at CXR Telcom but do not know if such improvement will be a continuing trend or only a temporary change. GROSS PROFIT. Gross profit as a percentage of total net sales increased to 39.8% for the six months ended June 30, 2003 as compared to 36.9% for the comparable period in 2002. In dollar terms, total gross profit increased by $931,000 (23.1%) to $4,970,000 as compared to $4,039,000 for the six months ended June 30, 2002. Gross profit for our electronic components segment increased in dollar terms by $564,000 (22.3%) to $3,096,000 for the six months ended June 30, 2003 as compared to $2,532,000 for the six months ended June 30, 2002, and increased as a percentage of related net sales to 39.4% for the six months ended June 30, 2003 from 38.9% for the six months ended June 30, 2002. This increase primarily was the result of increases in the profit margins of both digital switches and power supplies due to changes in product mix for XET Corporation's Digitran Division switch production operations and increased production due to higher sales volumes lowering per unit costs and product mix for XCEL Power Systems' U.K. power supply production operations. Gross profit for our communications equipment segment increased in dollar terms by $366,000 (24.3%) to $1,873,000 for the six months ended June 30, 2003 as compared to $1,507,000 for the comparable period in 2002, and increased as a percentage of net sales to 40.3% for the six months ended June 30, 2003 from 34.0% for the six months ended June 30, 2002. The increase in gross profit as a percentage of net sales primarily was due to the increase in sales volume at CXR France and cost reduction, which helped reduce costs on a per unit basis. Cost reductions at CXR Telcom were not sufficient to offset the effect of CXR Telcom's decline in sales, and CXR Telcom ended the first half of 2003 with a gross profit of 29.6% as compared to 36.9% in the first half of 2002. Based on recent orders, we expect CXR Telcom to improve its gross profit in the second half of 2003. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the six months ended June 30, 2003 decreased by $104,000 (2.8%) to $3,616,000 as compared to $3,720,000 for the six months ended June 30, 2002. Selling, general and administrative expenses also decreased as a percentage of total net sales, to 28.9% of net sales during the six months ended June 30, 2003 from 34.0% of net sales during the comparable period in 2002. Selling expenses were reduced by $134,000 in our communications equipment segment, and administrative costs were reduced by $253,000 in our communications equipment segment primarily due to staff reductions at CXR Telcom and CXR France. These reductions were partially offset by a $121,000 increase in administrative expenses in our electronic components segment, which was partially due to an increase in the reserve for doubtful accounts and miscellaneous other items. We will continue to maintain our vigilance in controlling costs. However, we have made most of the major cost reductions possible for our level of business and do not anticipate additional large cost reductions. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development 10 activities of our communications equipment segment and XET Corporation's Digitran Division. These expenses decreased by $30,000 (6.0%) to $467,000 for the six months ended June 30, 2003 as compared to $497,000 for the six months ended June 30, 2002 due primarily to cost reductions in the communication equipment segment. OTHER INCOME AND EXPENSE. Interest expense increased by $29,000 (15.8%) to $213,000 for the six months ended June 30, 2003 from $184,000 for the six months ended June 30, 2002 generally due to higher average debt balances at XCEL Power Systems. Other expense was $61,000 for the six months ended June 30, 2003 as compared to other income of $23,000 for the six months ended June 30, 2002 primarily due to miscellaneous discounts and fees. INCOME TAX EXPENSE. Income tax expense for the six months ended June 30, 2002 was $210,000 as compared to $105,000 for the comparable prior year period. The majority of the increase related to the recording by XCEL Power Systems of a provision for U.K. income tax that was required because XCEL Power Systems is expected to produce greater taxable income for 2003 than in 2002 and has consumed its net operating loss carryforwards. NET INCOME (LOSS). The net income for the six months ended June 30, 2003 was $403,000 as compared to the net loss of $444,000 for the six months ended June 30, 2002, an improvement of $847,000. The largest contribution to this positive change was the increase in net sales of CXR France in our communications equipment segment, which improved its operating income by $771,000. We continue to closely monitor costs throughout our operations and have reduced costs through staffing reductions in our communications equipment operations in the United States and France and through various other cost-cutting methods, such as using contract manufacturers, reducing facility rent expense and phasing out our administrative office in Paris, France. These actions have substantially reduced the sales volume required to create profitability at both CXR Telcom and CXR France. LIQUIDITY AND CAPITAL RESOURCES During the six months ended June 30, 2003 and the year ended December 31, 2002, 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, 2003, we had working capital of $4,650,000, which represented an increase of $689,000 (17.4%) over working capital at December 31, 2002, an accumulated deficit of $18,644,000, an accumulated other comprehensive loss of $345,000, cash and cash equivalents of $513,000, and $5,290,000 of accounts receivable. As of December 31, 2002, we had working capital of $3,961,000, an accumulated deficit of $19,042,000, an accumulated other comprehensive loss of $597,000, cash and cash equivalents of $254,000, and $5,356,000 of accounts receivable. Cash provided by our operating activities totaled $612,000 for the six months ended June 30, 2003, an improvement of $1,150,000 as compared to cash used in our operating activities of $538,000 for the six months ended June 30, 2002. This $1,150,000 increase in cash provided by operations during the six months ended June 30, 2003 primarily resulted from generation of net income as compared to our recording of a net loss in the prior year and the reduction of inventory levels. Cash provided by our investing activities totaled $4,000 for the six months ended June 30, 2003 as compared to $58,000 for the six months ended June 30, 2002. Included in the results for the six months ended June 30, 2002 are $72,000 of fixed asset purchases. 11 Cash used in our financing activities totaled $616,000 for the six months ended June 30, 2003 as compared to $188 of cash provided by our financing activities for the six months ended June 30, 2002, due to repayments of bank debt. On August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting as guarantor, obtained a credit facility from Wells Fargo Business Credit, Inc. In April 2002, the maturity date of the facility was extended by two years to August 16, 2005. Since April 17, 2002, the facility has provided for a revolving loan of up to $3,000,000 secured by inventory and accounts receivable and a term loan in the amount of $687,000 secured by machinery and equipment. On June 30, 2003, the interest rate was the prime rate (then 4%) plus 1%, subject to a minimum interest charge of $13,500 per month. The balance outstanding at June 30, 2003 was $796,000 on the revolving loan and $76,000 on the term loan, and we had available to us $19,000 of additional borrowings under the revolving loan. The credit facility contains restrictive financial covenants that are set by mutual agreement each year. At June 30, 2003, we were in compliance with these covenants, which include a minimum net income covenant and a minimum debt service ratio to be measured quarterly. The credit facility also contains an annual net worth covenant. As of June 30, 2003, our foreign subsidiaries had credit facilities, including lines of credit and term loans, with Venture Finance PLC, a subsidiary of the global Dutch ABN AMRO Holdings N.V. financial institution, in England, Banc National de Paris, Banque Hervet and IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., in France, and Johan Tokyo Credit Bank and Johnan Shinkin Bank in Japan. At June 30, 2003, the balances outstanding under our U.K., France and Japan credit facilities were $2,075,000, $873,000 and $75,000, respectively. XCEL Japan Ltd. , or XJL, obtained a term loan on November 29, 2002 from the Johnan Shinkin Bank. The loan is amortized over five years and carries an annual interest rate of 3.25%. The balance of the loan as of June 30, 2003 was $75,000 using the exchange rate in effect at that date for conversion of Japanese yen into United States dollars. Our U.K. subsidiary, XCEL Power Systems, Ltd., or XPS, obtained a credit facility with Venture Finance PLC as of November 12, 2002, which facility expires on November 15, 2005. Using the exchange rate in effect at June 30, 2003 for the conversion of British pounds into United States dollars, the facility is for a maximum of $2,475,000 and includes a $578,000 unsecured cash flow loan, a $132,000 term loan secured by fixed assets and the remainder is a loan secured by accounts receivable and inventory. The interest rate is the base rate of Venture Finance PLC (4% at June 30, 2003) plus 2%, and is subject to a minimum rate of 4% per annum. There are no financial performance covenants applicable to this credit facility. As of June 30, 2003, CXR France had credit facilities with several lenders with balances totaling up to approximately $873,000 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. Because CXR France has experienced a substantial reduction in revenue, some of its lenders have made reductions in the total available credit. Banque Hervet reduced availability to $78,000 from $159,000 effective December 31, 2002. On February 10, 2003, Societe Generale notified CXR France that CXR France had to pay back its credit line balance by April 30, 2003. Societe Generale agreed to an alternative pay back schedule for the full balance owed as of March 31, 2003 so that $54,000 was due by May 31, 2003 and another $54,000 was due by June 30, 2003. The overdraft loan from Societe Generale has been paid off in accordance with the bank's demand. There is a $12,000 balance outstanding that will be paid off upon the collection of 12 certain receivables. Accordingly, we sought alternative financing sources in France to replace all of the lenders to our French operations. On April 8, 2003, CXR France obtained a credit facility from IFN Finance. The new credit line is for a maximum of $1,371,000, based on the exchange rate in effect at June 30, 2003 for the conversion of euros into United States dollars. This is an increase over the total of credit lines that CXR France has with its other banks. The IFN Finance facility will replace the several smaller credit lines. The IFN Finance facility is secured by accounts receivable and carries an annual interest rate of 1.6 percentage points above the French "T4M" rate. The French T4M rate was 2.2103% as of June 30, 2003. Funds that become available under the new IFN Finance credit line as new accounts receivables develop are being used to retire the existing CXR France debt. Our backlog was $11,476,000 as of June 30, 2003 as compared to $14,886,000 as of June 30, 2002. Our backlog as of June 30, 2003 was 96.1% 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 3.9% related to our communications equipment 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, 2003, 62.8% and 37.2% of our total net sales were generated by our electronic components segment and communications equipment segment, respectively. We experienced a 4.9% increase in our communications equipment segment sales for the six months ended June 30, 2003 as compared to the six months ended June 30, 2002. This increase was net of a 43.4% decline in sales of test equipment. The test equipment decline was due to our discontinuation of test equipment resales in Europe and the general telecommunications downtown in the United States. 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 could reduce our total 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 2002. These actions were intended to reduce the cash outlays of our telecommunications equipment segment to match its revenue rate. Also, in February 2003, we reduced the staffing level by 50% at CXR Telcom, which we anticipate will reduce costs at an annualized rate of approximately $360,000. This savings is in addition to the approximate $325,000 annualized savings we have begun to realize from moving CXR Telcom into a lower cost facility in November 2002. We also have contracted with Asian manufacturers for production of test equipment components at lower prices than we previously paid to our former suppliers and have received shipments of quality components from these new suppliers. 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. The symbol "P" represents the prime rate, and the symbol "B" represents the lender's base rate. 13
PAYMENTS DUE BY PERIOD ---------------------- CONTRACTUAL (IN THOUSANDS) OBLIGATIONS AT JUNE 30, 2003 2003 2004 2005 2006 2007 THEREAFTER TOTAL ---------- ------- -------- ------ ------- ---------- -------- Line of Credit (Domestic) $ 795 $ -- $ -- $ -- $ -- $ -- $ 795 Average Interest Rate P+1% Line of Credit (U.K.) $ 1,389 $ -- $ -- $ -- $ -- $ -- $ 1,389 Average Interest Rate B+2% Overdraft (France) $ 767 $ -- $ -- $ -- $ -- $ -- $ 767 Average Interest Rate 5.5% -7.2% Term Loan (Domestic) $ 19 $ 38 $ 18 $ -- $ -- $ -- $ 75 Average Interest Rate P+1% Term Loan (U.K.) $ 23 $ 46 $ 617 $ -- $ -- $ -- $ 686 Average Interest Rate B+2% Term Loan (France) $ 40 $ 56 $ 10 $ -- $ -- $ -- $ 106 Average Interest Rate 5.2% -5.6% Term Loan (Japan) $ 7 $ 17 $ 17 $ 16 $ 15 $ -- $ 72 Average Interest Rate 3.25% Capitalized Lease Obligations $ 103 $ 121 $ 35 $ 3 $ -- $ -- $ 262 Operating Leases $ 240 $ 562 $ 382 $ 6 $ -- $ -- $ 1,190 ---------- ------- -------- ------ ------- ---------- -------- $ 3,383 $ 840 $ 1,079 $ 25 $ 15 $ -- $ 5,342
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. EFFECTS OF INFLATION The impact of inflation and changing prices has not been significant on the financial condition or results of operations of either our company or our operating subsidiaries. IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt" and amends SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking Fund Requirements." Under SFAS No. 4, all gains and losses from extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. With the elimination of SFAS No. 4, gains and losses from extinguishment 14 of debt are to be classified as extraordinary items only if they meet the criteria for extraordinary items in Accounting Principles Bulletin ("APB") Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Applying the provisions of APB Opinion No. 30 will distinguish transactions that are part of an entity's recurring operations from those that are unusual or infrequent or that meet the classification of an extraordinary item. SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," and amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. The adoption of the provisions of SFAS No. 145 during 2002 did not have any impact on our 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 No. 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. The adoption of this statement has not had a material effect on our financial statements. In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize a liability, at the inception of the guarantee, for the fair value of obligations it has undertaken in issuing the guarantee and also include more detailed disclosures with respect to guarantees. FIN 45 is effective for guarantees issued or modified after December 31, 2002 and requires the additional disclosures for interim or annual periods ended after December 15, 2002. The initial recognition and measurement provisions of FIN 45 have not had an impact on our results of operations or financial position. In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the effect that the adoption of EITF Issue No. 00-21 but do not expect a material impact on our consolidated financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We have chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Bulletin Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Accordingly, compensation expense for stock options is measured 15 as the excess, if any, of the estimate of the market value of our stock at the date of the grant over the amount an employee must pay to acquire the stock. We adopted the annual disclosure provisions of SFAS No. 148 for our financial reports for the year ended December 31, 2002 and also adopted the interim disclosure provisions for our financial reports beginning with the quarter ended March 31, 2003. Because this standard involves disclosures only, the adoption of SFAS No. 148 did not impact our results of operations, financial position or liquidity. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51." FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 requires that its provisions are effective immediately for all arrangements entered into after January 31, 2003. For arrangements entered into prior to January 31, 2003, the FIN 46 provisions are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. The provisions of FIN 46 have not had have a material impact on our results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 is effective for all financial instruments created or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 is not expected to have a material effect on our consolidated financial condition or results of operations. EURO CONVERSION Our operating subsidiaries located in France and the U.K. had combined net sales from operations approximating 69.1% and 58.7%, respectively, of our total net sales for the six months ended June 30, 2003 and the year ended December 31, 2002. Net sales from the French subsidiary participating in the euro conversion were approximately 28.8% and 25.8%, respectively, of our net sales for the six months ended June 30, 2003 and the year ended December 31, 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. 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. 16 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. Our annual report on Form 10-K for the year ended December 31, 2002 contains information about our debt obligations that are sensitive to changes in interest rates under "Item 7A. Quantitative and Qualitative Disclosures About Market Risk." There were no material changes in those market risks during the six months ended June 30, 2003. ITEM 4. CONTROLS AND PROCEDURES. Our Chief Executive Officer and Chief Financial Officer (our principal executive officer and principal financial officer, respectively) have concluded, based on their evaluation as of June 30, 2003, that the design and operation of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated, recorded, processed, summarized and reported to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding whether or not disclosure is required. During the quarter ended June 30, 2003, there were no changes in our "internal controls over financial reporting" (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 17 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 May and June 2003, we issued an aggregate of 587,286 shares of common stock to five investors upon conversion of 58,728.6 shares of our Series B Preferred Stock. In May and June 2003, we issued an aggregate of 1,263,250 shares of common stock to four investors upon conversion of 25 shares of our Series A Preferred Stock. 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 transaction did not involve any public offering and the purchasers were accredited or 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 certificate of designations related to our Series B Preferred Stock provides that shares of Series B 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 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. 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits -------- Number Description ------ ----------- 10.1 Fifth Amendment to Credit and Security Agreement dated July 1, 2003 by and between CXR Telcom Corporation and XET Corporation, as borrowers, and Wells Fargo Business Credit, Inc., as lender 10.2 Credit facility agreement dated April 8, 2003 between IFN Finance and CXR, S.A.S. 31.1 Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification 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. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MICROTEL INTERNATIONAL, INC. Dated: August 14, 2003 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) 20 EXHIBITS FILED WITH THIS REPORT ON FORM 10-Q Number Description ------ ----------- 10.1 Fifth Amendment to Credit and Security Agreement dated July 1, 2003 by and between CXR Telcom Corporation and XET Corporation, as borrowers, and Wells Fargo Business Credit, Inc., as lender 10.2 Credit facility agreement dated April 8, 2003 between IFN Finance and CXR, S.A.S. 31.1 Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification 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 21 EX-10.1 3 microtel_10qex10-1.txt EXHIBIT 10.1 FIFTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Fifth Amendment to Credit and Security Agreement (the "AMENDMENT"), dated as of July 1, 2003, is made by and between CXR TELCOM 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 -------- A. 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, that certain Third Amendment to Credit and Security Agreement dated as of September 20, 2001, and that certain Fourth Amendment to Credit and Security Agreement dated as of April 17, 2002 (the "CREDIT AGREEMENT"). Capitalized terms used herein without definition shall have the meaning ascribed to them in the Credit Agreement. B. The Lender is willing to amend the Credit Agreement pursuant to the terms and conditions set forth herein. The Borrower is entering into this Amendment with the understanding and agreement that, except as specifically provided herein, none of the Lender's rights or remedies as set forth in the Credit Agreement are being waived or modified by the terms of this Amendment. Amendment --------- NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follow: 1. Amendments to Article I - Definitions. (a) ADDITIONAL DEFINITIONS. The following definitions are hereby added to Section 1.1 of the Credit Agreement in alphabetical order: "`ADDITIONAL TERM ADVANCES' has the meaning specified in Section 2.2." "`APPLICABLE BOOK NET WORTH AMOUNT' means at any time, the sum of (a) Five Million Five Hundred Thousand Dollars ($5,500,000), plus (b) an amount equal to eighty percent (80%) of the positive Net Income (after corporate allocations) of Microtel and its subsidiaries, on a consolidated basis, earned in each fiscal year ending after 12/31/02 (with no deduction for a net loss in any such fiscal year)." "`INITIAL TERM ADVANCE' has the meaning specified in Section 2.2." 2. Amendments to Article II - Amount and Terms of the Credit Facility. (a) Section 2.2 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "SECTION 2.2 TERM ADVANCES. The Lender agrees, on the terms and subject to the conditions herein set forth, to make a one-time advance to XET on the Funding Date in the original principal amount of Six Hundred Forty-Six Thousand Seven Hundred Sixty-Five Dollars ($646,765) and to make a one-time advance to CXR on the Funding Date in the original principal amount of Forty Thousand Two Hundred Thirty-Five Dollars ($40,235) (collectively, the "INITIAL TERM ADVANCES"); PROVIDED, HOWEVER, that the Lender, in its sole discretion, may make an additional one-time advance to XET on July 1, 2003, in an amount such that the aggregate amount of outstanding advances to XET pursuant to this Section 2.2 does not exceed One Hundred Thirty-Five Thousand Dollars ($135,000), and may make an additional one-time advance to CXR on July 1, 2003, in an amount such that the aggregate amount of outstanding advances to CXR pursuant to this Section 2.2 does not exceed Fifteen Thousand Dollars ($15,000) (collectively, the "ADDITIONAL TERM ADVANCES," and together with the Initial Term Advances, the "TERM ADVANCES"). The Borrowers' obligation to pay the Term Advances shall be evidenced by the Term Notes and shall be secured by the Collateral as provided in Article III." (b) Section 2.3(a) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(a) As to the XET Term Note, beginning on September 1, 2000, and on the first day of each month thereafter, in substantially equal monthly installments equal to the greater of $10,779.42 or an amount sufficient to fully amortize the principal balance of the XET Term Note over an assumed term of sixty (60) months; PROVIDED, HOWEVER, that after the Additional Term Advances are made, the outstanding principal balance of the XET Term Note shall be due and payable beginning on August 1, 2003, and on the first day of each month thereafter, in substantially equal monthly installments equal to an amount sufficient to fully amortize the principal balance of the XET Term Note over an assumed term of twenty-five (25) months;" (c) Section 2.3(b) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(b) As to the CXR Term Note, beginning on September 1, 2000, and on the first day of each month thereafter, in substantially equal monthly installments equal to the greater of $670.58 or an amount sufficient to fully amortize the principal balance of the CXR Term Note over an assumed term of sixty (60) months; PROVIDED, HOWEVER, that after the Additional Term Advances are made, the outstanding principal balance of the CXR Term Note shall be due and payable beginning on August 1, 2003, and on the first day of each month thereafter, in substantially equal monthly installments -2- equal to an amount sufficient to fully amortize the principal balance of the CXR Term Note over an assumed term of twenty-five (25) months;" (d) Section 2.3 of the Credit Agreement is hereby amended by adding the word "and" after subsection (c) thereof and by adding new subsection (d) which will read in its entirety as follows: "(d) The Lender may obtain one appraisal of the Borrowers' Equipment during any twelve (12) month period, at the Borrowers' expense, and an appraisal of the Borrowers' Equipment at any other time during such twelve (12) month period, at the Lender's expense. If as of the date of determination the aggregate outstanding principal balance of the Term Notes exceed eighty percent (80%) of the auction value of the Equipment as shown on the most recent appraisal of Borrowers' Equipment, upon demand by the Lender, the Borrowers shall immediately prepay the outstanding principal amount of the Term Notes in the amount of such excess together with any interest due and payable in respect to such amount and any prepayment fee owed pursuant to Section 2.10(b)." 3. Amendments to Article VI - Borrowers' Affirmative Covenants (a) MINIMUM DEBT SERVICE COVERAGE RATIO. Section 6.12 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "SECTION 6.12 MINIMUM DEBT SERVICE COVERAGE RATIO. The Borrowers 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 trailing nine (9) month basis, of not less than 1.25 to 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 Borrowers will cause MicroTel and its subsidiaries to maintain a Book Net Worth, on a consolidated basis, at an amount not less than the Applicable Book Net Worth Amount for the fiscal year ending December 31, 2002, and for each fiscal year ending December 31 thereafter." (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 Borrowers will maintain their 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: -3- Minimum Cumulative Date Net Income ---- ---------- March 31, 2003 $(250,000) June 30, 2003 $(200,000) September 30, 2003 $100,000 December 31, 2003 $100,000" 4. REFERENCES TO XIT. Any reference to the term XIT in the Credit Agreement and each Loan Document shall mean and be a reference to XET. 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 thereunder. 6. ACCOMMODATION FEE. The Borrower shall pay to the Lender in cash as of the date hereof a fully earned, non-refundable fee in the amount of Five Hundred Dollars ($500) in consideration of the Lender's execution of this Amendment (the "ACCOMMODATION FEE"). 7. EFFECTIVENESS OF THIS AMENDMENT. The Lender must have received the following items, in form and content acceptable to the Lender, before this Amendment is effective and before the Lender is required to extend any credit to the Borrower as provided for by this Amendment. (a) AMENDMENT. This Amendment fully executed in a sufficient number of counterparts for distribution to the Lender and the Borrower. (b) ACKNOWLEDGEMENT. The Acknowledgement and Agreement of Guarantor attached to this Amendment, fully executed in a sufficient number of counterparts for distribution to the Lender and the Borrower. (c) ACCOMMODATION FEE. The Accommodation Fee. (d) REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth herein and in the Credit Agreement must be true and correct. (e) 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 the Lender. 8. 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 its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitutes the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. -4- (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) The representations and warranties contained in each Loan Document (other than any such representations or warranties that, by their terms, are specifically made as of a date other than the date hereof) are correct on and as of the date hereof as though made on and as of such date. 9. REFERENCES. Upon and after the effectiveness of this Amendment, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof' or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to "the Credit Agreement," "thereof' or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as modified and amended hereby. 10. 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. 11. RELEASE. The Borrower, and Guarantor by signing the Acknowledgment and Agreement of Guarantor set forth below, each hereby absolutely and unconditionally releases and forever discharges the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower or Guarantor has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. It is the intention of the parties in executing this release that the same shall be effective as a bar to each and every claim, demand and cause of action specified and in furtherance of this intention each waives and relinquishes all rights and benefits under Section 1542 of the Civil Code of the State of California, which provides: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MIGHT HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." -5- 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. 12. 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. 13. RATIFICATION. The Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Credit Agreement, as amended hereby, and the Loan Documents effective as of the date hereof. 14. ESTOPPEL. To induce the Lender to enter into this Amendment and to continue to make advances to the Borrower under the Credit Agreement, the Borrower hereby acknowledges and agrees that, after giving effect to this Amendment, as of the date hereof, there exists no Event of Default and no right of offset, defense, counterclaim or objection in favor of the Borrower as against the Lender with respect to the Obligations. 15. CHOICE OF LAW. The validity of this Amendment, its construction, interpretation and enforcement, the rights of the parties hereunder, shall be determined under, governed by, and construed in accordance with the internal laws of the State of California governing contracts only to be performed in that State. 16. 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. Delivery of an executed counterpart of a signature page to this Amendment by telefacsimile shall be effective as delivery of a manually executed counterpart of this Amendment. -6- 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 TELCOM CORPORATION, a Minnesota corporation a Delaware corporation By: /S/ VINCENT L. MADDELA By: /S/ RANDOLPH D. FOOTE --------------------------- ----------------------------- Name: Vincent L Maddela Name: Randolph D. Foote Title: Asst. Vice President Title: Vice President & CFO XET CORPORATION, a New Jersey corporation By: /S/ RANDOLPH D. FOOTE ----------------------------- Name: Randolph D. Foote Title Vice President and CFO -7- 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 11 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 Its: Senior Vice President & CFO -8- EX-10.2 4 microtel_10qex10-2.txt EXHIBIT 10.2 [English translation to be provided by amendment] CONVENTION DE FINANCEMENT DE BALANCE N CONDITIONS PARTICULIERES Denomination sociale du Client: CXR S.A.S., dont le siege social est rue de l'Ornette - 28410 Abondant Siren n 785 754 706 ARTICLE 1: CHAMP D'APPLICATION - ------------------------------- Nature des produits fabrication et vente de materiels de transmission, entreprises industrielles et Types de debiteurs commercials, debiteurs publics, Portee territoriale France metropolitaine, Royaume-Uni, Belgique et Espagne, Duree maximum de credit-initial debiteur 130 jours, Conditions de paiement habituelles de 30 a 90 jours fin de mois le 10. ARTICLE 2: CESSION DES CREANCES - -------------------------------- Periodicite hebdomadaire. Justificatifs a premiere demande factures, bons de commande et bons de livraison. ARTICLE 3: POURCENTAGE ET ENCOURS MAXIMUM DE FINANCEMENT - --------------------------------------------------------- 80% (quatre vingt pour-cent) des creances agreecs. Encours de financement maximum autorise: 1.200.000 E (un million deux cent mille curos). L'encours finance par debiteur no pourra pas exceder 10% (dix pour-cent) de l'encours de financement. 1 ARTICLE 4: REMUNERATION - ------------------------ 4.1. Commission de Flux: Il est fixe un forfait annuel de commission de flux de 32.004 E H.T. (trente deux mille quatre euros). Le forfait precite sera du quelle que soit la duree effective de la convention et il sera tacitement reconduit tous les ans a compter de la date de prise d'effect de la convention. Sa perception sera fractionnee en douze echeances mensuelles de 2.667 E H.T. (deux mille six cent soixante sept euros) a compter de la date de prise d'effet de la convention. 4.2. Commission de Financement: Le taux annuel hors T.V.A. de cette commission applicable a l'cncours de financement est fixe au taux de la moyenne du marche monetaire dit T4M, augmente de 1.60 (un virgule soixante pourcent) point. Les prelevements operes dans des monnaies autres que l'Euro seront indexes sur le taux IFN Export. Lex taux T4M et IFN Export resultent de la moyenne arithmetique, pour chaque mois calendaire, des TEMPE* ou des taux journaliers de la devise de reference sur le marche monetaire, de la periode allant du premier jour ouvre jusqu' a l'avant dernier jour ouvre du mois considere. (* Taux Moyen Pondere en Euros du Marche Monetaire defini quotidiennement par la Banque Centrale Europeenne). ARTICLE 5: FRAIS ANNEXES - ------------------------- Recherche et/ou fourniture de duplicata d'un etat delivre gratuit. IFN Finance ne fera pas de recherche ni ne fournira de duplicata d'etats ages de plus d'un an. Frais d'ouverture de compte bancaire dedie: 1,000 E H.T. Frais de reclamation au Client de documents contractuels: 180 E H.T. l'unite. ARTICLE 6: PRISE D'EFFET - ------------------------- La convention prend effet pour les facturations a compter du jour de la signature. ARTICLE 7: GARANTIES A FOURNIR - ------------------------------- La presente convention ne prend effet qu'a la remise d'un engagement de caution solidaire par: - -MicroTel International Inc dont le siege social est situe a: 9485 Haven Avenue, Suite 100-- Rancho Cucamonga, CA, USA 91730. ARTICLE 8: RETENUE DE GARANTIE - ------------------------------- > Montant : 120,000 E (cent vingt mille euros). 2 > Constitution : 10% (dix pour-cent) des montants des creances cedees. ARTICLE 9: DIVERS - ------------------ > Le Client s'engage a communiquer les comptes consolides et la liasse fiscale 2002 complete avec les rapports du commissaire aux comptes, respectivement avant le 31 mai 2003 ct 20 juin 2003 > Le Client certifie expressement ne pas avoir souscrit de police d'assurance credit. En consequence, les dispositions de l'article 10 des conditions generales sont nulles et non avenues. Toutefois, dams l'hypothese ou le Client sourscrirait ulterieurement une police d'assurance credit, il s'engage a appliquer immediatement les dispositions visees a l'article 10 precite. Tous nos prix, taux de commission et frais mentionnes seront majores de la T.V.A. au taux en vigueur en cas d'assujettissement a la T.V.A. de cette operation. Fait a Paris, le 8 April 2003 en deux exemplaires originaux remis a chacune des parties. Signature autorisee et cachet commercial. NON DU SIGNATAIRE: Graham Jefferies QUALITE: Directeur General Le Client IFN Finance (Lu et approuve) Lu et approve /s/ GRAHAM JEFFERIES 3 CONVENTION DE FINANCEMENT DE BALANCE - -------------------------------------------------------------------------------- CONDITIONS GENERALES - -------------------------------------------------------------------------------- Entre in Societe, designec dans les conditions particulieres et par le cachet commercial appose sur les presentes conditions generales, ci-apres dennommee "Le Client", et IFN Financee S.A., au capital de 9.451.839 E, immatriculee au R.C.S. de Nanterre B 410 750 863 dont le siege social est a Levallois-Perret (92300). 39 rue Anatole France, ci-apres denommee "IFN Finance", il a ete arrete et convenu ce qui suit: IFN Finance en consideration des dirigeants du Client et des informations pontees a sa connaissancc par ce dernier, accepte de conclure une convention de Financement de Balance avec le Client, la presente convention est constituee des conditions generales ci-apres et des conditions particulieres en annexes. ARTICLE 1: OBJET DE LA CONVENTION - ---------------------------------- IFN Finance s'engage, contre remuneration et dans les conditions de la presente convention, a financer les creances commerciales ou professionnelles representatives de la balance debiteurs du Client arretee chaque fin de semaine. ARTICLE 2: CHAMP D'APPLICATION - ------------------------------- La convention s'applique aux creances nees de ventes fermes de biens livres et aux creances correspondant a des prestations de services rendues. Le Client cede a IFN Finance l'integralite des creances comprised dans le champ d'application de la presente convention et s'lnterdit, pendant la duree de la convention, de conclure tout autre contrat ou convention quelconque permettant a un tiers de venir es concours avec IFN Finance. Sont exclues du champ d'application de la presente convention o les creances d'ncomptes, les creances correspondant a des ventes en depot ou consignation, a des ventes donnent lieu a une facturation parrielle, provisuire ou proforma, o les creances de frais, agios ou penalties restant a la charge des debiteurs, o les creances sur les fournisseurs du Client ou sur les enterprises sur lesquelles le Client exerce un controle effectif en participant soit: o a leur direction ou gestion, o a leur structure financiere ou qui reciproquement exercent un controle effectif dans les memes conditions. 1 Le respect du champ d'application, tel que precise aux conditions particulieres, incombe uniquement au Client, IFN Finance n'ayant aucun controle a effectuer. ARTICLE 3: CONVENTION DE COMPTE COURANT - ---------------------------------------- Toutes les operations traitees en execution de la presente convention sont enregistrees dans un compte courant ouvert au nom du Client dans les livres de IFN Finance; les dettes et creances reciproques, reputes connexes et indivisibles, se traduisent en articles de debit et de credit, et se compensent enire elles. Le compre courant ouvert au nom du Client sera tenu en Euros, Les operations effectuees, par commodite pour le Client, dans d'outres monnaies pouront a tout moment, aur l'initiative de IFN Finance, ette converties dans la monnaie du compre courant, au cours du jour de ladite conversion IFN Finance aura le faculte, si necessiare, d'oxecuter les pretevements sur le compte courant en devises. En cas de pluralite de comptes, notamment en eas d'operations a l'exportation, ceux-ci constituent que de simples rubriques du compte courant avec toules les consequences qui s'y attachent et cela quelles que soient les devises dans lesquelles les opertions auront pu etre traitees. A l'expiration du preavis de resiliation de la convention souvre la periode de cleture du compte courant; le solde definitif en este etabli apres denouement des operations. Le Client autorise IFN Finance a inserire au debit du compte courant le montant des creances dont elle aurait acquis la propriete dans le cadre d'un contrat conclu avec an fournisseur du Client. ARTICLE 4: DEBITEURS, AGREMENTS ET DISPOSITIONS DIVERSES - --------------------------------------------------------- Le Client soumet chacun de ses debiteurs representatif d'un encours superieur a une limite de 100,000 E (cent mille euros) a l'agrement prealable de IFN Finance en lui fourmissant toute indication utile a son identification ainsi que toute information relative e leurs relations commerciales: modalites de paiement, litiges et retards de paiement. En cas d'information inexacle ou incomplete, l'agrement est considere comme nul. Sauf decision contraire de IFN Finance, les autes debiteurs sont reputes aulurnaliquement agrees. Les decisions relatives aux agrements ont un caractere confidential et cont reserves a l'usage exclusif du Client; celui-ci s'interdit d'en faire etat supres des tiers, y compris supres des debiteurs en cause. Les agreements, delivers per derit, portent sur un montant toutes taxes comprises. Ils determinent, a l'exclusion d'une quelconque garante, l'encours de creances agrees per IFN Finance sur les debiteurs consideres. La reduction ou la resiliation des agreements peut intervenir a tout moment; ces decisions sont communiquees au Client par tout moyen et prennent effet 2 immediatement. Dans dere demiere hypothese, l'encoure de creances agrees par IFN Finance ne saurait exceder la limite precitee de 100,000 E (cent mille euros). IFN Finance ouvira dans ses livres chaque compte debiteur du Client. A cene fin, le Client lui communiquera un fichier debiteurs mentionnant les informations suivantes: numeros de comptes, denominations sociales, numeros Siren, adressess et numeros de telephone. IFN Finance ouvrira egalement dans ses livres un compte debiteur centralisateur ou aeront comptabilises: - au credit le solde du compte bancairre dedie vise a l`article 7 des presentes conditions generales. - au credit le cumul des ceritures (reglements et notes de debit de toute nature operees par les debiteurs) en instance de lettrage selon l' annexe visee e l'article 5 de la presente convention. - au debit l'encours des effets remis a l'encaissement sur le compte bancaire dedie precite (sous reserve que le Client credite ses comptes debiteurs par le debit d'un compte (Debiteurs - Effts a recevuir) selon l'annexe visee a l'article 5 des presentes conditions generales. ARTICLES 5: CESSION DES CREANCES - -------------------------------- La cession des creances en pleine propriete au profis de IFN Finance s'upere en application des articles L. 313-23 a L. 313-34 du Code Monetaire et Financier ayant repris les dispositions de la loi n 81-1 du 2 janvier 1981, dite "Loi Dailly". La periodieite de cession correspond au dernier jour ouvre de chaque semaine. En consequence, le montant des creances cedees. le cas echeant minore des ecritures en instance de lettrage sera strictement representatif de la balance debiteurs du Client a la date de la cession. Les bordoreaux de cession, etablis selon un modele dument agree par IFN Finance dent le Client reconnait expressement avoir recu un exemplaire, mentionneront les informations suivantes: - dates, numeros, montants toutes taxes comprises, echeances, cumul total des factures et avoirs cedes. - numeros de compte des debiteurs factures, - et en annexes le detail et le cumul des ceritures en inslance de lettrage et l'encours des effets remis a l'encaissement sur le compte bancaire dedie. Dans l'hypothese ou le Client aurait recu en effet de commerce afferent a une ou des creances n'ayant pas fait l'objet de cession prealable car etablies postericurement a la derniere cession de creances, il s'engage a differer la complabilisation de l'effet considere jusqu'a la prochaine cession hebdomadaire. La Client s'oblige a regulariser tout document utile a la realisation de la cession. La facturation sera libellee en euros. Le Client garantit que les factures, et notamment le credit initial accorde aux debiteurs, sont conformes a la regiementtion en vigueur. 3 Le Client appose sur chaque facture une clause de paiement en fuveur de IFN Finance conformes au modele joint en annexes. Du seul fait de la cession d'une facture a IFN France, le Client garantit que l'original, revetu de la clause de paiement, a ete prealablement adresse su debiteur. IFN Finance inserit lors de chaque cession hebdumadaire de creances: Ecriture 1: credit ou debit de chaque compte debiteur des factures et evoirs afferents au bordereau de cession de la semaine precedente, Contrepartie 1: debit du compte courant du Client du cumul total du bordereau de cession de la semaine precedente. Ecriture 2: credit ou debit du solde du compte debiteur centralisaieur. Contreparte 2: debit ou credit a due concurrence du compte courant du Client. Ecriture 3: debit ou credit de chaque compre debiteur des factures et avoirs afferents au bordereau de cession de la semaine consideree, Contrepartie 3: credit du compte courant du Client du cumul total du bordereau de cession de la semaine consideree. Ecriture 4: credit due compte debiteur centralizateur du cumul des ecritures en instance de lettrage annexe au bordereau de cession de la semaine consideree Contrepartie 4: debit a due concurrence du compte courant du Client. Ecriture 5: debit du compre debiteur centralisateur de l'encours des effets remis a l'encaissement sur le compte bancaire dedie annexe au bordereau de cession de la semaine consideree. Contrepartie 5 credit a due concurrence du compte courant du Client. ARTICLE 6: JUSTIFICATIFS - ------------------------- Le Client duit joindre aux borderaux de cession une cople certifiee sincere et conforme de sa balance debiteurs a la date consideree. A tout moment, IFN Finance pourra exiger du Client le respect des dispositions suivantes - la remise des origineux de factures, - la remise des duplicata de factures obligatoirement accompagnes des notes d'acceptation de cession de creances professionelles signes et tamponnes des debiteurs, - la remise de tous les documents qu'elle jugors necessaire pour etablir la preuve de la creance. - la verification par tous moyens du bien-fonde des avoirs ou notes de debit, - l'autorisation de plein droit de verifier aupres des debiteurs, par tous moyens, la realite des creances qui lui auront ete cedees. ARTICLE 7: RECOUVREMENT ET ENCAISSEMENT - --------------------------------------- IFN Finance, devenue proprietaire des creances, a seole qualite pour proceder a leur recouvrement, a l'encaissement des reglements afferents comme pour accorder tout report, prorogation ou agrrangement. Eu egard sux performances du Client relatives a la gestion de son poste debiteurs constatees par IFN Finance a la signature de lu presente convention, celle-ei mandate le Client, pour effecruer pour ses ordre et compte, la gestion, le recouvrement et l'encaissement des creances cedees. 4 En contrepartie, le Client s'engage a veiller a la constance des performances precitees pendant la duree de la presente convention notamment par le strict respect de sa procedure interne de recouvrement dont un exemplaire, date, vise et tamponne par les deux parties, constitue unc annexe a la presente convention. Toute modification apportee a la procedure consideree devra faire l'objet de l'accord prealable de IFN Finace. Le mandat vise a l'alinca precedent du present article est revocable par IFN Finance a tout moment et par tout muyen. Dans ee dernier cas, le Client's engage formellement a: - cesser de recouvrer los creances cedees et de collector directement les titres de paiement afferents, - apporter a IFN Finance toute l'assistance necessaire, notainment en cas d'application de la clause de reserve de propriete et doit l'aviser, sans delai, de tout evenement pouvant retarder, minorer ou comprometure les paiements en instance de recouvrement. En toote hypothese, IFN Finance se reserve la faculte, sans formalisme particulier a l'egard du Client, d'intervenir imediatement aupres des debiteurs par tous moyens de san choix. Le Client's s'engage a remettre immediatement sur un compte bancaire dedie ouvert au nom de IFN Finance, les titres de paiement relatifs aux factures cedees er a faire figurer les coordonnees dudit compte, qui lui seront communiquees par lettre separee, sur toutes les factures cedees. IFN Finance debitera periodiquement le solde crediteur du compte bancaire dedie vise au present article par le credit du compte debiteur centralisateur. Dan les cas ou le reglement d'une creance cedee est encaisse par le Client sur un compte bancaire a son nom, celui-ci est repute le resevoir en qualite de mandataire de IFN Finance et, sans delai, doit lui rembourser le montant des sommes recues par virement. A defaur, outre les sanctions prevues a l'article 14 des presentes conditions generales, IFN Finance est autorisee a reduire d'autant le droit a preivement du Client vu a contre-passer les sommes en question au debit de son compte courant. Le Client s'oblige a indiquer IFN Finance comme beneficiare sur les effects de commerce qu'il tice. Il lui donne pouvoir, a titre de mandat d'inierer commun, d'endosser en ses lieu et place tous les titres de paiement quelle pourrait recevoir et qui seraient libelles au nom du Client; le Client s'interdit de revoquer ce pouvoir avant l'etablissement du solde definitive du compte courant. En cas de contestation d'une creance cedee par un debiteur, le Client dispose d'un delai maximum de trente jours a compter de la date a laquelle il en a eu connaissence, pour la resoudre, c'est-a-dire pour obtenir du debiteur un accord de paiement integral. Dans le cas nu le litige n'est pas resolu dons le delai imparti, IFN Finance est en drot de debiter le compte courant du Client du montant de la creance contestee. ARTICLE 8: FINANCEMENT DES CREANCES - ------------------------------------ Le solde disponible pour le Client resulte du solde du compte courant, apres deduction de la retenue de garantie fixee aux conditions particuliers et des 5 creances non agrees au echues depuis plus de trents jours, dans la limite du pourcentage de financement et do l'encours de financement maximum autorise defines aux conditions particulieres. L'encours de financement augmente au debit de tous les pretevements en compte courant et diminue au credit des reglements des debiteurs ou du Client definitivement encaisses par IFN Finance. Son solde debiteur constitue l'assiette de la commission de financement definie aux conditions particulieres. Le Client a le droit de prelever, a tout moment, tout ou partie du solde disponible sur demande ecrite addressee a IFN Finance. Ce droit a pretevement est limite au seul solde disponible du compte courant. La regularisation d'un eventuel solde disponible negatif doit intervenir dans les meilleurs delais; des interers au taux de la commission de financement majore de deux points seront percus jusqua cette regularisation. Les deductions operees de droit par le debiteur, telles que rahais nu autres, les litigers non resolus et les reglements non ressitues, restent a la charge du Client et serent deduits du solde disponible. Outre les dispositions de l'article 14 des presentes conditions generales, IFN Finance pourra, a titre conservatoire, suspendre partiellement ou totalement les pretevements du Client en cas d'inexecution par ce dernier d'une de ses obligations contractuelles. ARTICLE 9: RETENUE DE GARANTIE - ------------------------------- Le Client demande a IFN Finance de constitutes dans les conditions ci-apres prevues et selon les modalites figurant aux conditions particulieres, une retenue de garantie conferee a IFN Finance pour surete en principal, commissions, frais et accessories de toutes les obligations du Client envers cette definiere au titre de la presente convention. Cette retenue de garantie, constiutive d'un gage-especes, non remuneree et indisponible pour le Client sera comptabilisee dans unc rubrique speciale du compte courant. Le compte de retenue de garantie sera credite par le debit du compte courant. IFN Finance pourra prelever a tout moment les sommes necessaries a la couverture de ses creances et de ses recours sur le Client, la retenue de garantie etant alors reconstituee pour atteindre le niveau convenu dans les conditions particulieres, sans jamais pouvoir descendre en dessous du seuil fixe aux dites conditions. Le montant de retenue de garantie ne saurait etre inferieur aux encour's cumules de litiges non resolus, d'avoirs a etablir ou en instance de cession. de risournes, remises ou bonifications de fin d'annee et de participations publicitaires. Durant le preavis de resiliation, le montant et le seuil de retenue de garantie fixes aux conditions particulieres seront majores de cinquante pour-cent. Sauf accord expres et prealable de IFN Finance, les sommes constituant la retenue de garentie ne peuvent faire l'objet de la part du Client d'sucune cession nu nantissement au profit d'un tiers. Le solde de la retenue de garantie, qui constitue un article de compte courant du Client, fait naitre a son profit le cas echeant une creance en restitution (apres compensation de plein droit avec le solde debiteur du compte courant) a la cloture des operations. 6 ARTICLE 10: ASSURANCE CREDIT - ---------------------------- Le Client delegue a IFN Finance le droit a indemnite decoulant de la police d'assurance credit qu'il a souscrite et s'oblige donc a faire toute demarche utile supres de l'Assureur Credit a l'establissement d'un avenant de delegation su benefice de IFN Finance. Cet avenant de delegation devra erre signe par le Client, IFN Finance et l'Assureur Credit au plus tard un mois a compter de la signature de la presente convention. L'existence de la police d'assurance credit constitute pour IFN Finance un element determinant de son consentement a la conclusion de la presente convention; en consequence, en cas de non-renouvellement, de resiliation anticipee ou de tout evenement en empechant l'application, IFN Finance se reserve le droit de resilier la presente convention. Le Client fournira a IFN Finance, des leur reception ou etablissement - la copie de la poice et de sea avenants eventuels. - la copie des agrements et/ou des resilitations d'agrements delivres par l'Assureur Credit. - tout documents etablissant que les obligations de la police sont pencruellement respectees, notamment declaration d'aliment, declaration de sinistre, paiement des primes. Le Client autorise IFN Finance a communiquer a l'Assureur Credit et a recueillir supres de celui-ei toute information relative a son activite, sa clientele et tout incident pouvant survenir a l'occasion du traitement des operations. ARTICLE 11: REMUNERATION DE IFN FINANCE - ---------------------------------------- Le Client et IFN Finance conviennent dans les conditions particulieres de la remuneration de IFN Finance. Les taxes, droits fiseaux ou sutres existants ou a venir, afferents sux operations prevues par la presente convention, les frais et commissions bancaires, les charges induites par la gestion, le recouvrement et l'encaissement par IFN Finance des creances cedees, dan l'hypothese de la revocation du mandat vise a l'article 7 des presentes conditions generales, sont a la charge exclusive du Client. Le risque de change n'est jamais supporte par IFN Finance. ARTICLE 12: INFORMATIONS - ------------------------ IFN Finance informe ponetuellement le Client des operations relatives aux creances cedees en lui adressant les etats correspondants ninsi qu'un releve mesuel recapitulant les operations intervenues dans le mois ecoule; tout ecriture passee en compte courant est reputee acceptee par le Client si elle n'est pas contestee dans le mois qui suit la date du releve mensuel nu elle figure. Le Client informe IFN Finance de tout evenement important pouvant affecter son exploitation, la repartition de son capital ou se direction. Le Client transmet a IFN Finance des leur etablissement nu leur actualisation et au plus tard selon les periodicites legales ou mentionnees, les documents suivants: 7 - Extrait K-Bis et statuts, - conditions generales de vente, - bilan, compte de resultat et annexes certifies sinceres et conformes, - rapports general et special du commissariat aux comptes, - situation trinestrielle d'exploitation, au plus tard un mois apres la cloture du trimestre civil, - formulaire d'audit de IFN Finance doment renseigne a premiere demande de cette demiere. Le Client dispose d'un delai de trois mois, a compter de la premiere cession de creances, pour communiquer a IFN Finance selon les periodicites mentionnees, les documents ci-dessous egulement sous format informatique dument agree par IFN Finance. - Lors de chaque cession de creances: bordereaux de cession de creances. - Mensuellement: fichier debiteurs et/ou a premiere demande de IFN Finance, d'autres documents que cette derniere jugerait necessaries pour un bon suivi de l'evolution des creances cedees et ee, pendant toute la duree de la presente convention ARTICLE 13 OBLIGATIONS GENERALES - -------------------------------- - IFN Finance se voit reconnaitre pur le Client le droit de proceder a tout moment a toute verification notamment des pieces comptables) qui lui paralua utile. - La Client garantit le caractere liquide, certain et exigible des creances cedees et confirme a priori que ses livraisons ou prestations ne souleveront pas de contestation notamment technique ou commerciale. - Lorsque son activite consiste en la livraison de biens, le Client, sauf accord expres et prealable de IFN Finance, s'oglige a vendre avec reserve de propriete. - Le Client devra prendre toutes dispositions pour degager IFN Finance de toute responsabilite en cas de perte ou destruction de la chose vendue et d'une maniere generale, pour tous dommages occasionnes a des tiers. ARTICLES 14 PRISE D'EFFET, DUREE ET RESILIATION DE LA CONVENTION - ---------------------------------------------------------------- La presente convention prend effet a compter du jour de sa signature; elle est conclue pour une duree indeterminee. Chacune des parties peut y mettre fin, a tout moment, par lettre recommandee avec accuse de reception, en respectant un preavis de trois mois. Sauf accord de IFN Finance, l'encours de financement durant ce previs ne pourra pas exceder celul existant le jour de la resiliation. IFN Finance peut resilier de plein droit la convention sans preavis dans les eas suivants: - force majeure (incendie, greve, destruction ou impossibilite materielle pour IFN Finance d'exercer son activite, etc.). - degradation significative de la situation financiere du Client ou denonciation des garanties donnees a IFN Finance. 8 - comportement gravement reprehensible du Client notamment caracterise par les faits suivants: - absence d'information de IFN Finance par le Client, sous en delai maximum de cinq jours ouvres, de modification substantielle - de sa situation juridique ou commerciale ou de sa direction, - irregularites dans la compabilite du Client ou des elements de sa gestion, - cession par le Client d'une facture non causee ou d'un avoir non motive. - non restitution de fonds recus des debiteurs relatifs a des factures cedees a IFN Finance. - solde disponible negatif du compte courant non resorbe dans les conditions prevues a l'article 8 de la presente convention. - manquement du Client a son devoir d'information tel que defini a l'article 12 de la presente convention. - manquement d'une maniere generale du Client a ses obligations contractuelles. Dans cette hypothese, IFN Finance pourra exiger le remboursement immediat des avances sur les creances non recouvrees supres eos debiteurs et le Client sera dechu de tous ses droits. La fin de la convention no privera pas IFN Finance des son droit de percevoir des debiteurs du Client le reglement de toutes creances, ni le Client de recevoir de IFN Finance tous montants qui lui sont dus. ARTICLE 15: TRANSFERT DE LA PRESENTE CONVENTION - ----------------------------------------------- Tour transfert, total ou partiel, sous queique forme que ce soit, du beneflee des dispositions de la presente convention par le Client au profit d'un tiers est soumis a l'autorisatiun prealable expresse de IFN Finance. ARTICLE 16: ATTRIBUTION DE COMPETENCE ET LOI APPLICABLE - ------------------------------------------------------- Tour litige relatif a l'execution, l'intrerpretation ou la resiliation de la presente convention sera de la compotence exclusive du Tribunal de Commerce de Paris, la loi francaise etant seule applicable. Fait a Paris le 8 avril 2003 en deux exemplaires originaux, remis a chacurie des parties. Signature autorisee et cachet commercial. NOM DU SIGNATAIRE: Graham Jefferies QUOILTE: Directeur General Le Client IFN Finance (Lu et approuve) Lu et approve /s/ GRAHAM JEFFERIES 9 EX-31.1 5 microtel_10qex31-1.txt EXHIBIT 31.1 CERTIFICATIONS I, Carmine T. Oliva, certify that: 1. I have reviewed this Form 10-Q of MicroTel International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted pursuant to SEC Release 34-47986]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/ CARMINE T. OLIVA - ----------------------------------------------------- Carmine T. Oliva Chief Executive Officer (principal executive officer) I, Randolph D. Foote, certify that: 1. I have reviewed this Form 10-Q of MicroTel International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) [language omitted pursuant to SEC Release 34-47986] for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted pursuant to SEC Release 34-47986]; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s RANDOLPH D. FOOTE - ----------------------------------------------------- Randolph D. Foote Chief Financial Officer (principal financial officer) EX-32.1 6 microtel_10qex32-1.txt EXHIBIT 32.1 CERTIFICATION 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, 2003 (the "Report"), the undersigned hereby certify in their capacities as Chief Executive Officer and Chief Financial Officer of the Company, respectively, 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, 2003 By: /s/ CARMINE T. OLIVA ------------------------------------ Carmine T. Oliva Chief Executive Officer (principal executive officer) Dated: August 14, 2003 By: /s/ RANDOLPH D. FOOTE ------------------------------------ Randolph D. Foote Chief Financial Officer (principal financial officer) A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----