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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, 2004 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number 1-10346
MICROTEL INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 77-0226211
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
9485 HAVEN AVENUE, SUITE 100
RANCHO CUCAMONGA, CALIFORNIA 91730
(Address of Principal Executive Offices) (Zip Code)
(909) 987-9220
(Registrant's Telephone Number, Including Area Code)
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 August 2, 2004, there were 24,695,458 shares of the issuer's common
stock, $0.0033 par value, outstanding.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited)
and December 31, 2003........................................................................ F-1
Condensed Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2004 and 2003 (unaudited)..................................................... F-2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the
Three and Six Months Ended June 30, 2004 and 2003 (unaudited)................................ F-3
Condensed Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 2004 (unaudited)................................................... F-4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2004 and 2003 (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................................................................................... 12
ITEM 4. CONTROLS AND PROCEDURES....................................................................... 13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................. 14
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES.............. 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES............................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................... 14
ITEM 5. OTHER INFORMATION............................................................................. 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.............................................................. 15
SIGNATURES .............................................................................................. 15
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 30, December 31,
ASSETS 2004 2003
------------ ------------
Current assets: (unaudited)
Cash and cash equivalents $ 1,436 $ 1,174
Accounts receivable, net of allowance for doubtful
accounts of $152 and $161, respectively 4,871 5,393
Inventories 6,109 6,683
Prepaid and other current assets 545 555
------------ ------------
Total current assets 12,961 13,805
Property, plant and equipment, net 410 322
Goodwill, net of accumulated amortization of $1,073 and $1,050,
respectively 2,464 2,447
Other assets 655 595
------------ ------------
$ 16,490 $ 17,169
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,458 $ 2,882
Current portion of long-term debt 262 316
Accounts payable 1,582 1,637
Accrued expenses 2,769 3,274
------------ ------------
Total current liabilities 7,071 8,109
Long-term debt, less current portion 853 819
Other liabilities 274 325
------------ ------------
Total liabilities 8,198 9,253
------------ ------------
Stockholders' equity:
Preferred stock, authorized 10,000,000 shares;
Convertible Series B Preferred Stock, $0.01 par value;
issued and outstanding 200 shares and 1,000 shares,
respectively (aggregate liquidation preferences of $1 and
$4, respectively) 1 4
Common stock, $0.0033 par value. Authorized 50,000,000
shares; issued and outstanding 23,482,000 and 23,476,000,
respectively 77 77
Additional paid-in capital 25,617 25,613
Accumulated deficit (17,447) (17,886)
Accumulated other comprehensive income 44 108
------------ ------------
Total stockholders' equity 8,292 7,916
------------ ------------
$ 16,490 $ 17,169
============ ============
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, 2004 AND 2003
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(in thousands, except per share amounts)
Net sales $ 6,432 $ 6,834 $ 12,624 $ 12,502
Cost of sales 3,533 4,005 6,978 7,532
------------ ------------ ------------ ------------
Gross profit 2,899 2,829 5,646 4,970
Operating expenses:
Selling, general and administrative 2,067 1,918 4,284 3,616
Engineering and product development 312 246 595 467
------------ ------------ ------------ ------------
Income from operations 520 665 767 887
Other expense:
Interest expense (94) (117) (190) (213)
Other expense (30) (47) (36) (61)
------------ ------------ ------------ ------------
Income before income taxes 396 501 541 613
Income tax expense 27 142 102 210
------------ ------------ ------------ ------------
Net income $ 369 $ 359 $ 439 $ 403
============ ============ ============ ============
Earnings per share:
Net income:
Basic $ 0.02 $ 0.02 $ 0.02 $ 0.02
============ ============ ============ ============
Diluted $ 0.02 $ 0.02 $ 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, 2004 AND 2003
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(in thousands)
Net income $ 369 $ 359 $ 439 $ 403
Other comprehensive income (loss):
Foreign currency translation adjustment (62) 224 (64) 252
--------- --------- --------- ---------
Comprehensive income $ 307 $ 583 $ 375 $ 655
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
F-3
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30, 2004
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
Accumulated
Series B Other
Convertible Compre-
Preferred Stock Common Stock Additional hensive
---------------------- ---------------------- Paid-In Accumulated Income
Shares Amount Shares Amount Capital Deficit (Loss) Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 2003 1 $ 4 23,476 $ 77 $ 25,613 $ (17,886) $ 108 $ 7,916
Preferred Series B conversions -- (3) 4 -- 3 -- -- --
Stock option exercise -- -- 2 -- 1 -- -- 1
Foreign currency translation
adjustment -- -- -- -- -- -- (64) (64)
Net profit -- -- -- -- -- 439 -- 439
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 2004 1 $ 1 23,482 $ 77 $ 25,617 $ (17,447) $ 44 $ 8,292
========== ========== ========== ========== ========== ========== ========== ==========
F-4
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2004 2003
---------- ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 439 $ 403
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 128 167
Provision for doubtful account -- 40
Provision for obsolete/slow moving inventory 339 317
Warrants issued for services -- 19
Changes in operating assets and liabilities:
Accounts receivable 522 17
Inventories 240 174
Other assets (77) (213)
Accounts payable and accrued expenses (611) (312)
---------- ----------
Cash provided by operating activities 980 612
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net purchases of property, plant and equipment (186) (2)
Cash collected on note receivable -- 6
---------- ----------
Cash provided by (used in) investing activities (186) 4
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in notes payable and long-term debt (443) (616)
---------- ----------
Cash (used in) financing activities (443) (616)
---------- ----------
Effect of exchange rate changes on cash (89) 259
Net increase in cash and cash equivalents 262 259
---------- ----------
Cash and cash equivalents at beginning of period 1,174 254
---------- ----------
Cash and cash equivalents at end of period $ 1,436 $ 513
========== ==========
Cash paid for:
Income tax $ 170 $ 33
========== ==========
Interest $ 164 $ 210
========== ==========
See accompanying notes to condensed consolidated financial statements.
F-5
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004 AND 2003
(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 Anderson
Jacobson, formerly CXR, SA ("CXR-AJ") and XET Corporation ("XET"). XET and its
subsidiaries design, develop, manufacture and market digital and rotary
switches, power supplies and subsystem assemblies. CXR Telcom and CXR-AJ design,
develop, manufacture and market network access and transmission products and
communications test equipment. The Company conducts its operations out of
various facilities in the U.S., France, England and Japan and organizes itself
in two product line segments: 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 of America.
The unaudited condensed consolidated financial statements do, however,
reflect all adjustments, consisting of only normal recurring adjustments, which
are, in the opinion of management, necessary to state fairly the financial
position as of June 30, 2004 and December 31, 2003 and the results of operations
and cash flows for the related interim periods ended June 30, 2004 and 2003.
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 2003 annual report on
Form 10-K.
STOCK-BASED COMPENSATION
The Company applies Accounting Principles Bulletin ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly, no
compensation cost is recognized for its employee stock option plans unless the
exercise price of options granted is less than fair market value on the date of
grant. The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure."
The following table sets forth the net income, net income available for
common stockholders and earnings 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)
JUNE 30, 2004 AND 2003
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------ ------------ ------------- ------------
Net income:
As reported $ 369,000 $ 359,000 $ 439,000 $ 403,000
Add: Stock based compensation expense
included in reported net income, net
of related tax effect -- -- -- --
Deduct: Stock-based compensation
expense determined under the fair
value-based method (34,000) (10,000) (48,000) (24,000)
------------ ------------ ------------- ------------
Pro forma $ 335,000 $ 349,000 $ 391,000 $ 379,000
============ ============ ============= ============
Basic earnings per share:
As reported $ 0.02 $ 0.02 $ 0.02 $ 0.02
Add: Stock based compensation expense
included in reported net income, net
of related tax effect -- -- -- --
Deduct: Stock-based compensation
expense determined under the fair
value-based method (0.01) -- -- --
------------ ------------ ------------- ------------
Pro forma $ 0.01 $ 0.02 $ 0.02 $ 0.02
============ ============ ============= ============
Diluted earnings per share:
As reported $ 0.02 $ 0.02 $ 0.02 $ 0.02
Add: Stock based compensation expense
included in reported net income, net of
related tax effect -- -- -- --
Deduct: Stock-based compensation
expensed determined under the fair
value-based method (0.01) (0.01) -- --
------------ ------------ ------------- ------------
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 or loss in future periods. The calculations were based on
a Black-Scholes pricing model with the following assumptions: no dividend yield;
expected volatility of 87% to 92%; risk-free interest rate of 3%; expected lives
of 7 years.
F-7
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004 AND 2003
(UNAUDITED)
(2) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -----------------------------
2004 2003 2004 2003
------------- ------------- ------------- ------------
(in thousands, except per share amounts)
NUMERATOR:
Net income $ 369 $ 359 $ 439 $ 403
Less: accretion of the excess of the
redemption value over the carrying
value of redeemable preferred stock -- 2 -- 5
------------- ------------- ------------- ------------
Income attributable to common
stockholders $ 369 $ 357 $ 439 $ 398
============= ============= ============= ============
DENOMINATOR:
Weighted average number of common
shares outstanding during the period 23,482 21,865 23,481 21,705
Incremental shares from assumed
conversions of warrants, options and
preferred stock 826 1,643 871 1,753
------------- ------------- ------------- ------------
Adjusted weighted average number of
outstanding shares 24,308 23,508 24,352 23,458
============= ============= ============= ============
Basic earnings per share $ 0.02 $ 0.02 $ 0.02 $ 0.02
============= ============= ============= ============
Diluted earnings per share $ 0.02 $ 0.02 $ 0.02 $ 0.02
============= ============= ============= ============
F-8
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004 AND 2003
(UNAUDITED)
The following options and warrants were excluded from the computation of diluted earnings
per share as a result of the exercise prices exceeding the average market prices of the
underlying shares of common stock.
Three Months Ended
June 30,
-------------------------------------
2004 2003
------------ ------------
Options and warrants to purchase
shares of common stock 911,000 1,300,000
------------ ------------
Exercise prices $1.00 - $3.44 $0.35 - $3.44
------------- -------------
Six Months Ended
June 30,
-------------------------------------
2004 2003
------------ ------------
Options and warrants to purchase
shares of common stock 1,129,000 2,291,000
------------ ------------
Exercise prices $1.00 - $3.44 $0.35 - $3.44
------------- -------------
(3) INVENTORIES
Inventories consist of the following:
June 30, December 31,
2004 2003
------------ ------------
Raw materials $ 3,162,000 $ 3,230,000
Work-in-process 1,347,000 1,963,000
Finished goods 1,550,000 1,490,000
------------ ------------
$ 6,109,000 $ 6,683,000
============ ============
(4) REPORTABLE SEGMENTS
The Company has two reportable segments: electronic components and
communications equipment. The electronic components segment operates in the
U.S., European and Asian markets and designs, manufactures and markets digital
and rotary switches, power supplies and subsystem assemblies. The communications
equipment segment operates principally in the U.S. and European markets and
designs, manufactures and distributes voice and data transmission and networking
equipment and communications test instruments.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. 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 and different
design and manufacturing and marketing strategies.
F-9
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004 AND 2003
(UNAUDITED)
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
2003 annual report on Form 10-K. Selected financial data for each of the Company's operating segments is shown
below:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
---------------- ---------------- ---------------- ----------------
Sales to external customers:
Electronic Components $ 3,955,000 $ 4,378,000 $ 7,860,000 $ 7,849,000
Communications Equipment 2,477,000 2,456,000 4,764,000 4,653,000
---------------- ---------------- ---------------- ----------------
$ 6,432,000 $ 6,834,000 $ 12,624,000 $ 12,502,000
================ ================ ================ ================
Segment pretax profits (losses):
Electronic Components $ 813,000 $ 985,000 $ 1,596,000 $ 1,659,000
Communications Equipment 141,000 99,000 130,000 (33,000)
---------------- ---------------- ---------------- ----------------
$ 954,000 $ 1,084,000 $ 1,726,000 $ 1,626,000
================ ================ ================ ================
June 30, 2004 December 31, 2003
---------------- -----------------
Segment assets:
Electronic Components $ 8,641,000 $ 9,466,000
Communications Equipment 6,674,000 6,969,000
---------------- ----------------
$ 15,315,000 $ 16,435,000
================ ================
The following is a reconciliation of the reportable segment income and assets to the Company's
consolidated totals:
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
------------- ------------- ------------- -------------
Total income for reportable segments $ 954,000 $ 1,084,000 $ 1,726,000 $ 1,626,000
Unallocated amounts:
Unallocated general corporate
expenses (558,000) (583,000) (1,185,000) (1,013,000)
------------- ------------- ------------- -------------
Consolidated income (loss) before
income taxes $ 396,000 $ 501,000 $ 541,000 $ 613,000
============ ============ ============ ============
F-10
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004 AND 2003
(UNAUDITED)
June 30, December 31,
2004 2003
------------ ------------
Assets
Total assets for reportable segments $15,315,000 $16,435,000
Other assets 1,175,000 734,000
------------ ------------
Total consolidated assets $16,490,000 $17,169,000
============ ============
(5) NEW ACCOUNTING PRONOUNCEMENTS
New accounting pronouncements are discussed under the heading "Impacts
of New Accounting Pronouncements" in Item 2 of Part I of this report.
(6) INCOME TAXES
The effective tax rate for the three- and six-month periods ended June
30, 2004, is different than the 34% U.S. statutory rate primarily because of
foreign taxes on foreign source income that cannot be offset by the utilization
of U.S. tax loss carryforwards.
(7) CREDIT FACILITIES
On June 1, 2004, the Company's subsidiaries, XET Corporation and CXR
Telcom Corporation, together with the Company acting as guarantor, obtained a
credit facility from Wells Fargo Bank, N.A. for the Company's domestic
operations. This facility is effective through July 1, 2005 and replaced the
previous credit facility the Company had with Wells Fargo Business Credit, Inc.
No prepayment penalty was due because the prior loan contract excluded from
prepayment penalties loans replaced with new credit facilities from Wells Fargo
Bank, N.A. Also, the new credit facility has no minimum interest.
The new credit facility provides a $3,000,000 revolving credit line
secured by accounts receivable and inventories. The first $2,000,000 of
borrowings are not formula-based and do not have to be supported by specific
receivables or inventory balances. The interest rate is variable and is adjusted
monthly based on the prime rate plus 0.5%. The prime rate at June 30, 2004 was
4.25%.
The new credit facility also provides a term loan of $150,000 secured
by machinery and equipment, amortizable over 36 months at a variable rate equal
to the prime rate plus 1.5%. In addition, Wells Fargo Bank, N.A. has provided
the Company with $300,000 of credit available for the purchase of new capital
equipment when needed.
As of June 30, 2004, the Company had a balance owing under the new
credit facility of $1,469,000, and the Company had $681,000 of availability. The
credit facility is subject to the following financial covenants: debt service;
annual profitability; debt-to-tangible net worth; current ratio; and minimum
tangible net worth. As of June 30, 2004, the Company was in compliance with each
of these covenants other than the current ratio covenant. The Company obtained a
waiver of non-compliance of the current ratio covenant.
F-11
MICROTEL INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2004 AND 2003
(UNAUDITED)
As of June 30, 2004, the Company's 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, IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National
de Paris, Societe Generale in France and Sogelease and Johnan Shinkin Bank in
Japan. At June 30, 2004, the balances outstanding under the Company's U.K.,
France and Japan credit facilities were $1,151,000, $739,000 and $64,000,
respectively.
(8) SUBSEQUENT EVENT
Pursuant to the terms of a Stock Purchase Agreement executed on July
13, 2004, the Company acquired all of the issued and outstanding common stock of
Larus Corporation, a California corporation ("Larus"). Larus is based in San
Jose, California and engages in the manufacturing and sale of telecommunications
products. Larus has one wholly-owned subsidiary, Vista Labs, Incorporated
("Vista"), which provides engineering services to Larus. The Company acquired
all of the assets and liabilities of Larus in this transaction, including the
intellectual property, cash, accounts receivable and inventories owned by each
of Larus and Vista.
The purchase price for the acquisition consisted of $1,000,000 in cash,
the issuance of 1,213,592 shares of the Company's common stock, $887,500 in the
form of two short-term, zero interest promissory notes, $3,000,000 in the form
of two subordinated secured promissory notes, and warrants to purchase up to an
aggregate of 150,000 shares of the Company's common stock at $1.30 per share. In
addition, the Company assumed $245,000 worth of accounts payable and accrued
expenses and entered into an above-market real property lease with the sellers,
which lease represents an obligation that exceeds the fair market value by
approximately $756,000 and is part of the acquisition purchase price. The cash
portion of the acquisition purchase price was funded with proceeds from the
Company's credit facility with Wells Fargo Bank, N.A. and cash on-hand.
In determining the purchase price for Larus, the Company took into
account the historical and expected earnings and cash flow of Larus, as well as
the value of companies of a size and in an industry similar to Larus, comparable
transactions and the market for such companies generally. The Company will
consolidate the results of operations of Larus beginning from the date of
acquisition, July 13, 2004.
F-12
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 ability to efficiently and effectively integrate and
operate the businesses of our newly-acquired subsidiaries,
Larus Corporation ("Larus") and Vista Labs, Incorporated
("Vista");
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, 2003, and the "Risk Factors"
we included in that report.
Any of the factors described above could cause our financial results,
including our net income or loss or growth in net income or 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 three of our wholly-owned operating subsidiaries, XET
Corporation ("XET"), CXR Telcom Corporation ("CXR Telcom"), and CXR Anderson
Jacobson, formerly CXR, SA ("CXR-AJ"), 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:
2
o Electronic Components
-- digital and rotary switches
-- electronic power supplies
-- subsystem assemblies
o Communications Equipment
-- network access and transmission 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
aerospace customers, defense contractors and industrial customers, were 63.4%,
59.1% and 46.1% of our total net sales during 2003, 2002 and 2001, respectively,
and 62.3% of our total net sales during the six months ended June 30, 2004.
Sales of communications equipment and related services, primarily to private
customer premises and public carrier customers, were 36.6%, 40.9% and 53.9% of
our total net sales during 2003, 2002 and 2001, respectively, and 37.7% of our
total net sales during the six months ended June 30, 2004.
During the six months ended June 30, 2004, we achieved a 2.4% sales
volume increase in our communications equipment segment as compared to the six
months ended June 30, 2003, and the sales volume for our electronic components
segment remained stable as compared to the comparable prior year period. As
discussed below, our cost reductions and Asian outsourcing have reduced the
breakeven point in our communications equipment segment, which enabled us to
produce a small operating profit in this segment despite the historically low
sales volume that reflects a three-year downturn in the telecommunications
market.
In 2003, our communications equipment segment sales increased slightly
from the historically low level experienced in 2002. As a result of the
telecommunications business downturn in 2001 and 2002, we experienced
significant reductions in sales and gross profit as well as changes in our
product mix. Consequently, during 2003 we shifted our overall focus toward
growing our electronic components business. However, we also continued working
to improve the growth and performance of our communications equipment business,
particularly customer premises network access and transmission products. These
efforts are continuing during 2004 and include our recent acquisition of Larus
as discussed below, which acquisition is expected to enhance our performance
based upon synergies anticipated to occur through the planned combination of the
businesses of Larus and CXR Telcom.
In addition to shifting our overall focus toward growing our electronic
components business, during the first half of 2003 we reduced costs at CXR
Telcom by reducing its work force and increasing our sourcing of test equipment
components from Asian manufacturers that produce components for lower prices
than we previously paid to our former suppliers. We have also reduced costs
elsewhere in our communications equipment segment and lowered the breakeven
point both in our United States and France operations through various
cost-cutting methods, such as using Asian contract manufacturers, reducing
facility rent expense and downsizing our administrative office in Paris, France.
These cost-cutting efforts were a major factor in restoring our communications
equipment segment to profitability in 2003 and the first half of 2004. However,
3
we cannot predict if the recent improvement in telecom sales we are experiencing
indicates the end of the severe telecommunications market downturn or the extent
to which the downturn may continue to negatively affect our ability to sell our
products and services to customers in the telecommunications industry.
In July 2004, we acquired Larus Corporation. Larus is a San Jose,
California-based manufacturer and seller of telecommunications products that has
one wholly-owned subsidiary, Vista Labs, Incorporated, which provides
engineering services to Larus. The basic purchase terms of the acquisition are
described below under the heading "Liquidity and Capital Resources." We will
consolidate the results of operations of Larus beginning from the date of
acquisition, July 13, 2004. Based on current sales projections, we anticipate
that the Larus acquisition will be accretive to our earnings per share despite
the associated expenses relating both to the payment of the purchase
price and the operation and integration of Larus' business. We expect increased
sales of our French subsidiary's products in the U.S. market as a result of
sales and marketing support for the French products by Larus' U.S.-based sales
and marketing staff. We intend to consolidate our CXR Telcom subsidiary's
operations into the Larus facility, which we anticipate will result in
significant administrative and facilities cost savings.
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, 2003. 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 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.
4
FOREIGN CURRENCY TRANSLATION
We have foreign subsidiaries that together accounted for 68.8% of our
net revenues, 70.6% of our assets and 70.3% of our total liabilities as of and
for the year ended December 31, 2003, and 67.6% of our net revenues, 67.9% of
our assets and 68.3% of our total liabilities as of and for the six months ended
June 30, 2004. 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 gains of
$108,000 and $44,000 that were included as part of accumulated other
comprehensive income within our balance sheets at December 31, 2003 and June 30,
2004, respectively. During the year ended December 31, 2003 and the six months
ended June 30, 2004, we included foreign currency translation adjustments of a
gain of approximately $705,000 and a loss of $64,000, respectively, under other
comprehensive income or 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 these periods. 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 or lower than those we
recorded for these periods.
GOODWILL IMPAIRMENT
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.
5
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. If that were the case, we would have to record an expense in order to
reduce the carrying value of our goodwill. 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. At December 31, 2003, the reported goodwill totaled $2,447,000 (net of
accumulated amortization of $1,070,000). During 2003 and the six months ended
June 30, 2004, we did not record any impairment losses related to goodwill and
other intangible assets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30,
2003
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,
-------------------------------
2004 2003
------------ ------------
Net sales......................................... 100.0% 100.0%
Cost of sales..................................... 54.9 58.6
------- -------
Gross profit...................................... 45.1 41.4
Selling, general and administrative
expenses........................................ 32.1 28.1
Engineering and product development
expenses........................................ 4.9 3.6
------- -------
Operating income.................................. 8.1 9.7
Interest expense.................................. (1.5) (1.7)
Other income...................................... (0.5) (0.7)
------- -------
Income before income tax expense.................. 6.1 7.3
Income tax expense................................ 0.4 2.0
------- -------
Net income ....................................... 5.7% 5.3%
======= =======
NET SALES. Net sales for the three months ended June 30, 2004 decreased
by $402,000 (5.9%) to $6,432,000 as compared to $6,834,000 for the three months
ended June 30, 2003.
Net sales of our electronic components decreased by $423,000 (9.7%) to
$3,955,000 for the three months ended June 30, 2004 as compared to $4,378,000
for the three months ended June 30, 2003. Net sales of U.K.-produced power
supplies by XCEL Power Systems Ltd. ("XPS") decreased by $550,000 (27.3%) to
$1,467,000 for the three months ended June 30, 2004 as compared to $2,017,000
for the three months ended June 30, 2003 due to deferral of some program
delivery schedules and delay in placement of new engineering contracts. Net
sales of subsystem assemblies by XPS increased by $24,000 (5.6%) to $450,000
from $426,000 in the 2003 period. We anticipate that during the remainder of
2004 we will experience a level of sales of power supplies similar to the level
we experienced in the three months ended June 30, 2004. Net sales of switches
6
manufactured by XET Corporation's Digitran Division increased by $48,000 (3.3%)
to $1,511,000 for the three months ended June 30, 2004 as compared to $1,463,000
for the three months ended June 30, 2003.
Net sales of our communications equipment products and services
increased by $21,000 (0.9%) to $2,477,000 for the three months ended June 30,
2004 as compared to $2,456,000 for the three months ended June 30, 2003,
primarily due to an improvement in net sales of test equipment by CXR Telcom.
Test equipment net sales increased by $118,000 (19.1%) to $735,000 for the three
months ended June 30, 2004 as compared to $617,000 for the three months ended
June 30, 2003 primarily due to increased market penetration into the central
region of the U.S.
CXR-AJ, our French subsidiary, produces all of our network access
equipment and transmission products. Net sales of network access equipment and
transmission products manufactured by CXR-AJ decreased by $52,000 (3.3%) to
$1,535,000 for the three months ended June 30, 2004 as compared to $1,587,000
for the prior year period primarily due to reduced sales to distributors.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 45.1% for the three months ended June 30, 2004 as compared to 41.4% for the
comparable period in 2003. In dollar terms, total gross profit increased by
$70,000 (2.5%) to $2,899,000 for the three months ended June 30, 2004 as
compared to $2,829,000 for the three months ended June 30, 2003.
Gross profit for our electronic components segment decreased slightly
in dollar terms by $32,000 (1.8%) to $1,694,000 for the three months ended June
30, 2004 as compared to $1,726,000 for the three months ended June 30, 2003, but
increased as a percentage of related net sales to 42.8% for the three months
ended June 30, 2004 from 39.4% for the three months ended June 30, 2003. This
increase primarily resulted from increased profit margins of digital switches
due to changes in product mix to a greater proportion of high margin military
spare parts. The gross profit for digital switches increased to $912,000 from
$731,000 in the prior year period, while the gross profit on power supplies
decreased to $642,000 from $839,000 in the prior year period primarily due to
lower sales volumes. The gross profit for XPS, producer of power supplies,
decreased by $197,000 (23.5%) to $642,000 for the three months ended June 30,
2004 as compared to $839,000 for the three months ended June 30, 2003 due to
lower sales. We expect 2004 sales of power supplies to be less than in 2003 due
to scheduling of shipments, which we anticipate will result in a lower gross
profit for power supplies in 2004 as compared to 2003.
Gross profit for our communications equipment segment increased in
dollar terms by $103,000 (9.3%) to $1,205,000 for the three months ended June
30, 2004 as compared to $1,102,000 for the three months ended June 30, 2003, and
increased as a percentage of net sales to 48.6% for the three months ended June
30, 2004 from 44.8% for the three months ended June 30, 2003. The increase in
gross profit was due to an increase in test equipment sales volume at CXR Telcom
and the reduction in costs due to outsourcing to Asian sources. These factors
were instrumental in improving our gross profit in test instruments and related
sales to $526,000 as compared to a gross loss of $335,000 in the prior period.
CXR-AJ's decrease in gross profit to $679,000 from $767,000 in the prior year
period primarily was due to lower markups on sales of network access products
and a larger proportion of resale products in the sales base as compared to the
proportion of our in-house manufactured products in the sales base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $149,000 (7.8%) to $2,067,000 for the three
months ended June 30, 2004 as compared to $1,918,000 for the three months ended
June 30, 2003. Selling, general and administrative expenses also increased as a
percentage of total net sales, to 32.1% of net sales during the three months
ended June 30, 2004 from 28.1% of net sales during the comparable period in
2003. The increase in selling, general and administrative expenses was due to
several factors discussed below.
7
Sales commissions decreased by $61,000 (11.6%) to $69,000 for the three
months ended June 30, 2004 as compared to $130,000 for the three months ended
June 30, 2003, primarily due to lower negotiated commission rates established by
CXR Telcom for its sales representatives. However, other sale expenses increased
by $174,000 (36.5%) to $651,000 for the three months ended June 30, 2004 as
compared to $477,000 for the three months ended June 30, 2003, primarily due to
the addition of a sales and marketing manager at XET for the marketing of new
rotary switches and also an increase in marketing and sales activities at CXR
Telcom. In addition, CXR-AJ incurred $31,000 of marketing costs attending the
Hanover Fair tradeshow during the three months ended June 30, 2004.
Administration expenses increased slightly by $35,000 (2.7%) to $1,346,000 for
the three months ended June 30, 2004 as compared to $1,311,000 for the three
months ended June 30, 2003. Legal and accounting fees increased $34,000 and
administrative costs of our electronic component segment increased $48,000 for
the three months ended June 30, 2004 as compared to the three months ended June
30, 2003. There was also a net decrease in wages of $90,000 for the three months
ended June 30, 2004 as compared to the three months ended June 30, 2003
primarily due to a reversal of an accrual for executive bonuses. We anticipate
that selling, general and administrative expenses for the remainder of 2004 will
remain at levels higher than those we experienced last year due to increased
investments in new products, sales and marketing expenses for our new low
profile rotary and digital switches, our increased activity in searching for and
analyzing potential acquisitions, our expansion of our investor relations
program and our increased corporate governance activities in response to the
Sarbanes-Oxley Act of 2002 and recently adopted rules and regulations of the
Securities and Exchange Commission.
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities. These expenses increased by $66,000 (26.8%) to $312,000 for the
three months ended June 30, 2004 as compared to $246,000 for the three months
ended June 30, 2003. The majority of the increase was due to additional research
and engineering for new low profile rotary and digital switches, including the
hiring of two engineers. We expect this higher level of expense to continue
throughout 2004 as we develop our new family of rotary switches.
OTHER INCOME AND EXPENSE. Interest expense decreased by $23,000 (19.7%)
to $94,000 for the three months ended June 30, 2004 as compared to the three
months ended June 30, 2003 due to reduced balances and reduced costs associated
with a new credit facility for our U.S. operations. We expect annual costs
associated with this new credit facility to be approximately $150,000 less the
costs associated with our previous facility. Other expense was $30,000 for the
three months ended June 30, 2004 as compared to $47,000 for the three months
ended June 30, 2003.
INCOME TAX EXPENSE. Income tax expense for the three months ended June
30, 2004 was $27,000 as compared to $142,000 for the comparable prior year
period. The reduction was primarily due to reduced U.K. income tax payables
related to an increase in available loss carryforwards.
NET INCOME. The net income for the three months ended June 30, 2004
increased $10,000 (2.8%) to $369,000 as compared to the net income of $359,000
for the three months ended June 30, 2003. The primary reason for the increase
was reduced tax provisions for U.K. taxes. This reduction was almost totally
offset with the impact of increased sales and marketing expenses to launch new
products and improve the marketing and sales efforts in promoting our existing
products. 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.
8
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003
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,
-------------------------------
2004 2003
------------ ------------
Net sales......................................... 100.0% 100.0%
Cost of sales..................................... 55.3 60.2
------- -------
Gross profit...................................... 44.7 39.8
Selling, general and administrative
expenses........................................ 33.9 28.9
Engineering and product development
expenses........................................ 4.7 3.8
------- -------
Operating income.................................. 6.1 7.1
Interest expense.................................. (1.5) (1.7)
Other expense..................................... (0.3) (0.5)
------- -------
Income before income tax expense.................. 4.3 4.9
Income tax expense................................ 0.8 1.7
------- -------
Net income ....................................... 3.5% 3.2%
======= =======
NET SALES. Net sales for the six months ended June 30, 2004 increased
by $122,000 (1.0%) to $12,624,000 as compared to $12,502,000 for the six months
ended June 30, 2003.
Net sales of our electronic components increased slightly by $11,000
(0.1%) to $7,860,000 for the six months ended June 30, 2004 as compared to
$7,849,000 for the six months ended June 30, 2003. Net sales of power supplies
by XPS decreased by $1,089,000 (26.4%) to $3,037,000 for the six months ended
June 30, 2004 as compared to $4,126,000 for the six months ended June 30, 2003
due to the deferral of some program delivery schedules. We anticipate that
during the remainder of 2004 we will experience a level of sales of power
supplies similar to the level we experienced in the first half of 2004. Despite
the decrease in net sales of power supplies, during the six months ended June
30, 2004, XPS realized a $411,000 (96.5%) increase in sales of electronic
subsystem assemblies to $837,000 as compared to $426,000 in the prior year
period. Net sales of switches manufactured by XET Corporation's Digitran
Division increased by $303,000 (11.2%) to $3,000,000 for the six months ended
June 30, 2004 as compared to $2,697,000 for the six months ended June 30, 2003.
The increase in net sales of digital switches was a result of increased orders
from our customers for military equipment spare parts that we believe were
partially due to the war in Iraq. Sales of electronic subsystem assemblies
manufactured by the Digitran Division were negligible in the current period and
the comparable prior year period.
Net sales of our communications equipment products and services for the
six months ended June 30, 2004 increased by $111,000 (2.4%) to $4,764,000 for
the six months ended June 30, 2004 as compared to $4,653,000 for the six months
ended June 30, 2003. The increase was primarily due to an improvement in net
sales of test equipment by CXR Telcom. Test equipment net sales increased by
$309,000 (34.0%) to $1,217,000 for the six months ended June 30, 2004 as
compared to $908,000 for the six months ended June 30, 2003 primarily due to
increased market penetration into the central region of the U.S. and $115,000 of
sales related to a new contract for test equipment for an agency of the
Department of Homeland Security. We believe that follow-on orders for this
project are probable and likely will be sizable.
9
Net sales of network access equipment and transmission products
manufactured and marketed by CXR-AJ decreased by $163,000 (4.9%) to $3,136,000
for the six months ended June 30, 2004 as compared to $3,299,000 for the prior
year period.
GROSS PROFIT. Gross profit as a percentage of total net sales increased
to 44.7% for the six months ended June 30, 2004 as compared to 39.8% for the
comparable period in 2003. In dollar terms, total gross profit increased by
$676,000 (13.6%) to $5,646,000 for the six months ended June 30, 2004 as
compared to $4,970,000 for the six months ended June 30, 2003.
Gross profit for our electronic components segment increased in dollar
terms by $239,000 (7.7%) to $3,335,000 for the six months ended June 30, 2004 as
compared to $3,096,000 for the six months ended June 30, 2003, and increased as
a percentage of related net sales to 42.4% for the six months ended June 30,
2004 from 39.4% for the six months ended June 30, 2003. This increase primarily
resulted from increased profit margins of digital switches due to changes in
product mix to a greater proportion of high margin military spare parts. The
gross profit for XPS, producer of power supplies, decreased to $1,251,000 from
$1,436,000 in the prior year period primarily due to lower shipments.
Gross profit for our communications equipment segment increased in
dollar terms by $438,000 (23.4%) to $2,311,000 for the six months ended June 30,
2004 as compared to $1,873,000 for the six months ended June 30, 2003, and
increased as a percentage of net sales to 48.5% for the six months ended June
30, 2004 from 40.3% for the six months ended June 30, 2003. The increase in
gross profit was due to the increase in sales volume at CXR Telcom, the
reduction in costs due to outsourcing to Asian sources and the sale of demo
equipment. These factors were instrumental in improving our gross profit in test
instruments and related sales to $887,000 for the six months ended June 30, 2004
as compared to a gross profit of $312,000 in the prior year period. The gross
margin for test instruments increased significantly to 66.3% for the six months
ended June 30, 2004 from 29.6% for the prior year period. CXR-AJ's decrease in
gross profit to $1,423,000 for the six months ended June 30, 2004 from
$1,562,000 for the prior year period primarily was due to lower sales of network
access products, and CXR-AJ's gross margin declined to 41.5% for the six months
ended June 30, 2004 from 43.4% for the prior year period due to a larger
proportion of resale products in the sales base as compared to the proportion of
our in-house manufactured products in the sales base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $668,000 (18.5%) to $4,284,000 for the six
months ended June 30, 2004 as compared to $3,616,000 for the six months ended
June 30, 2003. Selling, general and administrative expenses also increased as a
percentage of total net sales, to 33.9% of net sales during the six months ended
June 30, 2004 from 28.9% of net sales during the comparable period in 2003. The
increase in selling, general and administrative expenses was due to several
factors discussed below.
Sales expenses increased by $364,000 (31.1%) to $1,536,000 for the six
months ended June 30, 2004 from $1,172,000 for the prior year period due to the
addition of a sales manager and increased marketing expenses for new low profile
rotary and digital switches, test instruments and network access products.
Administrative expenses increased by $303,000 (12.4%) to $2,747,000 for the six
months ended June 30, 2004 from $2,444,000 for the six months ended June 30,
2003 due to increases in legal, accounting and investor relations expenses and
investment banking fees that primarily related to searching for and analyzing
potential acquisitions. We anticipate that selling, general and administrative
expenses for the remainder of 2004 will remain at levels higher than those we
experienced last year due to our increased activity in searching for and
analyzing potential acquisitions, our expansion of our investor relations
program and our increased corporate governance activities in response to the
Sarbanes-Oxley Act of 2002 and recently adopted rules and regulations of the
Securities and Exchange Commission.
10
ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product
development expenses consist primarily of research and product development
activities. These expenses increased by $128,000 (27.4%) to $595,000 as compared
to $467,000 in the prior year period. The majority of the increase was due to
additional research, engineering and patent expenses for our new patent-pending
low profile rotary and digital switch products, including the hiring of two
engineers. We expect this higher level of expense to continue throughout 2004 as
we continue to develop our new family of low profile rotary and digital
switches.
OTHER INCOME AND EXPENSE. Interest expense decreased to $190,000 for
the six months ended June 30, 2004 as compared to $213,000 for the six months
ended June 30, 2003 due to lower loan balances. Other expense was $36,000 for
the six months ended June 30, 2004 as compared to $61,000 for the six months
ended June 30, 2003.
INCOME TAX EXPENSE. Income tax expense for the six months ended June
30, 2004 was $102,000 as compared to $210,000 for the comparable prior year
period. The majority of the tax relates to U.K. income tax. The reduction was
primarily due to reduced U.K. income tax payable related to an increase in
available loss carryfowards.
NET INCOME. The net income for the six months ended June 30, 2004
increased by $36,000 (8.9%) to $439,000 as compared to the net income of
$403,000 for the six months ended June 30, 2003. The largest contribution to
this positive change was the decrease in the U.K. tax provision. Also
contributing was the increase in net sales and gross profit of CXR Telcom in our
communications equipment segment, which improved its operating income by
$489,000. This was offset by lower operating earnings derived from power
supplies and network access equipment. 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 downsizing our administrative
office in Paris, France.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 2003 and the six months ended June
30, 2004, 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, 2004, we had working capital of
$5,890,000, which represented a $194,000 improvement from working capital of
$5,696,000 at December 31, 2003. Also at June 30, 2004, we had an accumulated
deficit of $17,447,000, accumulated other comprehensive gains of $44,000, cash
and cash equivalents of $1,436,000, and $4,871,000 of accounts receivable. At
December 31, 2003, we had an accumulated deficit of $17,886,000, accumulated
other comprehensive gains of $108,000, cash and cash equivalents of $1,174,000,
and $5,393,000 of accounts receivable.
Cash provided by our operating activities totaled $980,000 for the six
months ended June 30, 2004 as compared to cash provided by our operating
activities of $612,000 for the six months ended June 30, 2003. This $368,000
increase in cash provided by operations during the six months ended June 30,
2004 as compared to the comparable prior year period primarily resulted from
improved accounts receivable collections.
11
Cash used in our investing activities totaled $186,000 for the six
months ended June 30, 2004 as compared to $4,000 for the six months ended June
30, 2003. Included in the results for the six months ended June 30, 2004 are
$186,000 of fixed asset purchases for telecommunications, management information
systems and support of prototype and production quantities of our new low
profile rotary and digital switches.
Cash used in our financing activities totaled $443,000 for the six
months ended June 30, 2004 as compared to $616,000 of cash used in our financing
activities for the first six months of 2003, due to repayment of bank debt in
both periods.
On June 1, 2004, our subsidiaries, XET Corporation and CXR Telcom
Corporation, together with MicroTel acting as guarantor, obtained a credit
facility from Wells Fargo Bank, N.A. for our domestic operations. This facility
is effective through July 1, 2005 and replaced the previous credit facility we
had with Wells Fargo Business Credit, Inc. No prepayment penalty was due because
the prior loan contract excluded from prepayment penalties loans replaced with
new credit facilities from Wells Fargo Bank, N.A.. Also, the new credit facility
has no minimum interest.
The new credit facility provides a $3,000,000 revolving credit line
secured by accounts receivable and inventories. The first $2,000,000 of
borrowings are not formula-based and do not have to be supported by specific
receivables or inventory balances. The interest rate is variable and is adjusted
monthly based on the prime rate plus 0.5%. The prime rate at June 30, 2004 was
4.25%.
The new credit facility also provides a term loan of $150,000 secured
by machinery and equipment, amortizable over 36 months at a variable rate equal
to the prime rate plus 1.5%. In addition, Wells Fargo Bank, N.A. has provided us
with $300,000 of credit available for the purchase of new capital equipment when
needed.
As of June 30, 2004, we had a balance owing under the new credit
facility of $1,469,000, and we had $681,000 of availability. The credit facility
is subject to the following financial covenants: debt service; annual
profitability; debt to tangible net worth; current ratio; and minimum tangible
net worth. As of June 30, 2004, we were in compliance with each of these
covenants other than the current ratio covenant. We obtained a waiver of
non-compliance of the current ratio covenant.
As of June 30, 2004, 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,
IFN Finance, a subsidiary of ABN AMRO Holdings, N.V., Banc National de Paris,
Societe Generale in France and Sogelease and Johnan Shinkin Bank in Japan. At
June 30, 2004, the balances outstanding under our U.K., France and Japan credit
facilities were $1,151,000, $739,000 and $64,000, respectively.
XCEL Japan Ltd., or XJL, obtained a term loan on November 29, 2002 from
Johnan Shinkin Bank. The loan is amortized over five years and carries an annual
fixed interest rate of 3.25%. The balance of the loan as of June 30, 2004 was
$64,000 using the exchange rate in effect at that date for conversion of
Japanese yen into United States dollars.
Our U.K. subsidiary, XPS, obtained a credit facility with Venture
Finance PLC as of November 12, 2002. This credit facility expires on November
15, 2005. Using the exchange rate in effect at June 30, 2004 for the conversion
of British pounds into United States dollars, the facility is for a maximum of
$2,730,000 and includes a $637,000 unsecured cash flow loan, a $146,000 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 (4.5% at June 30, 2004) plus 2%, and is subject to a minimum rate of 4% per
annum. There are no financial performance covenants applicable to this credit
facility.
12
On April 8, 2003, CXR-AJ obtained a credit facility from IFN Finance, a
subsidiary of ABN AMRO N.V. The credit line is for a maximum of $1,459,000,
based on the exchange rate in effect at June 30, 2004 for the conversion of
euros into United States dollars. This represents a substantial increase over
the total of the credit lines that CXR-AJ had with its former lenders. In
addition, CXR-AJ has outstanding term loans with two other French banks totaling
$57,000. The IFN Finance facility is secured by accounts receivable and carries
an annual interest rate of 1.6% above the French "T4M" rate. The French T4M rate
was 2.03% as of May 31, 2004.
Our backlog was $8,403,000 as of June 30, 2004 as compared to
$11,476,000 as of June 30, 2003. The reduction in backlog was primarily due to
substantial shipments under long-term contracts by XPS in the U.K. Our backlog
as of June 30, 2004 was 90.8% 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 9.2% 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.
We took various actions to reduce costs in 2003. These actions were
intended to reduce the cash outlays of our telecommunications equipment segment
to match its revenue rate. 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 Asian suppliers.
We included in our annual report on Form 10-K for the year ended
December 31, 2003 a contractual obligations table that outlines payments due
from us or our subsidiaries under our lines of credit and other significant
contractual obligations through 2008, exclusive of interest. During the six
months ended June 30, 2004, no material changes in this information occurred
outside the ordinary course of business.
As described above under the heading "Overview," we acquired Larus and
Vista in July 2004. As a result of the acquisition, we acquired all of the
assets and liabilities of Larus, including the intellectual property, cash,
accounts receivable and inventories owned by each of Larus and Vista. The
purchase price consisted of $1,000,000 in cash, the issuance of 1,213,592 shares
of our common stock, $887,500 in the form of two short-term, zero interest
promissory notes that have since been repaid, $3,000,000 in the form of two
subordinated secured promissory notes, and warrants to purchase up to an
aggregate of 150,000 shares of our common stock at $1.30 per share. In addition,
we assumed $245,000 worth of accounts payable and accrued expenses and entered
into an above-market seven-year real property lease with the sellers, which
lease represents an obligation that exceeds the fair market value by
approximately $756,000.
We funded the cash portion of the Larus acquisition purchase price
using proceeds from our credit facility with Wells Fargo Bank, N.A. and our cash
on-hand. In determining the purchase price for Larus, we took into account the
historical and expected earnings and cash flow of Larus, as well as the value of
companies of a size and in an industry similar to Larus, comparable transactions
and the market for such companies generally.
13
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, including the additional expenses relating to
the Larus acquisition. If, however, our capital requirements or cash flow vary
materially from our current projections or if unforeseen circumstances occur, we
may require additional financing. Depressed global economic conditions may cause
prolonged declines in investor confidence 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 during the periods presented.
IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 132 (revised
2003), "Employers' Disclosures about Pensions and Other Postretirement
Benefits," an amendment of SFAS Nos. 87, 88 and 106, and a revision of SFAS No.
132. The statement is effective for fiscal years and interim periods ending
after December 15, 2003. The statement revises employers' disclosures about
pension plans and other post-retirement benefit plans. It does not change the
measurement or recognition of those plans required by SFAS Nos. 87, 88 and 106.
The new rules require additional disclosures about the assets, obligations, cash
flows, and net periodic benefit cost of defined benefit pension plans and other
post-retirement benefit plans. The adoption of this statement has not adversely
affected our financial condition or results of operations.
In December 2003, the FASB issued FASB Staff Position No. ("FSP")
106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003." The guidance is
effective for initial interim or annual fiscal periods ending after December 7,
2003. FSP 106-1 permits employers that sponsor post-retirement benefit plans
(plan sponsors) that provide prescription drug benefits to retirees to make a
one-time election to defer accounting for any effects of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 ("Act"). Without
FSP 106-1, plan sponsors would be required under SFAS No. 106 to account for the
effects of the Act in the fiscal period that includes December 8, 2003, the date
the President signed the Act into law. The adoption of this statement has not
adversely affected our financial condition or results of operations.
In December 2003 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. ("SAB") 104, "Revenue Recognition." SAB 104 codifies,
revises and rescinds certain sections of SAB 101, in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and Securities and Exchange Commission rules and regulations.
Accordingly, there is no impact to our results of operations, financial position
or cash flows as a result of the issuance of SAB No. 104.
14
In December 2003, the FASB issued FASB Interpretation No. ("FIN") 46R,
"Consolidation of Variable Interest Entities." FIN 46R requires the application
of either FIN 46 or FIN 46R by public entities to all special purpose entities
("SPEs") created prior to February 1, 2003, as of December 31, 2003 for calendar
year-end companies. FIN 46R is applicable to all non-SPEs created prior to
February 1, 2003 at the end of the first interim or annual period ending after
March 15, 2004. For all entities created subsequent to January 31, 2003, public
entities were required to apply the provisions of FIN 46. The adoption of FIN 46
did not adversely affect our consolidated financial position, results of
operations or cash flows. The adoption of FIN 46R for SPEs did not impact our
consolidated financial position, results of operations or cash flows, and we do
not believe the adoption of FIN 46R for non-SPEs will adversely affect our
consolidated financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have established and acquired international subsidiaries that
prepare their balance sheets in the relevant foreign currency. In order to be
included in our consolidated financial statements, these balance sheets are
converted, at the then current exchange rate, into United States dollars, and
the statements of operations are converted using weighted average exchange rates
for the applicable period. Accordingly, fluctuations of the foreign currencies
relative to the United States dollar could have an effect on our consolidated
financial statements. Our exposure to fluctuations in currency exchange rates
has increased as a result of the growth of our international subsidiaries.
However, because historically the majority of our currency exposure has related
to financial statement translation rather than to particular transactions, we do
not intend to enter into, nor have we historically entered into, forward
currency contracts or hedging arrangements in an effort to mitigate our currency
exposure.
A substantial portion of our notes payable and long-term debt have
variable interest rates based on the prime interest rate and/or 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,
2003 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, 2004.
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, 2004, 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 principal executive
officer and our principal financial officer, as appropriate to allow timely
decisions regarding whether or not disclosure is required.
During the quarter ended June 30, 2004, 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.
15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not a party to any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
We have not paid dividends on our common stock to date. Our credit
facility with Wells Fargo Bank, N.A. prohibits the payment of cash dividends on
our common stock. 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.
Pursuant to the terms of a Stock Purchase Agreement executed on July
13, 2004, we acquired all of the issued and outstanding common stock of Larus
Corporation, a California corporation ("Larus"). Prior to the acquisition, all
of the common stock of Larus was owned by Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 18, 1995, and Warren P.
Yost and Gail A. Yost, as Co-Trustees Under Declaration of Trust dated March 9,
1988.
Larus is based in San Jose, California and engages in the manufacturing
and sale of telecommunications products. Larus has one wholly-owned subsidiary,
Vista Labs, Incorporated ("Vista"), which provides engineering services to
Larus. We acquired all of the assets and liabilities of Larus in this
transaction, including the intellectual property, cash, accounts receivable and
inventories owned by each of Larus and Vista. We intend to use these acquired
assets for the same purpose for which they were used by each of Larus and Vista.
The purchase price for the acquisition consisted of $1,000,000 in cash,
the issuance of 1,213,592 shares of our common stock, $887,500 in the form of
short-term, zero interest promissory notes that have been subsequently paid in
full, $3,000,000 in the form of two subordinated secured promissory notes, and
warrants to purchase up to an aggregate of 150,000 shares of our common stock at
$1.30 per share. In addition, we assumed $245,000 worth of accounts payable and
accrued expenses and entered into an above-market real property lease with the
sellers, which lease represents an obligation that exceeds fair market value by
approximately $756,000. The cash portion of the acquisition purchase price was
funded with proceeds from our credit facility with Wells Fargo Bank, N.A. and
cash on-hand. In determining the purchase price for Larus, we took into account
the historical and expected earnings and cash flow of Larus, as well as the
value of companies of a size and in an industry similar to Larus, comparable
transactions and the market for such companies generally.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
Number Description
------ -----------
2.1 Stock Purchase Agreement dated July 13, 2004 between MicroTel
International Inc.; Noel C. McDermott; Warren P. Yost; Noel C.
McDermott, as Trustee of the Noel C. McDermott Revocable
Living Trust dated December 19, 1995; and Warren P. Yost and
Gail A. Yost, as Co-Trustees Under Declaration of Trust dated
March 9, 1988 (1)
2.2 Subordinated Secured Promissory Note dated July 13, 2004 in
the principal amount of $1,681,318.68 made by MicroTel
International Inc. in favor of Noel C. McDermott Revocable
Living Trust dated December 19, 1995
2.3 Subordinated Secured Promissory Note dated July 13, 2004 in
the principal amount of $1,318,681.32 made by MicroTel
International Inc. in favor of Warren P. Yost and Gail A.
Yost, as Co-Trustees Under Declaration of Trust dated March 9,
1988
2.4 Pledge and Security Agreement dated July 13, 2004 between
MicroTel International Inc.; Noel C. McDermott, as Collateral
Agent; Noel C. McDermott, as Trustee of the Noel C. McDermott
Revocable Living Trust dated December 19, 1995; and Warren P.
Yost and Gail A. Yost, as Co-Trustees Under Declaration of
Trust dated March 9, 1988
2.5 Intercreditor Agreement dated July 13, 2004 between MicroTel
International Inc.; Noel C. McDermott, as Trustee of the Noel
C. McDermott Revocable Living Trust dated December 19, 1995;
and Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988
2.6 Continuing Guarantee dated July 13, 2004 made by Larus
Corporation in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988
2.7 Continuing Guarantee dated July 13, 2004 made by Vista Labs
Incorporated in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988
2.8 Continuing Guarantee dated July 13, 2004 made by CXR Telcom in
favor of Noel C. McDermott, as Trustee of the Noel C.
McDermott Revocable Living Trust dated December 19, 1995, and
Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988
2.9 Security Agreement dated July 13, 2004 made by Larus
Corporation in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988
17
2.10 Security Agreement dated July 13, 2004 made by Vista Labs
Incorporated in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988
2.11 Security Agreement dated July 13, 2004 made by CXR Telcom in
favor of Noel C. McDermott, as Trustee of the Noel C.
McDermott Revocable Living Trust dated December 19, 1995, and
Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988
10.1 Commercial Lease dated July 13, 2004 between MicroTel
International Inc., as Tenant, and Noel C. McDermott and
Warren P. Yost, as Landlord, for the premises located at 894
Faulstich Court, San Jose, California
10.2 Credit Facility Letter Agreement dated June 1, 2004 between
Wells Fargo Bank, N.A., XET Corporation and CXR Telcom
Corporation
10.3 Revolving Line of Credit Note dated June 1, 2004 in the
principal amount of up to $3,000,000 made by XET Corporation
and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A.
10.4 Term Note dated June 1, 2004 in the principal amount of
$150,000 made by XET Corporation and CXR Telcom Corporation in
favor of Wells Fargo Bank, N.A.
10.5 Continuing Guaranty made by XET Corporation and CXR Telcom
Corporation in favor of Wells Fargo Bank, N.A.
10.6 Security Agreement Equipment made by XET Corporation in favor
of Wells Fargo Bank, N.A.
10.7 Security Agreement Equipment made by CXR Telcom Corporation in
favor of Wells Fargo Bank, N.A.
10.8 Continuing Security Agreement Rights to Payment and Inventory
made by XET Corporation in favor of Wells Fargo Bank, N.A.
10.9 Continuing Security Agreement Rights to Payment and Inventory
made by CXR Telcom Corporation in favor of Wells Fargo Bank,
N.A.
18
31 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 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
------------------
(1) Filed with the Securities and Exchange Commission on July 28,
2004 as an exhibit to our Form 8-K for July 13, 2004 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: August 16, 2004 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)
19
EXHIBITS ATTACHED TO THIS REPORT
Number Description
------ -----------
2.2 Subordinated Secured Promissory Note dated July 13, 2004 in
the principal amount of $1,681,318.68 made by MicroTel
International Inc. in favor of Noel C. McDermott Revocable
Living Trust dated December 19, 1995
2.3 Subordinated Secured Promissory Note dated July 13, 2004 in
the principal amount of $1,318,681.32 made by MicroTel
International Inc. in favor of Warren P. Yost and Gail A.
Yost, as Co-Trustees Under Declaration of Trust dated March 9,
1988
2.4 Pledge and Security Agreement dated July 13, 2004 between
MicroTel International Inc.; Noel C. McDermott, as Collateral
Agent; Noel C. McDermott, as Trustee of the Noel C. McDermott
Revocable Living Trust dated December 19, 1995; and Warren P.
Yost and Gail A. Yost, as Co-Trustees Under Declaration of
Trust dated March 9, 1988
2.5 Intercreditor Agreement dated July 13, 2004 between MicroTel
International Inc.; Noel C. McDermott, as Trustee of the Noel
C. McDermott Revocable Living Trust dated December 19, 1995;
and Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988
2.6 Continuing Guarantee dated July 13, 2004 made by Larus
Corporation in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988
2.7 Continuing Guarantee dated July 13, 2004 made by Vista Labs
Incorporated in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988
2.8 Continuing Guarantee dated July 13, 2004 made by CXR Telcom in
favor of Noel C. McDermott, as Trustee of the Noel C.
McDermott Revocable Living Trust dated December 19, 1995, and
Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988
2.9 Security Agreement dated July 13, 2004 made by Larus
Corporation in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988
2.10 Security Agreement dated July 13, 2004 made by Vista Labs
Incorporated in favor of Noel C. McDermott, as Trustee of the
Noel C. McDermott Revocable Living Trust dated December 19,
1995, and Warren P. Yost and Gail A. Yost, as Co-Trustees
Under Declaration of Trust dated March 9, 1988
2.11 Security Agreement dated July 13, 2004 made by CXR Telcom in
favor of Noel C. McDermott, as Trustee of the Noel C.
McDermott Revocable Living Trust dated December 19, 1995, and
Warren P. Yost and Gail A. Yost, as Co-Trustees Under
Declaration of Trust dated March 9, 1988
20
10.1 Commercial Lease dated July 13, 2004 between MicroTel
International Inc., as Tenant, and Noel C. McDermott and
Warren P. Yost, as Landlord, for the premises located at 894
Faulstich Court, San Jose, California
10.2 Credit Facility Letter Agreement dated June 1, 2004 between
Wells Fargo Bank, N.A., XET Corporation and CXR Telcom
Corporation
10.3 Revolving Line of Credit Note dated June 1, 2004 in the
principal amount of up to $3,000,000 made by XET Corporation
and CXR Telcom Corporation in favor of Wells Fargo Bank, N.A.
10.4 Term Note dated June 1, 2004 in the principal amount of
$150,000 made by XET Corporation and CXR Telcom Corporation in
favor of Wells Fargo Bank, N.A.
10.5 Continuing Guaranty made by XET Corporation and CXR Telcom
Corporation in favor of Wells Fargo Bank, N.A.
10.6 Security Agreement Equipment made by XET Corporation in favor
of Wells Fargo Bank, N.A.
10.7 Security Agreement Equipment made by CXR Telcom Corporation in
favor of Wells Fargo Bank, N.A.
10.8 Continuing Security Agreement Rights to Payment and Inventory
made by XET Corporation in favor of Wells Fargo Bank, N.A.
10.9 Continuing Security Agreement Rights to Payment and Inventory
made by CXR Telcom Corporation in favor of Wells Fargo Bank,
N.A.
31 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 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
21