================================================================================
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended MARCH 31, 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 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 May 9, 2003, there were 21,576,788 shares of the issuer's common
stock, $0.0033 par value, outstanding.
================================================================================
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of March 31, 2003 (unaudited)
and December 31, 2002................................................... F-1
Condensed Consolidated Statements of Operations for the Three Months
Ended March 31, 2003 and 2002 (unaudited)............................... F-2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the
Three Months Ended March 31, 2003 and 2002 (unaudited).................. F-3
Condensed Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 2003 (unaudited)........................... F-4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 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.............................................................. 14
ITEM 4. CONTROLS AND PROCEDURES.................................................. 14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................................ 15
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................ 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.......................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................... 15
ITEM 5. OTHER INFORMATION........................................................ 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................... 16
SIGNATURES ......................................................................... 16
CERTIFICATIONS......................................................................... 17
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, December 31,
ASSETS 2003 2002
--------- ---------
Current assets: (unaudited)
Cash and cash equivalents $ 29 $ 254
Accounts receivable, net of allowance for doubtful
accounts of $163 and $130, respectively 5,179 5,356
Inventories 7,392 7,505
Prepaid and other current assets 430 343
--------- ---------
Total current assets 13,030 13,458
Property, plant and equipment, net 392 588
Goodwill, net of accumulated amortization of $1,047 and $1,050,
respectively 2,329 2,346
Other assets 527 394
--------- ---------
$ 16,278 $ 16,786
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,733 $ 3,475
Current portion of long-term debt 256 318
Accounts payable 4,179 3,897
Accrued expenses 1,777 1,807
--------- ---------
Total current liabilities 8,945 9,497
Long-term debt, less current portion 917 927
Other liabilities 329 348
--------- ---------
Total liabilities 10,191 10,772
--------- ---------
Convertible redeemable Series A Preferred Stock, $10,000
unit value. Authorized 200 shares; issued and outstanding
25 shares (aggregate liquidation preference of $250) 285 282
Stockholders' equity:
Preferred stock, authorized 10,000,000 shares;
Convertible Series B Preferred Stock, $0.01 par value;
issued and outstanding 60,000 shares and 64,000 shares,
respectively (aggregate liquidation preferences of $383 and
$410, respectively) 374 400
Common stock, $0.0033 par value. Authorized 50,000,000 shares;
issued and outstanding 21,577,000 and 21,535,000,
respectively 71 71
Additional paid-in capital 24,926 24,900
Accumulated deficit (19,000) (19,042)
Accumulated other comprehensive loss (569) (597)
--------- ---------
Total stockholders' equity 5,802 5,732
--------- ---------
$ 16,278 $ 16,786
========= =========
See accompanying notes to condensed consolidated financial statements.
F-1
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
Three months ended March 31,
------------------------
2003 2002
-------- --------
(in thousands, except per share
amounts)
Net sales $ 5,668 $ 4,820
Cost of sales 3,527 3,291
-------- --------
Gross profit 2,141 1,529
Operating expenses:
Selling, general and administrative 1,698 1,865
Engineering and product development 221 238
-------- --------
Income (loss) from operations 222 (574)
Other income (expense):
Interest expense (96) (90)
Other income (14) 4
-------- --------
Income (loss) before income taxes 112 (660)
Income tax expense 68 39
-------- --------
Net income (loss) $ 44 $ (699)
======== ========
Earnings (loss) per share:
Net income (loss):
Basic $ 0.00 $ (0.03)
======== ========
Diluted $ 0.00 $ (0.03)
======== ========
See accompanying notes to condensed consolidated financial statements.
F-2
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)
Three Months Ended March 31
2003 2002
------ ------
(In Thousands)
Net income (loss) $ 44 $(699)
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustment 28 (38)
------ ------
Comprehensive Income (loss) $ 72 $(737)
------ ------
See accompanying notes to condensed consolidated financial statements.
F-3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
Series B
Convertible Accumulated
Preferred Stock Common Stock Additional Other
-------------------- ------------------- Paid-In Accumulated Comprehensive
Shares Amount Shares Amount Capital Deficit Income (Loss) Total
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2002 64 400 21,535 71 24,900 (19,042) (597) 5,732
Preferred Series B conversions (7) (26) 42 -- 26 -- -- --
Foreign currency translation adjustment 28 28
Accretion of redeemable preferred stock -- -- -- -- -- (2) -- (2)
Net profit -- -- -- -- -- 44 -- 44
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2003 57 374 21,577 71 24,926 (19,000) (569) 5,802
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
F-4
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
2003 2002
------ ------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 44 $(699)
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation and amortization 78 82
Provision for doubtful account 37 19
Provision for obsolete/slow moving inventory 67 119
Changes in operating assets and liabilities:
Accounts receivable 136 482
Inventories 40 (165)
Other assets (174) 47
Accounts payable and accrued expenses 240 394
------ ------
Cash provided by operating activities 468 279
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (4) (35)
Cash collected on note receivable -- 14
------ ------
Cash (used in) investing activities (4) (21)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) in notes payable and long-term debt (814) (432)
------ ------
Cash (used in) financing activities (814) (432)
------ ------
Effect of exchange rate changes on cash 125 (46)
Net (decrease) in cash and cash equivalents (225) (220)
------ ------
Cash and cash equivalents at beginning of period 254 604
------ ------
Cash and cash equivalents at end of period $ 29 $ 384
====== ======
Cash paid for:
Income tax $ 14 $ 9
====== ======
Interest $ 93 $ 92
====== ======
See accompanying notes to condensed consolidated financial statements.
F-5
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 generally accepted
accounting principles.
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 March 31, 2003 and December 31, 2002 and the results of
operations and cash flows for the related interim periods ended March 31, 2003
and 2002. However, these results are not necessarily indicative of results for
any other interim period or for the year. It is suggested that the accompanying
condensed consolidated financial statements be read in conjunction with the
Company's audited consolidated financial statements included in its 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.
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:
F-6
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003 AND 2002
(UNAUDITED)
Three months ended Three months ended
March 31, 2003 March 31, 2002
-------------- --------------
Net income (loss)
As reported $ 44,000 $ (699,000)
Pro forma $ 31,000 $ (707,000)
Net income (loss) available for common
stockholders (less accretion of preferred stock)
As reported $ 42,000 $ (702,000)
Pro forma $ 29,000 $ (710,000)
Basic earnings (loss) per share
As reported $ 0.00 $ (0.03)
Pro forma $ 0.00 $ (0.03)
Diluted earnings (loss) per share
As reported $ 0.00 $ (0.03)
Pro forma $ 0.00 $ (0.03)
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.
(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 March 31,
----------------------
2003 2002
--------- ---------
(in thousands, except per share
amounts)
NUMERATOR:
Net income (loss) $ 44 (699)
Less: accretion of the excess of the redemption
value over the carrying value of redeemable preferred stock (2) (3)
--------- ---------
Income (loss) attributable to common stockholders $ 42 $ (702)
========= =========
DENOMINATOR:
Weighted average number of common shares outstanding during the period 21,545 20,675
Incremental shares from assumed conversions of warrants, options
and preferred stock 1,862 --
--------- ---------
Adjusted weighted average shares 23,407 20,675
--------- ---------
Basic earnings (loss) per share $ 0.00 $ (0.03)
========= =========
Diluted earnings (loss) per share $ 0.00 $ (0.03)
========= =========
F-7
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003 AND 2002
(UNAUDITED)
The computation of diluted loss per share for the three month period
ended March 31, 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 March 31, 2002, there were
308,000 shares of common stock underlying options and warrants that were
anti-dilutive and 2,751,000 shares of common stock underlying shares of
convertible preferred stock.
(3) INVENTORIES
Inventories consist of the following.
March 31, 2003 December 31, 2002
-------------- -----------------
Raw materials $ 2,798,000 $ 2,904,000
Work-in-process 2,904,000 2,988,000
Finished goods 1,690,000 1,613,000
------------- -------------
$ 7,392,000 $ 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.
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:
Three months ended Three months ended
March 31, 2003 March 31, 2002
------------ ------------
Sales to external customers:
Electronic Components $ 3,471,000 $ 2,865,000
Communications Equipment 2,197,000 1,955,000
------------ ------------
$ 5,668,000 $ 4,820,000
============ ============
Segment pretax profits (losses)
Electronic Components $ 674,000 $ 465,000
Communications Equipment (132,000) (659,000)
------------ ------------
$ 542,000 $ (194,000)
============ ============
March 31, 2003 December 31, 2002
------------ ------------
Segment assets
Electronic Components $ 9,467,000 $ 9,445,000
Communications Equipment 6,768,000 6,773,000
------------ ------------
$16,235,000 $16,218,000
============ ============
F-8
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 2003 AND 2002
(UNAUDITED)
The following is a reconciliation of the reportable segment income
(loss) and assets to the Company's consolidated totals:
Three months ended Three months ended
March 31, 2003 March 31, 2002
------------- -------------
Total income (loss) for reportable segments $ 542,000 $ (194,000)
Unallocated amounts:
Unallocated general corporate expenses (430,000) (466,000)
------------- -------------
Consolidated income (loss) before
income taxes $ 112,000 $ (660,000)
============= =============
March 31, 2003 December 31, 2002
------------ ------------
Assets
Total assets for reportable segments $ 16,235,000 $ 16,218,000
Other assets 43,000 568,000
------------- -------------
Total consolidated assets $ 16,278,000 $ 16,786,000
============= =============
(5) NEW CXR FRANCE CREDIT FACILITY
As of March 31, 2003, CXR France had credit facilities with several
lenders totaling up to approximately $716,000 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 are contemplating, and others 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. As of March 31, 2003, that credit
line balance was $161,000. As a result, the Company sought alternative financing
sources in France to replace all of the current lenders to the Company's French
operations. On April 8, 2003, CXR France obtained a credit facility from IFN
Finance, a subsidiary of ABN AMRO Holdings, N.V. The new credit line is for a
maximum of $1,307,000, based on the exchange rate in effect at March 31, 2003
for the conversion of euros into United States dollars. The facility is secured
by accounts receivable and carries an annual interest rate of 1.6 percentage
points above the French "T4M" rate, which was 2.758% as of March 31, 2003.
Societe Generale has agreed to an alternative pay back schedule for the full
balance currently owed so that $54,000 is due by May 31, 2003 and another
$54,000 is due by June 30, 2003. Funds that become available under the new IFN
Finance credit line as new accounts receivables develop will be 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" on page 12 of this report.
(7) INCOME TAXES
The effective tax rate for the three-month period ended March 31,
2003 differed from the federal statutory rate primarily due to certain domestic
operating losses having been incurred without a tax benefit having been
recorded.
F-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction
with our condensed consolidated financial statements and notes to financial
statements included elsewhere in this document. This report and our condensed
consolidated financial statements and notes to financial statements contain
forward-looking statements, which generally include the plans and objectives of
management for future operations, including plans and objectives relating to our
future economic performance and our current beliefs regarding revenues we might
earn if we are successful in implementing our business strategies. The
forward-looking statements and associated risks may include, relate to or be
qualified by other important factors, including, without limitation:
o the projected growth 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
2
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 during 2002, 2001 and 2000,
respectively, and 61.2% of our total net sales during the quarter ended March
31, 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 38.8% of our total net
sales during the quarter ended March 31, 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 first quarter of 2003, our electronic components segment,
which primarily serves defense and aerospace markets, improved its sales and
profits as compared to the first quarter of 2002. Our communications equipment
segment improved its sales and reduced its loss in the first quarter of 2003.
The improvement was related to CXR France, which serves mainly our
telecommunications premises equipment customer in Europe and the United States.
CXR France's 42.0% increase in sales was partially offset by a 51.2% decline in
sales at CXR Telcom in Fremont, California, which subsidiary mainly sells to
telecommunications carrier companies in the United States. In the first quarter
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 do not anticipate a further decline in our communications equipment
segment sales in 2003 as compared to 2002. We believe that our communications
transmission and network access equipment may actually realize a modest
improvement in sales in 2003 as compared to 2002. We have reduced costs in our
communications equipment segment and lowered the breakeven point both in our U.
S. 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
3
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. 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, goodwill impairment and
foreign currency translation.
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 cost 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.
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,
2002 and the three months ended March 31, 2003, we did not record any impairment
losses related to goodwill and other intangible assets.
4
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 76.3% of our net revenues, 75.2% of
our assets and 76.5% of our total liabilities as of and for the three months
ended March 31, 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."
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 these
financial statements would be included within our statement of operations.
If we dispose of any of our subsidiaries, any cumulative translation
gains or losses would be realized into our statement of operations. If we
determine that there has been a change in the functional currency of a
subsidiary to United States dollars, then any translation gains or losses
arising after the date of the change would be included within our statement of
operations.
Based on our assessment of the factors discussed above, we consider the
functional currency of each of our international subsidiaries to be each
subsidiary's local currency. Accordingly we had cumulative translation losses of
$597,000 and $569,000, respectively, that were included as part of accumulated
other comprehensive loss within our balance sheets at December 31, 2002 and
March 31, 2003, respectively. During the year ended December 31, 2002 and the
three months ended March 31, 2003, we included translation adjustments of gains
of approximately $446,000 and $28,000, respectively, under accumulated other
comprehensive income and loss.
If we had determined that the functional currency of our subsidiaries
was United States dollars, these gains or losses would have decreased or
increased our loss for the year ended December 31, 2002 and the three months
ended March 31, 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 three months ended March 31, 2003.
5
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31,
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
March 31,
--------------------------------------
2003 2002
----------------- ----------------
Net sales......................................... 100.0% 100.0%
Cost of sales..................................... 62.2 68.3
-------- --------
Gross profit...................................... 37.8 31.7
Selling, general and administrative
expenses........................................ 30.0 38.7
Engineering and product development
expenses........................................ 3.9 4.9
-------- --------
Operating income (loss)........................... 3.9 (11.9)
Interest expense.................................. (1.7) (1.9)
Other income...................................... (0.2) 0.1
-------- --------
Income (loss) before income tax expense........... 2.0 (13.7)
Income tax expense................................ 1.2 0.8
-------- --------
Net income (loss)................................. 0.8% (14.5)%
======== =========
NET SALES. Net sales for the three months ended March 31, 2003
increased by $848,000 (18.2%) to $5,668,000 as compared to $4,820,000 for the
three months ended March 31, 2002.
Net sales of our electronic components increased by $606,000 (21.2%) to
$3,471,000 for the three months ended March 31, 2003 as compared to $2,865,000
for the three months ended March 31, 2002. Net sales of power supplies by XCEL
Corporation, Ltd. increased by $636,000 (43.2%) to $2,109,000 for the three
months ended March 31, 2003 as compared to $1,473,000 for the three months ended
March 31, 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. Sales of digital
switches manufactured by our Digitran Division decreased by $109,000 (8.1%) to
$1,234,000 for the three months ended March 31, 2003 as compared to $1,343,000
for the three months ended March 31, 2002. The decline in sales of digital
switches was a result of lower than expected orders, which we believe was
primarily due to a temporary deferral of government orders that we believe will
result in an increase in sales of digital switches in subsequent quarters of
2003. Sales of electronic subsystem assemblies were negligible in the current
period and the comparable prior year period.
Net sales of our communications equipment products and services for the
three months ended March 31, 2003 increased by $242,000 (12.4%) to $2,197,000 as
compared to $1,955,000 for the three months ended March 31, 2002. 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 France and CXR Telcom. Transmission and
network access equipment sales increased by $637,000 (59.3%) to $1,712,000 for
the three months ended March 31, 2003 as compared to $1,075,000 in the prior
6
year period. Test equipment net sales for the three months ended March 31, 2003
decreased by $344,000 (54.2%) to $291,000 as compared to $635,000 for the three
months ended March 31, 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, our French subsidiary, produces all of our transmission
products and network access equipment. Net sales of transmission products and
network access equipment produced by CXR France increased by $637,000 (59.3%) to
$1,712,000 for the three months ended March 31, 2003 as compared to $1,075,000
for the three months ended March 31, 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. Total net
sales by CXR France, including both test equipment and transmission and
networking equipment, increased by $560,000 (42.0%) to $1,894,000 for the three
months ended March 31, 2003 as compared to $1,334,000 for the three months ended
March 31, 2002.
Net sales of our CXR HALCYON 704 series field test equipment decreased
by $93,000 (39.7%) to $141,000 for the three months ended March 31, 2003 as
compared to $234,000 for the three months ended March 31, 2002. Net sales of our
T-Com central office test equipment product line declined by $81,000 (51.0%) to
$78,000 for the three months ended March 31, 2003 as compared to $159,000 for
the three months ended March 31, 2002.
Both the CXR HALCYON and T-COM product lines experienced these
decreases in sales due to the continued slowdown in the capital expenditures of
telecommunications service providers. The service providers are releasing 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 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 37.8% for the three months ended March 31, 2003 as compared to 31.7% for the
comparable period in 2002. In dollar terms, total gross profit increased by
$612,000 (40.0%) to $2,141,000 for the three months ended March 31, 2003 as
compared to $1,529,000 for the comparable period in 2002.
Gross profit for our electronic components segment increased in dollar
terms by $332,000 (32.0%) to $1,370,000 for the three months ended March 31,
2003 as compared to $1,038,000 for the three months ended March 31, 2002, and
increased as a percentage of related net sales to 39.5% for the three months
ended March 31, 2003 from 36.2% for the three months ended March 31, 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 for XCEL Power
Systems' U.K. power supply production operations.
Gross profit for our communications equipment segment increased in
dollar terms by $280,000 (57.0%) to $771,000 for the three months ended March
31, 2003 as compared to $491,000 for the comparable period in 2002, and
increased as a percentage of net sales to 35.1% for the three months ended March
31, 2003 from 25.1% for the three months ended March 31, 2002. The increase in
7
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 quarter
of 2003 with a negative gross profit. Based on recent orders, we expect CXR
Telcom to improve its gross profit in subsequent quarters of 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased by $167,000 (9.0%) to $1,698,000 for the three
months ended March 31, 2003 as compared to $1,865,000 for the three months ended
March 31, 2002. Selling, general and administrative expenses also decreased as a
percentage of total net sales, to 30.0% of net sales during the three months
ended March 31, 2003 from 38.7% of net sales during the comparable period in
2002. The decrease in selling, general and administrative expenses was due to
several factors. Selling expenses were reduced by $96,000 in our communications
equipment segment, and administrative costs were reduced by $135,000 in our
communications equipment segment primarily due to staff reductions at CXR Telcom
and CXR France. These reductions were partially offset by an $83,000 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.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities of our communications equipment segment. These expenses decreased
slightly to $221,000 for the three months ended March 31, 2003 as compared to
$238,000 for the three months ended March 31, 2002.
OTHER INCOME AND EXPENSE. Interest expense increased by $6,000 (6.7%)
to $96,000 for the three months ended March 31, 2003 from $90,000 for the three
months ended March 31, 2002. Other expense was $14,000 for the three months
ended March 31, 2003 as compared to $4,000 for the three months ended March 31,
2002 primarily due to currency exchange rate fluctuations.
INCOME TAX EXPENSE. Income tax expense for the three months ended March
31, 2002 was $68,000 as compared to $39,000 for the comparable prior year
period. The majority of the increase related to the recording by XCL of a
provision for U.K. income tax that was required because XCL is expected to
produce greater taxable income for 2003 than in 2002 and has consumed its net
operating loss carryforwards.
NET INCOME (LOSS). The net income for the three months ended March 31,
2003 was $44,000 as compared to the net loss of $699,000 for the three months
ended March 31, 2002 . 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 $442,000. 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 turn a profit at both CXR Telcom and CXR France.
8
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 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 March 31, 2003, we had working
capital of $4,085,000, an accumulated deficit of $19,000,000, an accumulated
other comprehensive loss of $569,000, cash and cash equivalents of $29,000, and
$5,179,000 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 $468,000 for the
three months ended March 31, 2003 as compared to cash provided by our operating
activities of $279,000 for the three months ended March 31, 2002. This $189,000
increase in cash provided by operations during the three months ended March 31,
2003 primarily resulted from accounts receivable collections and increases in
accounts payable balances.
Cash used in our investing activities totaled $4,000 for the three
months ended March 31, 2003 as compared to $21,000 for the three months ended
March 31, 2002. Included in the results for the three months ended March 31,
2002 are $35,000 of fixed asset purchases.
Cash used in our financing activities totaled $814,000 for the three
months ended March 31, 2003 as compared to $432,000 for the three months ended
March 31, 2002, primarily 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 March 31, 2003, the interest rate was the
prime rate (then 4.25%) plus 1%, subject to a minimum interest charge of $13,500
per month. The balance outstanding at March 31, 2003 was $697,000 on the
revolving loan and $86,000 on the term loan, and we had available to us $148,000
of additional borrowings under the revolving loan. The credit facility contains
restrictive financial covenants that are set by mutual agreement each year. At
March 31, 2003, no covenants had been established for 2003.
As of March 31, 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, Societe Generale and Banque Hervet in France and Johan
Tokyo Credit Bank and Johnan Shinkin Bank in Japan. At March 31, 2003, the
balances outstanding under our U.K., France and Japan credit facilities were
$2,105,000, $716,000 and $78,000, 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 3.25%. The balance of the loan on March 31, 2003 was
$78,000 using the exchange rate in effect at that date for conversion of
Japanese yen into United States dollars.
9
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 March 31,
2003 for the conversion of British pounds into United States dollars, the new
facility is for a maximum of $2,370,000 and includes a $553,000 unsecured cash
flow loan, a $126,000 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 March 31, 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 March 31, 2003, CXR France had credit facilities with several
lenders totaling up to approximately $716,000 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 are contemplating, and others 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. As of March 31, 2003, that credit
line balance was $161,000. As a result, we sought alternative financing sources
in France to replace all of the current lenders to our French operations. On
April 8, 2003, CXR France obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO Holdings, N.V. The new credit line is for a maximum of
$1,307,000, based on the exchange rate in effect at March 31, 2003 for the
conversion of euros into United States dollars. The facility is secured by
accounts receivable and carries an annual interest rate of 1.6 percentage points
above the French "T4M" rate, which was 2.758% as of March 31, 2003. Societe
Generale has agreed to an alternative pay back schedule for the full balance
currently owed so that $54,000 is due by May 31, 2003 and another $54,000 is due
by June 30, 2003. Funds that become available under the new IFN Finance credit
line as new accounts receivables develop will be used to retire the existing CXR
France debt.
Our backlog was $11,815,000 as of March 31, 2003 as compared to
$14,800,000 as of March 31, 2002. Our backlog as of March 31, 2003 was 95.9%
related to our electronic components business, which business tends to provide
us with long lead-times for our manufacturing processes due to the custom nature
of the products, and 4.1% 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 three months ended March 31, 2003 and the year ended
December 31, 2002, 38.8% and 40.9% of our total net sales, respectively, were
generated by our communications equipment segment. We experienced a 12.4%
increase in our communications equipment segment sales for the three months
ended March 31, 2003 as compared to the three months ended March 31, 2002. This
increase was net of a 54.2% 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.
10
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.
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.
PAYMENTS DUE BY PERIOD
----------------------
CONTRACTUAL (IN THOUSANDS)
OBLIGATIONS AT
MARCH 31, 2003
2003 2004 2005 2006 2007 THERE-AFTER TOTAL
----------------------------- -------- ------- ------- ------- ------- ----------- ------
Line of Credit (Domestic) $ 697 $ -- $ -- $ -- $ -- $ -- $ 697
Average Interest Rate P+1%
Line of Credit (U.K.) $1,437 $ -- $ -- $ -- $ -- $ -- $1,437
Average Interest Rate B+2%
Overdraft (France) $ 599 $ -- $ -- $ -- $ -- $ -- $ 599
Average Interest Rate 5.5% -7.2%
Term Loan (Domestic) $ 72 $ 8 $ 5 $ -- $ -- $ -- $ 85
Average Interest Rate P+1%
Term Loan (U.K.) $ 21 $ 45 $ 602 $ -- $ -- $ -- $ 668
Average Interest Rate B+2%
Term Loan (France) $ 50 $ 56 $ 10 $ -- $ -- $ -- $ 116
Average Interest Rate 5.2% -5.6%
Term Loan (Japan) $ 13 $ 17 $ 17 $ 16 $ 15 $ -- $ 78
Average Interest Rate 3.25%
Capitalized Lease
Obligations $ 90 $ 98 $ 35 $ 3 $ -- $ -- $ 226
Operating Leases $ 475 $ 562 $ 382 $ 6 $ -- $ -- $1,425
------ ------ ------ ------- ------- ------ ------
$3,454 $ 786 1,051 25 $ 15 $ -- $5,331
In conjunction with our cost reductions, we believe that current and
future available capital resources, revenues generated from operations, and
other existing sources of liquidity, including the credit facilities we and our
subsidiaries have, will be adequate to meet our anticipated working capital and
capital expenditure requirements for at least the next twelve months. If,
however, our capital requirements or cash flow vary materially from our current
projections or if unforeseen circumstances occur, we may require additional
financing. Deteriorating global economic conditions may cause prolonged declines
in investor confidence in and accessibility to capital markets. Our failure to
raise capital, if needed, could restrict our growth, limit our development of
new products or hinder our ability to compete.
11
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 August 2001, the Financial Accounting Standards Board, or the FASB,
issued FASB Statement No. 143, "Accounting for Asset Retirement Obligations," or
SFAS No. 143. This statement addresses financial and reporting obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. It applies to all entities and legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or normal operation of long-lived
assets, except for certain obligations of lessees. This statement is effective
for financial statements issued for fiscal years beginning after June 15, 2002.
Our management has determined that the adoption of SFAS No. 143 has not had a
material effect on our financial position or results of operations.
In October 2001, the FASB issued FASB Statement No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," or SFAS No. 144. SFAS No.
144 requires that long-lived assets be measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating losses that
have not yet occurred. SFAS No. 144 is effective for our consolidated financial
statements beginning January 1, 2002. The implementation of SFAS No. 144 did not
have a material impact on our consolidated financial position or results of
operations.
In April 2002, the FASB issued FASB Statement No. 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections," or SFAS No. 145. 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 of debt are to be classified as extraordinary items only if
they meet the criteria for extraordinary items in 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 FASB Statement No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," or SFAS No. 146. 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. We do not
expect the adoption of this statement to have a material effect on our financial
statements.
12
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantees of Indebtedness of Others," or FIN 45. 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 December 2002, the FASB issued FASB Statement No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure-An Amendment of SFAS
123," or SFAS No. 148. 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 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 have adopted the annual disclosure provisions of SFAS No. 148 for
our financial reports for the year ended December 31, 2002 and have 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 FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51,"
or FIN 46. 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. We do not expect that
the provisions of FIN 46 will have a material impact on our results of
operations or financial position.
EURO CONVERSION
Our operating subsidiaries located in France and the U.K. had combined
net sales from operations approximating 72.2% and 58.7%, respectively, of our
total net sales for the three months ended March 31, 2003 and the year ended
December 31, 2002. Net sales from the French subsidiary participating in the
euro conversion were approximately 33.4% and 25.8%, respectively, of our net
sales for the three months ended March 31, 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.
13
While it is difficult to assess the competitive impact of the euro
conversion on our European operations, at this time we do not foresee any
material impediments to our ability to compete for orders from customers
requesting pricing using the new exchange rate. Since we have no significant
direct sales between our United States and European operations, we regard
exchange rate risk as nominal.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or the lender's
base rate, which exposes us to risk of earnings loss due to changes in such
interest rates. 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 three months ended March 31, 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 May 5, 2003 ("Evaluation Date"), that the design
and operation of our "disclosure controls and procedures" (as defined in Rules
13a-14(c) and 15d-14(c) 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 principal executive officer and our principal financial officer,
as appropriate to allow timely decisions regarding whether or not disclosure is
required.
There were no significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the
Evaluation Date, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no corrective actions were
required or undertaken.
14
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 March 2003, we issued 41,663 shares of common stock to one investor
upon conversion of 4,166.3 shares of our Series B Preferred Stock.
Exemption from the registration provisions of the Securities Act of
1933 for the transaction 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 purchaser was sophisticated with access to
the kind of information registration would provide.
DIVIDENDS
To date we have not paid dividends on our common stock. Our line of
credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash
dividends on our common stock. The certificates of designations related to our
Series A Preferred Stock and Series B Preferred Stock provide that shares of
those series of preferred stock are not entitled to receive cash dividends. We
currently intend to retain future earnings to fund the development and growth of
our business and, therefore, do not anticipate paying cash dividends on our
common stock within the foreseeable future. Any future payment of dividends on
our common stock will be determined by our board of directors and will depend on
our financial condition, results of operations, contractual obligations and
other factors deemed relevant by 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.
15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Number Description
------ -----------
10.1 Waiver of Default Agreement dated March 28, 2003 between XET
Corporation, CXR Telcom Corporation and Wells Fargo Business
Credit, Inc. (1)
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
----------
(1) Filed as an exhibit to our annual report on Form 10-K for the
year ended December 31, 2002 and incorporated herein by
reference.
(b) Reports on Form 8-K
None.
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: May 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)
16
CERTIFICATIONS
I, Carmine T. Oliva, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MicroTel
International, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ CARMINE T. OLIVA
-------------------------------------------------------------------
Carmine T. Oliva,
Chief Executive Officer (principal executive officer)
17
I, Randolph D. Foote, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MicroTel
International, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
/s/ RANDOLPH D. FOOTE
-------------------------------------------------------------------
Randolph D. Foote,
Chief Financial Officer (principal financial officer)
18
EXHIBITS FILED WITH THIS REPORT ON FORM 10-Q
Number Description
------ -----------
99.1 Certifications of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act Of 2002
19