-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I38Bc0bGw+YEHNwYbLCRTSK8RlNXTSbdEiD+FBYQAN6Lu4/tR+N94Xy7WM8MBaGn nvU5HFpPPpKDRTXUEO0vvQ== 0000893220-97-001601.txt : 19970925 0000893220-97-001601.hdr.sgml : 19970925 ACCESSION NUMBER: 0000893220-97-001601 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19970924 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROTEL INTERNATIONAL INC CENTRAL INDEX KEY: 0000854852 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 770226211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-29925 FILM NUMBER: 97684787 BUSINESS ADDRESS: STREET 1: 4290 E BRICKELL STREET STREET 2: STE 102 CITY: ONTARIO STATE: CA ZIP: 91761-1511 BUSINESS PHONE: 9093914321 MAIL ADDRESS: STREET 1: 4290 E BRICKELL STREET STREET 2: STE 102 CITY: ONTARIO STATE: CA ZIP: 91761-1511 FORMER COMPANY: FORMER CONFORMED NAME: CXR CORP DATE OF NAME CHANGE: 19920703 S-1/A 1 AMEND.NO 1 FORM S-1 MICROTEL INTERNATIONAL, INC. 1 As filed with the Securities and Exchange Commission on September 23, 1997 Registration No. 333-29925 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 -------------------- (Amendment No. 1) MICROTEL INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 3679 (Primary Standard Industrial Classification Code Number) 77-0226211 (I.R.S. EMPLOYER IDENTIFICATION NO.) 4290 E. BRICKELL STREET ONTARIO, CALIFORNIA 91761 (909) 391-4321 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) CARMINE T. OLIVA PRESIDENT AND CHIEF EXECUTIVE OFFICER MICROTEL INTERNATIONAL, INC. 4290 E. BRICKELL STREET ONTARIO, CALIFORNIA 91761 (909) 391-4321 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: THOMAS P. GALLAGHER, ESQ. MARTIN J. CONROY, ESQ. SUZETTE N. BERRIOS, ESQ. GALLAGHER, BRIODY & BUTLER 212 CARNEGIE CENTER SUITE 402 PRINCETON, NEW JERSEY 08540 (609) 452-6000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.[X] CALCULATION OF REGISTRATION FEE
========================================================================================================== Proposed Proposed Amount Maximum Maximum Title of each Class of to be Offering Price Aggregate Amount of Securities to be Registered Registered Per Share (1) Offering Price Registration Fee - --------------------------------------------------------------------------------------------------------- Common Stock, $.0033 par value...... 12,682,260 shares $2.125 $26,949,802.50 $8166.61 (2) =========================================================================================================
(1) Based upon the average of the bid and asked prices reported by the National Association of Securities Dealers Automated Quotation System on September 19, 1997. (2) $7580.16 registration fee previously paid when S-1 originally filed on June 24, 1997. Pursuant to Rule 457, only an additional fee of $112.69, based on the 175,000 additional shares being registered, is due and not the entire $8166.61. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 2 MICROTEL INTERNATIONAL, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING THE LOCATION IN THE PROSPECTUS OF THE INFORMATION REQUIRED BY THE ITEMS OF FORM S-1
Item Number Caption Prospectus Caption or Location - ------ ------- ------------------------------ 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus...... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus............................... Inside Front Cover Page; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges................ Prospectus Summary; Risk Factors 4. Use of Proceeds............................... Use of Proceeds 5. Determination of Offering Price............... Outside Front Cover Page 6. Dilution...................................... Not Applicable 7. Selling Security Holders...................... Selling Security Holders 8. Plan of Distribution.......................... Plan of Distribution 9. Description of Securities to be Registered.... Securities to be Registered 10. Interests of Named Experts and Counsel........ Experts 11. Information with Respect to the Registrant.... Business; Description of Property; Legal Proceedings; Market Information; Financial Statements; Selected Financial Data; Management Discussion and Analysis of Financial Condition and Results of Operations; Directors and Executive Officers; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management; Certain Relationships and Related Transactions 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................. Disclosure of Commission Position on Indemnification for Securities Act Liabilities
3 PROSPECTUS 12,682,260 SHARES OF COMMON STOCK OF MICROTEL INTERNATIONAL, INC. This Prospectus is being used in connection with the offering, from time to time, by certain stockholders of MicroTel International, Inc. (the "Company") of shares of Common Stock, $0.0033, par value per share ("Common Stock") which have been issued by the Company, or which are issuable by the Company upon the exercise of certain warrants and options. The shares of Common Stock registered hereby consist of: (i) 2,000,000 outstanding shares held by certain persons who purchased shares of Common Stock in a transaction exempt from the registration requirements of the Securities Act (the "Yorkton Shares"); (ii) 6,119,130 shares of Common Stock issued in connection with a merger between a wholly-owned subsidiary of the Company and XIT Corporation ("XIT" or "XIT Corporation") pursuant to which XIT became a wholly-owned subsidiary of the Company (the "Merger Shares"); (iii) 1,579,783 shares of Common Stock issuable upon the exercise of Common Stock purchase options (the "Option Shares"); (iv) 2,157,879 shares of Common Stock issuable upon the exercise of Common Stock purchase warrants (the "Warrant Shares"); and (v) 825,468 shares of Common Stock held by certain shareholders who have agreements with the Company for the registration of such shares (the "Other Shares") (the Yorkton Shares, Merger Shares, Option Shares, Warrant Shares and Other Shares are collectively referred to herein as the "Shares"). The Shares may be offered from time to time by the Selling Shareholders identified herein. See "Selling Shareholders." Except for the cash proceeds, if any, that the Company will receive upon issuance of the Option Shares and the Warrant Shares, the Company will not receive any of the proceeds from the sale of the Shares. All expenses of the offering, other than commissions or discounts of broker-dealers, will be borne by the Company. See "Plan of Distribution" herein for a description of the manner in which the securities covered by this Prospectus may be sold. ----------------------------- THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" AT PAGES 7 TO 13. ----------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ----------------------------- The date of this Prospectus is September 23, 1997 - 3 - 4 TABLE OF CONTENTS PROSPECTUS SUMMARY.......................................................5 THE COMPANY..............................................................5 RISK FACTORS.............................................................6 USE OF PROCEEDS.........................................................13 SELLING SECURITY HOLDERS................................................13 PLAN OF DISTRIBUTION....................................................28 SECURITIES TO BE REGISTERED.............................................29 EXPERTS.................................................................31 BUSINESS................................................................32 DESCRIPTION OF PROPERTY.................................................46 LEGAL PROCEEDINGS.......................................................48 MARKET INFORMATION......................................................49 SELECTED FINANCIAL DATA.................................................50 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............52 DIRECTORS AND EXECUTIVE OFFICERS........................................74 EXECUTIVE COMPENSATION..................................................76 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............................................................80 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................................................83 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..........................................85 FINANCIAL STATEMENTS...................................................F-1 5 AVAILABLE INFORMATION The Company is subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy and information statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy and information statements and other information may be inspected and copied at the public reference facilities of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Commission by mail at prescribed rates. Requests should be directed to the Commission's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site (http://www.sec.gov) that contains certain of the Company's reports which were filed after the Company became an electronic filer. The Company's Common Stock is quoted on the Nasdaq SmallCap Market and material filed by the Company can be inspected at the offices of the National Association of Securities Dealers, Inc. 1735 K Street N.W., Washington, D.C. 20006. The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act of 1933, as amended (the "Securities Act") with respect to the Securities being offered by this Prospectus (including all exhibits and amendments hereto, the "Registration Statement"). This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto, to which reference is hereby made. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to summarize the material provisions of such documents, but are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved. Copies of the Registration Statement and the exhibits thereto may be inspected, without charge, at the offices of the Commission, at the addresses set forth above. - 4 - 6 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Prospectus. Prospective purchasers of the Securities should carefully read the entire Prospectus and should consider, among other things, the matters set forth in "Risk Factors." As used in this Prospectus, the term "Company" refers to MicroTel International, Inc. and, unless the context otherwise requires, its direct and indirect subsidiaries. As used in this Prospectus, "CXR" shall refer to the Company as it existed prior to the Merger. Because XIT is treated as the acquiror in the Merger for financial accounting purposes, the historical financial information of the Company presented herein is that of XIT Corporation. When used anywhere in this Prospectus, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "should," "believe" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating costs and financial position. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. THE COMPANY The Company, through its various direct and indirect operating subsidiaries, designs, manufactures and distributes a wide range of electronics hardware products and provides related services. Prior to March 26, 1997, the Company designed, manufactured and marketed electronic telecommunication test equipment and data communication equipment (modems) primarily to the major long distance companies, the regional Bell operating companies ("RBOCs"), international telephone companies and private communications networks. On March 26, 1997, the Company was acquired by XIT Corporation, a New Jersey corporation, in a reverse acquisition pursuant to which XIT became a wholly-owned subsidiary of the Company and the holders of XIT common stock became the owners of approximately 65% of the Company's common stock (the "Merger"). XIT designs, manufactures and markets information technology products, including displays and input components, subsystem assemblies, printed circuits, and hybrid microelectronic circuits for the international telecommunications, medical, industrial, and military/aerospace markets. Following the Merger, the Company has been organized along three product line sectors --Instrumentation and Test Equipment, Circuits, and Components and Subsystem Assemblies. In connection with the Merger, the Company has agreed to register under the Securities Act the Common Stock issued to the XIT shareholders, as well as the Common Stock underlying certain options and warrants held by the XIT shareholders which were converted into warrants and options to acquire the Company's Common Stock effective as of the Merger, in order to permit the public resale of the Common Stock by the XIT shareholders. On April 14, 1997, the Company sold Investment Units consisting of one share of its common stock and one-quarter of a warrant to purchase its common stock (the "Units") pursuant to an exemption from registration under Regulation S of the Securities Act (the "Yorkton Offering"). Yorkton Securities, Inc. ("Yorkton") acted as Placement Agent. The Company sold 2,000,000 Units, resulting in net proceeds to the Company of $4,258,000. In connection with the Yorkton Offering, the Company has agreed to register under the Securities Act the Common Stock issued to the purchasers, the Common Stock underlying the warrants issued to the purchasers, and the Common Stock and Common Stock underlying warrants granted to Yorkton and an unaffiliated third party intermediary in order to permit the public resale of the Common Stock held or to be acquired pursuant to the exercise of such warrants. The Company has also included in this Prospectus certain shares of Common Stock and shares of Common Stock underlying warrants and options pursuant to various registration rights agreements between the Company and third parties. The Company's principal executive offices are located at 4290 E. Brickell Street, Ontario, California 91761, and its telephone number is (909) 391-4321. - 5 - 7 THE OFFERING Securities Offered 12,682,260 Shares of Common Stock, comprised of 2,000,000 Yorkton Shares, 6,119,130 Merger Shares, 1,579,783 Option Shares, 2,157,879 Warrant Shares, and 825,468 Other Shares. Use of Proceeds There will be no proceeds to the Company from the sale of the Shares by the Selling Shareholders. The Company will use the proceeds from the exercise of the warrants and Options for working capital, business development and general corporate purposes.
NASDAQ Symbol MCTL RISK FACTORS In addition to the other information contained elsewhere in this Prospectus, prospective investors should consider carefully the factors set forth below prior to purchasing any of the Shares offered hereby. - 6- 8 RISK FACTORS WHEN USED ANYWHERE IN THE DISCUSSION OF RISK FACTORS BELOW, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND," "SHOULD," "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN CONTINUING LOSSES; WRITE-DOWNS; LIQUIDITY AND CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING; DEPENDENCE ON TELEPHONE INDUSTRY; RESTRUCTURING OF THE INDUSTRY; DEPENDENCE ON PROPRIETARY TECHNOLOGY. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. INTEGRATION OF OPERATIONS. On March 26, 1997, CXR merged with XIT Corporation. The success of the Merger will be determined by various factors, including management's ability to integrate effectively the operations of the Company and CXR and the financial performance of the companies' operations after the Merger. Factors which will affect management's ability to integrate successfully the operations of the Company and CXR include the ability to implement management systems that take advantage of marketing and cost saving opportunities and to minimize the financial impact of expenses associated with such integration. There can be no assurance that management will be able to successfully integrate the operations of the Company and CXR or that the anticipated benefits of the Merger will be realized. See "Business." COMPETITION; TECHNOLOGICAL OBSOLESCENCE. Competition in the electronics hardware industry is intense with a large number of companies developing technology and products similar to the Company's products and technology. The industry consists of development stage companies and major domestic and international companies, many of which have financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than those of the Company. There can be no assurance that the Company will be successful in competing with such entities. Furthermore, there can be no assurance that competitors will not succeed in developing products or technologies that would render the Company's products and technologies obsolete or in obtaining market acceptance of products more rapidly than the Company. See "Business-Competition." DEPENDENCE UPON MAJOR CUSTOMER. The Company has one customer, Motorola, to which it sells printed circuit boards, which accounted for 41% of XIT's sales for the year ended September 30, 1996 and 22% of XIT's sales for the six months ended June 30, 1997. The loss of Motorola as a customer would have a material adverse effect on the Company. In fiscal 1996 and in the first half of 1997, the Company's product orders from Motorola declined significantly. Moreover, during the first quarter of 1997 the Company was unable to timely ship the lower level of orders - 7 - 9 received in the first quarter of 1997 as a result of material sourcing problems caused by cash flow constraints (see "Liquidity and Capital Requirements; Need for Additional Financing" below). The Company's delivery performance has improved and sales demand from Motorola has increased in the third quarter of 1997. There can be no assurance, however, that sales to Motorola will continue to rebound or that they will not decline again in the future. Any such decline could have a material adverse affect on the Company. DEPENDENCE ON KEY PERSONNEL. The Company's future success will to a large degree be dependent upon the skills of its existing management and other key personnel. The failure to attract and maintain key personnel could have a material adverse effect on the Company. The Company maintains key man life insurance on Carmine T. Oliva, President and Chief Executive Officer, as follows: a) a $1.5 million policy naming MicroTel International, Inc. as beneficiary, and b) a $2.0 million policy naming, as 50% beneficiaries, each of his wife and XIT Corporation. CONTINUING LOSSES; WRITE-DOWNS. For the fiscal years ended September 30, 1996 and 1995, the Company reported net income of approximately $1,083,000 and $337,000 respectively. However, for the three months ended December 31, 1996 and the six months ended June 30, 1997, the Company incurred net losses of $(889,000) and $(2,038,000), respectively, versus earning net income of $151,000 and $825,000, respectively, in the comparable periods of prior years. Additionally, on a pro forma basis (including the results of both the Company and the CXR as if they had combined at the beginning of the respective periods), the Company incurred net losses of $(4,130,000) and $(3,847,000) for the six months ended June 30, 1997 and the year ended September 30, 1996, respectively. The decline in actual results of operations for the three months ended December 31, 1996 versus the three months ended December 31, 1995 was principally caused by the deterioration of the Company's Circuits Sector business as discussed above under "Dependence Upon Major Customer". The decline for the six months ended June 30, 1997 versus the first half of 1996, was due to the continuing problems in the Circuits Sector as well as to a decline in sales for the Company's Components and Subsystem Assemblies Sector. This latter decline in sales for the Company's Components and Subsystems Assemblies Sector was due to a) the loss in July 1996 of a major account for display monitors, b) a significant digital switch program in place in the first two quarters of 1996 which did not repeat in 1997, and c) a general decline in sector product sales due to the aging of related customer programs (see "Cyclical Nature of Electronics Industry" below). In the Components and Subsystems Assemblies Sector, the Company is in the process of qualifying itself and its products with new prospective customers for display monitors. If obtained, revenues from such customers should replace the loss in revenue which resulted from the loss of the major display monitor account in 1996. Additionally, it is actively seeking new programs with existing customers and new accounts to replace the decline in revenues related to the aging of its current customers' programs. During 1996 and continuing in the first quarter of 1997, domestic sales of the Instrumentation and Test Equipment Sector (CXR's operating subsidiaries, CXR Telcom Corporation and CXR S.A.) were negatively impacted by delays in buying by its principal customers, as a result of the consolidation and/or restructuring of these companies in the wake of the passage of the Telecommunications Bill of 1996, and the Sector's European sales were negatively impacted by a decline in sales to France Telecom during its pre-privatization reorganization and a generally weak French economy. Additionally, sales for both operating subsidiaries have been negatively impacted by the rapid obsolescence of the analog-based components of their product lines, particularly older transmission products; and further, both sales and margins have been impacted by extreme price competition for transmission products in general. In the fourth quarter of 1996 and in the first quarter of 1997 prior to the Merger, CXR reduced the carrying value of certain inventory and capitalized software by $1,006,000 and $209,000, respectively. These write-downs resulted from its reassessments of the anticipated continuing near-term impact of the industry and economic factors noted above on asset realizability. The Company believes based on its current assessment that the write-downs are adequate. The Company anticipates that it will become profitable in last quarter 1997 as CXR's markets stabilize, demand for printed circuit boards returns to historical levels, and sales levels for the Components and Subsystem Assemblies Sector increase due to business development efforts currently in progress. However, there can be no assurance that these events will occur, that further write-downs of operating assets, as well as write-downs of the goodwill originating in the Merger, will not be necessary should actual business conditions deteriorate, or that the Company will return to profitability in 1997 or thereafter. - 8 - 10 LIQUIDITY AND CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING Cash of $2,766,000 was used in operations in the first six months of 1997 versus cash of $374,000 being provided by operations in the first half of 1996. The principal cause of this reversal in cash flows is the losses incurred by the Company in 1997 as discussed above under "Continuing Losses; Write-downs". Lack of working capital has adversely impacted the operations of the Company. Because the Company owed money to certain key vendors and was unable to secure funds to bring these vendors current, the Company's Circuits Sector was unable to procure all of the materials needed to timely ship certain of its sales orders to Motorola. As a result, Motorola cut-back its orders to the Sector, and demand has only begun to approach its historical levels in the current period. (See "Dependence Upon Major Customer" above.) In the other business sectors of the Company, inventory levels were reduced and trade payables aged as a result of working capital shortages. The proceeds from the Company's private placement of its securities in April 1997 alleviated the most immediate working capital problems of the Company, allowing it to pay down its oldest accounts payable and improve its trade credit relationships. Additionally, in the third quarter of 1997, the Company was able to borrow $100,000 from a related party to assist in financing the production of accelerating orders from Motorola. However, cash flows from operations during the next twelve months may need to be further supplemented to support the Company's working capital needs, and will definitely need to be supplemented for planned business development and acquisition activities. The specific needs for and timing of any additional financing will depend upon results of operations, acquisition opportunities, and other unforeseen factors which cannot be predicted. There can be no assurance that such financing will be available, or that it will be available on terms and conditions acceptable to the Company. If available, any additional equity financings may be dilutive to the Company's stockholders and any debt financing may contain restrictive covenants and additional debt service requirements which could adversely affect the Company's operating results. See also, "Exercise of Outstanding Options and Warrants; Additional Dilution." CYCLICAL NATURE OF ELECTRONICS INDUSTRY. The segments of the electronics industry in which the Company operates have, in many instances, historically been cyclical and subject to significant economic changes and downturns. Such changes, including in recent years the contraction of military, and commercial and governmental aerospace spending, have in certain instances been characterized by diminished product demand, accelerated erosion of average selling prices, and overcapacity. In addition, the electronics industry is subject to rapid technological change and product obsolescence. Discontinuance or modification of products containing printed circuit boards or other components manufactured by the Company could have a material adverse affect on the Company as occurred in the first six months of 1997 for the Company's Components and Subsystem Assemblies Sector (see "Continuing Losses; Write-downs" above). As a result, the Company may experience substantial period-to-period fluctuations in future operating results due to general electronic industry conditions, overall economic conditions or other factors. DEPENDENCE ON TELEPHONE INDUSTRY; RESTRUCTURING OF THE INDUSTRY. The Company's CXR subsidiaries are largely dependent upon sales to their principal customers in the telephone industry. CXR Telcom's customers include AT&T, Sprint, MCI, and the RBOCs. As a result of the consolidation and/or restructuring of these companies in the wake of the passage of the 1996 Telecommunications Bill, certain anticipated sales to these companies have been canceled or delayed. Moreover, sales of CXR S.A. have been negatively impacted by the pre-privatization reorganization of France Telecom, its major customer, as well as a generally weak French economy. Although the Company believes that demand for CXR's products will increase in 1997 now that a significant portion of the consolidation and restructuring is completed, there can be no assurance that the Company will experience this increased demand. - 9 - 11 VARIABILITY OF CUSTOMER REQUIREMENTS; NATURE AND EXTENT OF CUSTOMER COMMITMENTS ON ORDERS. The level and timing of orders placed by the Company's customers vary due to customer attempts to manage inventory, changes in the customers' manufacturing strategies and variation in demand for customer products due to, among other things, technological change, introduction of new product life cycles, competitive conditions or general economic conditions. The Company generally does not obtain long-term purchase orders or commitments. A certain portion of the Company's backlog may be subject to cancellation or postponement without a significant penalty or without any penalty. ENVIRONMENTAL COMPLIANCE. The Company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its manufacturing process. A failure by the Company to comply with present and future regulations could subject it to future liabilities or the suspension of production. Such regulations could also restrict the Company's ability to expand its facilities or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The Company may also from time to time be subject to lawsuits with respect to environmental matters. The extent of the Company's liability under any such suit is indeterminable and may, in certain circumstances, have a material adverse affect on the Company. POSSIBLE VOLATILITY OF MARKET PRICE OF COMMON STOCK. The trading price of the Common Stock is subject to significant fluctuations in response to variations in quarterly operating results, general conditions in the electronics industry and other factors. In addition, the stock market is subject to price and volume fluctuations which affect the market price for many high technology companies in particular, and which can be unrelated to operating performance. INCREASED PUBLIC FLOAT. Upon the effectiveness of the Registration Statement of which this Prospectus is a part, and upon expiration of certain lock-up agreements applicable to certain shares of the Company's Common Stock (see "Securities to be Registered; Lock-up Provision"), the number of freely tradeable shares of the Company's Common Stock held by non-affiliates will substantially increase. If a significant number of these freely tradeable shares are sold in the open market in the near term, the price of the Company's Common Stock may be negatively impacted. ACQUISITIONS. The Company may from time to time pursue the acquisition of other companies, assets or product lines that complement or expand its existing business. Acquisitions involve a number of risks that could adversely affect the Company's operating results, including the diversion of management's attention, the assimilation of the operations and personnel of the acquired companies, the amortization of acquired intangible assets and the potential loss of key employees. No assurance can be given that any acquisition by the Company will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's future success will be highly dependent on proprietary technology, particularly in the areas of instrumentation and test equipment, multilayer high density circuit boards and microelectronic circuits. The Company presently holds certain limited numbers of patents but more generally relies upon copyright, trademark and trade secret laws to establish its proprietary rights in its products. There can be no assurance that the Company's reliance on these laws will be adequate to protect its proprietary rights or that its competitors will not independently develop technologies that are substantially equivalent or superior to its technology. In the future, the Company may file additional patent applications covering its products or subsystems. There can be no assurance that any - 10 - 12 patents will issue from any such applications or, if patents do issue, that any claims allowed will be sufficiently broad to protect the Company's technology. In addition, there can be no assurance that any patents that may be issued to the Company will not be challenged, consolidated or circumvented, or that any rights granted thereunder would provide proprietary protection to the Company. Although the Company will continue to implement protective measures and intends to defend its proprietary rights, policing unauthorized use of its technology, systems and products will be difficult and there can be no assurance that these measures will be successful. In addition, the laws of certain foreign countries in which the Company is active may not protect the Company's proprietary rights to the same extent as do the laws of the United States. POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK. The Company's Certificate of Incorporation authorizes the issuance of 10,000,000 shares of "blank check" Preferred Stock, with designations, rights and preferences that may be determined from time to time by the Board of Directors. None of the shares of Preferred Stock are issued or outstanding as of the date hereof. However, the Board of Directors is empowered, without further stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the Common Stock. In addition, such provisions could limit the price that certain investors might be willing to pay in the future for shares of the Company's Common Stock and may have the effect of delaying or preventing a change in control of the Company. The issuance of Preferred Stock also could decrease the amount of earnings and assets available for distribution to the holders of Common Stock. Although the Company has no plans to issue any shares of Preferred Stock, there can be no assurance that the Company will not issue Preferred Stock at some time in the future. LACK OF DIVIDENDS. The Company has never paid a cash dividend on any class of its capital stock and does not anticipate paying any dividends in the foreseeable future. It is anticipated that future earnings, if any, will be retained to finance the development and expansion of the Company's business. EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS; ADDITIONAL DILUTION; SHARES AVAILABLE FOR SALE. At September 8, 1997, there were outstanding exercisable stock options to purchase an aggregate of 2,217,839 shares of Common Stock at exercise prices ranging from $1.625 to $5.00 per share. Additionally, at September 8, 1997, there were outstanding and exercisable warrants to purchase 2,189,879 shares of Common Stock at exercise prices ranging from $1.21 to $3.79 per share. To the extent that the outstanding stock options and warrants are exercised, substantial additional dilution to the interests of MicroTel's stockholders will occur. See "Description of Securities to be Registered." RISKS OF TECHNOLOGICAL CHANGE. The markets for the Company's products and services are generally characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new product and service introductions. There - 11 - 13 can be no assurance that the Company can successfully identify new product opportunities and develop and bring new products and services to market in a timely manner. The Company's pursuit of necessary technological advances will require substantial time and expense, and there can be no assurance that the Company will succeed in adapting its businesses to changing technology standards and customer requirements. The introduction of new products and services could render the Company's existing products and services obsolete and unmarketable. There can be no assurance that the announcement or introduction of new products or services by the Company or its competitors or any change in industry standards will not cause a decline in existing sales levels of existing products or services, which could have a material adverse effect on the Company's business, financial condition and results of operations. NASDAQ MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET; RISKS OF LOW-PRICED STOCKS. The Company's Common Stock is currently quoted on the Nasdaq. For continued listing, a company, among other things, must have $2,000,000 in net tangible assets, $1,000,000 in equity and a minimum bid price of $1.00 per share. On August 25, 1997 the Commission announced its adoption of stricter listing requirements which have been approved by the National Association of Securities Dealers, Inc. ("NASD"). The proposed listing requirements include a stricter asset test and a required $1.00 minimum bid price regardless of net worth. If the Company is unable to satisfy Nasdaq's maintenance criteria in the future, its securities may be delisted from Nasdaq. In such event, trading in the Company's securities would thereafter be conducted in the over-the-counter market in the "pink sheets" or on the NASD's "Electronic Bulletin Board." As a consequence of such delisting, an investor would likely find it more difficult to dispose of, or to obtain quotations as to, the price of the Company's securities. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. The Commission's regulations generally define a penny stock to be an equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on the Nasdaq or a national securities exchange and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith. In addition, if the Company's securities are not quoted on the Nasdaq, or the Company does not meet the other exceptions to the penny stock regulations cited above, trading in the Company's securities would be covered by Rule 15g-9 promulgated under the Exchange - 12 - 14 Act for non-Nasdaq and non-exchange listed securities. Under such rule, broker/dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities, in general, also are exempt from this rule if the market price is at least $5.00 per share. If the Company's securities become subject to the regulations applicable to penny stocks, the market liquidity for the Company's securities could be adversely affected. In such an event, the regulations on penny stocks could limit the ability of broker/dealers to sell the Company's securities and thus the ability of purchasers of the Company's securities to sell their securities in the secondary market. EFFECT OF ISSUANCE OF SHARES ON NET OPERATING LOSS CARRYFORWARDS. The Company and CXR have substantial net operating loss carryforwards for Federal and state tax purposes. For a summary of the NOL's and Expiration dates, see notes to the Consolidated Financial Statements of the Company and CXR included herein. However, because of the ownership changes to both entities for tax purposes resulting from the Merger, the use of these NOL carryforwards to offset future taxable income will be limited. The Company believes that it will only be able to use approximately $825,000 of the current NOL carryforwards for Federal and state tax purposes per year. This limitation of the use of the Company's NOL carryforwards may have a material adverse effect on the Company's net income and cash flow, should the Company have taxable income in future years. USE OF PROCEEDS Because the Shares offered hereby are being sold by the Selling Shareholders, the Company will not receive any of the proceeds from any sale of the Shares by the Selling Shareholders. The Company will receive the proceeds from the issuance of the Option Shares and Warrant Shares upon the exercise of the stock options and warrants relating to such shares by the holders thereof. In the event that all of the stock options and warrants are exercised, the proceeds to be received by the Company upon such exercise will be $10,027,676 exclusive of the expenses of this Offering. The Company will use these proceeds, if any, for working capital, business development and general corporate purposes. SELLING SECURITY HOLDERS The following table sets forth as of September 23, 1997, the following information regarding each Selling Shareholder who is offering Shares pursuant to this Prospectus: the name of each Selling Shareholder; any position, office, or other material relationship which the Selling Shareholder has had within the past three years with the Company or any of its predecessors or affiliates; the number of shares of Common Stock owned by each Selling Shareholder before the offering pursuant to this Prospectus, the amount of shares to be offered for each Selling - 13 - 15 Shareholder's account, and the amount and percentage of the Common Stock to be owned by each Selling Shareholder (assuming the sale of all shares registered hereby) after the offering pursuant to this Prospectus is complete.
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- Douglas G. Abramson 105 105 0 * - ---------------------------------------------------------------------------------------- Howard Baldwin 12,822 12,822 0 * - ---------------------------------------------------------------------------------------- Michael Baldwin 12,822 12,822 0 * - ---------------------------------------------------------------------------------------- Bank Sal Oppeneheim Jr. & 75,000(4) 75,000 0 * (i.e.) - ---------------------------------------------------------------------------------------- Bank of Scotland Nominees 25,000(5) 25,000 0 * (Unit Trusts/Limited) - ---------------------------------------------------------------------------------------- Banque Hervet 50,000(6) 50,000 0 * - ---------------------------------------------------------------------------------------- David A. Barrett(7) 220,237(8) 220,237 0 * - ---------------------------------------------------------------------------------------- David A. Barrett, 10,179 10,179 0 * Trustee for Jennifer P Barrett Trust - ---------------------------------------------------------------------------------------- David A. Barrett, 10,179 10,179 0 * Trustee for David A Barrett, Jr. Trust - ---------------------------------------------------------------------------------------- David A. Barrett, 10,179 10,179 0 * Trustee for Elizabeth C Barrett Trust - ---------------------------------------------------------------------------------------- Laurie Barrett 4,595 4,595 0 * - ---------------------------------------------------------------------------------------- Andrew Bellak 14,514 14,514 0 * - ---------------------------------------------------------------------------------------- John Billington 4,197 4,197 0 * - ---------------------------------------------------------------------------------------- Louis Bernat 48,237 48,237 0 * - ---------------------------------------------------------------------------------------- Bruce J. Bertrand 14,515 14,515 0 * - ----------------------------------------------------------------------------------------
- 14 - 16
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- Bertrand Family Trust 595,106 595,106 0 * - ---------------------------------------------------------------------------------------- Jason Bender 585 585 0 * - ---------------------------------------------------------------------------------------- Brewin Nominees Ltd. 37,500(9) 37,500 0 * - ---------------------------------------------------------------------------------------- Kevin M. Briody 32,755(10) 32,755 0 * - ---------------------------------------------------------------------------------------- James P. Butler (11) 75,000(12) 75,000 0 * - ---------------------------------------------------------------------------------------- Marshall Butler 15,966 15,966 0 * - ---------------------------------------------------------------------------------------- Caisse Centrale des Banques 50,000(13) 50,000 0 * Populaires - ---------------------------------------------------------------------------------------- Timothy W. Cameron 1,451 1,451 0 * - ---------------------------------------------------------------------------------------- Mark C. Carson 2,902 2,902 0 * - ---------------------------------------------------------------------------------------- Kristen L. Cavallaro 1,209 1,209 0 * - ---------------------------------------------------------------------------------------- Arnold B. Chace, Jr 27,578 27,578 0 * - ---------------------------------------------------------------------------------------- Arnold B. Chace, Jr., 17,417 17,417 0 * Trustee f/b/o Arnold B Chace, III - ---------------------------------------------------------------------------------------- Arnold B. Chace, Jr., 2,902 2,902 0 * Trustee f/b/o Arnold B Chace, III - ---------------------------------------------------------------------------------------- Malcolm G. Chace, 2,902 2,902 0 * Trustee f/b/o Arnold B. Chace, III - ---------------------------------------------------------------------------------------- Malcolm G. Chace III and 40,945 40,945 0 * Arnold B. Chace, Jr., Trustees f/b/o Arnold B. Chace Jr. et al - ---------------------------------------------------------------------------------------- Arnold B. Chace, Jr. U/A 24,567 24,567 0 * 10/11/72 Arnold B. Chace, Jr. and Malcolm G. Chase III, Trustees - ---------------------------------------------------------------------------------------- Malcolm G. Chace, 2,902 2,902 0 * Trustee f/b/o Sarah E. Chace - ---------------------------------------------------------------------------------------- Richard Childs 43,359 43,359 0 * - ---------------------------------------------------------------------------------------- Christiania Markets 50,000(14) 50,000 0 * - ---------------------------------------------------------------------------------------- Dominic Ciccone 7,257(15) 7,257 0 * - ---------------------------------------------------------------------------------------- Philip M. Colicchio 5,734 5,734 0 * - ----------------------------------------------------------------------------------------
- 15 - 17
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- John & Virginia 8,189 8,189 0 * Connolly - ---------------------------------------------------------------------------------------- Cleveland Cool 6,495 6,495 0 * - ---------------------------------------------------------------------------------------- John K. Crosby 3,955 3,955 0 * - ---------------------------------------------------------------------------------------- Frank D. Curley 388 388 0 * - ---------------------------------------------------------------------------------------- Timothy R. Curtin 627 627 0 * - ---------------------------------------------------------------------------------------- Bernard S. Davis 280 280 0 * - ---------------------------------------------------------------------------------------- Aldo DeFrancesco 2,902 2,902 0 * - ---------------------------------------------------------------------------------------- Den Norske Bank 125,000(16) 125,000 0 * - ---------------------------------------------------------------------------------------- Salvatore J 29,029 29,029 0 * Dimicelli, Sr - ---------------------------------------------------------------------------------------- Dina Partners 81,889 81,889 0 * - ---------------------------------------------------------------------------------------- Dreadnought Limited 187,500(17) 187,500 0 * - ---------------------------------------------------------------------------------------- Craig A. Drill 4,839 4,839 0 * - ---------------------------------------------------------------------------------------- Shermane B. Drill 4,837 4,837 0 * - ---------------------------------------------------------------------------------------- Daniel Dror(18) 15,000(19) 15,000 0 - ---------------------------------------------------------------------------------------- Robert Dubofsky 5,805 5,805 0 * - ---------------------------------------------------------------------------------------- Richard B. DuBusc 7,257 7,257 0 * - ---------------------------------------------------------------------------------------- Bruce S. Edington 943 943 0 * - ---------------------------------------------------------------------------------------- Elk International 1,380,000(20) 1,380,000 0 * - ---------------------------------------------------------------------------------------- entrenet Group, LLC 60,000(21) 60,000 0 * - ---------------------------------------------------------------------------------------- George and Sandra 79,928(22) 79,928 0 * Farndell - ---------------------------------------------------------------------------------------- Sandra Farndell 103,181 103,181 0 * - ----------------------------------------------------------------------------------------
- 16 - 18
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- William D. Fertig 3,628 3,628 0 * - ---------------------------------------------------------------------------------------- Findenas International Bank 38,706 38,706 0 * - ---------------------------------------------------------------------------------------- Laurence P. Finnegan, 127,560(24) 127,560 0 * Jr.(23) - ---------------------------------------------------------------------------------------- Laurence P. Finnegan, 4,789 4,789 0 * Jr. and Geraldine Finnegan - ---------------------------------------------------------------------------------------- Finter Bank Zurich 75,000(25) 75,000 0 * - ---------------------------------------------------------------------------------------- Robert A. Fish IRA 7,257 7,257 0 * - ---------------------------------------------------------------------------------------- Fish Family Trust 7,257 7,257 0 * - ---------------------------------------------------------------------------------------- Aaron H. Fleck 8,710 8,710 0 * - ---------------------------------------------------------------------------------------- Albert F. Ford, II 9,675 9,675 0 * - ---------------------------------------------------------------------------------------- Albert F. Ford, III, 86,803 86,803 0 * Trustee for Albert F. Ford II Trust - ---------------------------------------------------------------------------------------- Albert Ford, II, Trustee 1,451 1,451 0 * for Albert Ford, III Trust - ---------------------------------------------------------------------------------------- David A. Barrett, 6,551 6,551 0 * Trustee for Albert F. Ford, III Trust - ---------------------------------------------------------------------------------------- Andrew A. Ford 1,451 1,451 0 * - ---------------------------------------------------------------------------------------- Andrew A. Ford, Trust 1,638 1,638 0 * Andrew A. Ford Trustee - ---------------------------------------------------------------------------------------- Emily O. Ford 1,451 1,451 0 * - ----------------------------------------------------------------------------------------
- 17 - 19
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- David A. Barrett, 6,551 6,551 0 * Trustee for William A. Ford Trust - ---------------------------------------------------------------------------------------- Albert Ford, II, Trustee for William A. Ford Trust 1,451 1,451 0 * - ---------------------------------------------------------------------------------------- Russell E. Froelich 122,693(26) 122,693 0 * - ---------------------------------------------------------------------------------------- S. Fujii 52,664(27) 20,006 32,658 * - ---------------------------------------------------------------------------------------- Gallagher, Briody & Butler(28) 16,377 16,377 0 * - ---------------------------------------------------------------------------------------- Thomas P. Gallagher(29) 83,497(30) 83,497 0 * - ---------------------------------------------------------------------------------------- Dorothy R. Garfield 14,514 14,514 0 * - ---------------------------------------------------------------------------------------- Generio T. Gargiulo 250,278(31) 250,278 0 * - ---------------------------------------------------------------------------------------- Barbara Gargiulo 4,644 4,644 0 * - ---------------------------------------------------------------------------------------- Gilbert Gertner 10,000(32) 10,000 0 * - ---------------------------------------------------------------------------------------- Richard Gesoff 29,405 29,405 0 * - ---------------------------------------------------------------------------------------- Hugh Gillespie 29,029 29,029 0 * - ---------------------------------------------------------------------------------------- Mary L. & Hugh 40,944 40,944 0 * Gillespie - ---------------------------------------------------------------------------------------- John Francis Gorry 106,000 80,000 26,000 * - ---------------------------------------------------------------------------------------- Govett American Smaller 677,500(33) 677,500 0 * Companies Trust PLC - ---------------------------------------------------------------------------------------- Govett American Strategy Fund 160,000(34) 160,000 0 * - ---------------------------------------------------------------------------------------- Govett Global Smaller 200,000(35) 200,000 0 * Companies Investment Trust PLC - ---------------------------------------------------------------------------------------- William W. Gridley 7,257 7,257 0 * - ---------------------------------------------------------------------------------------- Growth International, Ltd. 20,000(36) 20,000 0 * - ---------------------------------------------------------------------------------------- Harriet Gurski 31,682 31,682 0 * - ----------------------------------------------------------------------------------------
- 18 - 20
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- John B. Hall 2,221 2,221 0 * - ---------------------------------------------------------------------------------------- Paul Hickey 56,150(37) 56,150 0 * - ---------------------------------------------------------------------------------------- P.K. Hickey and Co. 75,000(38) 75,000 0 * - ---------------------------------------------------------------------------------------- P. Randolph Hill 7,257 7,257 0 * - ---------------------------------------------------------------------------------------- Donald L. Horton 67,180(39) 16,378 50,802 * - ---------------------------------------------------------------------------------------- Darby E. Ford Hughes 1,451 1,451 0 * - ---------------------------------------------------------------------------------------- Frank A. Hutson 1,552 1,552 0 * - ---------------------------------------------------------------------------------------- Mark F. Hughes, Jr 1,226 1,226 0 * - ---------------------------------------------------------------------------------------- Ikans Kapital Forualting AB 25,000(40) 25,000 0 * - ---------------------------------------------------------------------------------------- Stephen P. Jacobus 50,801 50,801 0 * - ---------------------------------------------------------------------------------------- Rona Javitch, 6,821 6,821 0 * Cust. for David Javitch - ---------------------------------------------------------------------------------------- Jonathan Javitch 6,821 6,821 0 * - ---------------------------------------------------------------------------------------- Lee Javitch 67,870(41) 67,870 0 * - ---------------------------------------------------------------------------------------- Lisa Javitch 6,821 6,821 0 * - ---------------------------------------------------------------------------------------- Graham Jeffries 39,563(42) 3,276 36,287 * - ---------------------------------------------------------------------------------------- William C. Johnson 14,515(43) 14,515 0 * - ---------------------------------------------------------------------------------------- Andrea L. Kahn 504 504 0 * - ---------------------------------------------------------------------------------------- Malcolm G. Chace and 3,628 3,628 0 * Arnold B. Chace, Jr., Trustees f/b/o Henry A.P. Kent - ----------------------------------------------------------------------------------------
- 19 - 21
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- Malcolm G. Chace and 2,177 2,177 0 * Arnold B. Chace, Jr., Trustees f/b/o John D.P. Kent - ---------------------------------------------------------------------------------------- John D. P. Kent U/A 9/25/59 8,188 8,188 0 * Malcolm G. Chace III and Arnold B. Chace, Jr., Trustees - ---------------------------------------------------------------------------------------- Malcolm G. Chace and 1,451 1,451 0 * Arnold B. Chace, Jr., Trustees f/b/o Malcolm Parks Kent - ---------------------------------------------------------------------------------------- Malcolm Parks Kent U/A 9/25/59 8,189 8,189 0 * Malcolm G. Chace III and Arnold B. Chace, Jr., Trustees - ---------------------------------------------------------------------------------------- Malcolm G. Chace and 4,354 4,354 0 * Arnold B. Chace, Jr., Trustees f/b/o Patricia Kent - ---------------------------------------------------------------------------------------- Laurence Keen 75,000(44) 75,000 0 * - ---------------------------------------------------------------------------------------- Stanley Knapp 8,708 8,708 0 * - ---------------------------------------------------------------------------------------- John L. Kraft 3,348 3,348 0 * - ---------------------------------------------------------------------------------------- Leigh Fibers Co. 7,257 7,257 0 * - ---------------------------------------------------------------------------------------- Leigh Textiles, Inc. 7,257 7,257 0 * - ---------------------------------------------------------------------------------------- Robert Lenington 991 991 0 * - ---------------------------------------------------------------------------------------- Leslie Group, Inc. 97,890 97,890 0 * - ---------------------------------------------------------------------------------------- Charlotte P. Levine 55,459 55,459 0 * - ---------------------------------------------------------------------------------------- William Lewisham 26,000 26,000 0 * - ---------------------------------------------------------------------------------------- Norman B. Lipsett 12,885 12,885 0 * - ---------------------------------------------------------------------------------------- Lee Javitch 26,433 26,433 0 * Trustee for the Indenture of Trust of Norman B Lipsett, Trust - ----------------------------------------------------------------------------------------
- 20 - 22
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- John Madden 3,090 3,090 0 * - ---------------------------------------------------------------------------------------- George V. Malone 1,451 1,451 0 * - ---------------------------------------------------------------------------------------- James G. Marquez 5,805 5,805 0 * - ---------------------------------------------------------------------------------------- Karen L. Martin 1,209 1,209 0 * - ---------------------------------------------------------------------------------------- Ralph S. Mason, III 8,189 8,189 0 * - ---------------------------------------------------------------------------------------- Ralph S. Mason, 8,189 8,189 0 * Unified Credit Trust - ---------------------------------------------------------------------------------------- Thomas McCann 18,651(45) 18,651 0 * - ---------------------------------------------------------------------------------------- Edward J. McManimon, 2,221 2,221 0 * III - ---------------------------------------------------------------------------------------- Louis S. Mendez and 14,514 14,514 0 * Heidi M. Mendez - ---------------------------------------------------------------------------------------- Metraplex Corp. 208,481 208,481 0 * - ---------------------------------------------------------------------------------------- H. Scott Miller 966 966 0 * - ---------------------------------------------------------------------------------------- William J. and Beverly 58,991(46) 8,189 50,802 * J. Miller - ---------------------------------------------------------------------------------------- Alvin Mirman, 725 725 0 * Custodian for Danny Mirman - ---------------------------------------------------------------------------------------- Ilene Mirman 4,839 4,839 0 * - ---------------------------------------------------------------------------------------- Felice Mischel 20,000(47) 20,000 0 - ---------------------------------------------------------------------------------------- Jacques Moisset 62,000(48) 48,000 14,000 - ---------------------------------------------------------------------------------------- Jacques J. Moore 12,090 12,090 0 * - ----------------------------------------------------------------------------------------
- 21 - 23
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- Ted Morgan 8,392 8,392 0 * - ---------------------------------------------------------------------------------------- Henry Mourad(49) 309,368(50) 220,368 89,000 - ---------------------------------------------------------------------------------------- Robert C. Neff 1,019 1,019 0 * - ---------------------------------------------------------------------------------------- NCL (Nominees) Limited 368,750(51) 368,750 0 * - ---------------------------------------------------------------------------------------- John J. Oberdorf 562 562 0 * - ---------------------------------------------------------------------------------------- Maureen M. Oberdorf 36,266 36,266 0 * - ---------------------------------------------------------------------------------------- William P. Oberdorf 4,079 4,079 0 * - ---------------------------------------------------------------------------------------- Carmine T. Oliva(52) 1,284,232(53) 1,284,232 0 * - ---------------------------------------------------------------------------------------- Carmine T. and Georgeann Oliva 497,031(54) 497,031 0 * - ---------------------------------------------------------------------------------------- Georgeann Oliva 81,889 81,889 0 * - ---------------------------------------------------------------------------------------- Jason A. Oliva 38,150 38,150 0 * - ---------------------------------------------------------------------------------------- Ronald P. and Betty J. 166,728(55) 166,728 0 * Oliva - ---------------------------------------------------------------------------------------- Rose Oliva 4,355(56) 4,355 0 * - ---------------------------------------------------------------------------------------- Samuel G. and T. 118,163 118,163 0 * Michelle Morrison Oliva - ---------------------------------------------------------------------------------------- Samuel J. Oliva 705,284(57) 705,284 0 * - ---------------------------------------------------------------------------------------- J.C. Bradford and Co. Cust. 178,029 178,029 0 * f/b/o Ronald D. Ordway IRA RLVR - ---------------------------------------------------------------------------------------- Henry C. Oskman 49,060(58) 49,060 0 * - ---------------------------------------------------------------------------------------- Norman S. Palazini 3,842 3,842 0 * - ----------------------------------------------------------------------------------------
- 22 - 24
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- William S. Papazian 5,734 5,734 0 * - ---------------------------------------------------------------------------------------- James B. Raphalian 14,514 14,514 0 * - ---------------------------------------------------------------------------------------- Barry Reifler(59) 40,000(60) 40,000 0 * - ---------------------------------------------------------------------------------------- George Riley 20,071 20,071 0 * - ---------------------------------------------------------------------------------------- Martin Romm 7,257 7,257 0 * - ---------------------------------------------------------------------------------------- Romofin AG 200,000(61) 200,000 0 * - ---------------------------------------------------------------------------------------- The Royal Bank of 118,750(62) 118,750 0 * Scotland Trust Company (Jersey) Ltd. - ---------------------------------------------------------------------------------------- Robert B. Runyon(63) 327,303(64) 327,303 0 * - ---------------------------------------------------------------------------------------- Catherine Rusk 1,451 1,451 0 * - ---------------------------------------------------------------------------------------- George R. Rusk 200,105 200,105 0 * - ---------------------------------------------------------------------------------------- Terrance Rusk 1,451 1,451 0 * - ---------------------------------------------------------------------------------------- Samantha Rusk 1,451 1,451 0 * - ---------------------------------------------------------------------------------------- Jerome M. St. John 4,079 4,079 0 * - ---------------------------------------------------------------------------------------- St. John & Wayne 5,806(65) 5,806 0 * - ---------------------------------------------------------------------------------------- Harvey Sandler 14,029 14,029 0 * - ---------------------------------------------------------------------------------------- M. Alden Siegel 10,160 10,160 0 * - ---------------------------------------------------------------------------------------- Kathryn A. Silva 1,209 1,209 0 * - ---------------------------------------------------------------------------------------- Graham Smith 7,257(66) 7,257 0 * - ---------------------------------------------------------------------------------------- David B. Solomon 43,544 43,544 0 * - ---------------------------------------------------------------------------------------- David & Sylvia Sorin 3,869 3,869 0 * - ---------------------------------------------------------------------------------------- David Sorin 5,321 5,321 0 * - ---------------------------------------------------------------------------------------- Neil Sussman 75,000(67) 75,000 0 * - ---------------------------------------------------------------------------------------- Mark Suvall 20,320 20,320 0 * - ----------------------------------------------------------------------------------------
- 23 - 25
======================================================================================== Total Number Shares to be Owned of Shares to Upon Completion of be Offered Offering(2)(3) Shares Owned for Selling Name of Selling Prior to Shareholder's Percentage Shareholder Offering(1) Account Number of Class - ---------------------------------------------------------------------------------------- Jack Talan(68) 166,000(69) 155,000 11,000 * - ---------------------------------------------------------------------------------------- Gallant Thein 41,779(70) 16,378 25,401 * - ---------------------------------------------------------------------------------------- John A. Trott 52,324 52,324 0 * - ---------------------------------------------------------------------------------------- Gerald Unterman 154,258 154,258 0 * - ---------------------------------------------------------------------------------------- C. Michael Vaughn, Jr. and 7,257 7,257 0 * Carol Vaughn - ---------------------------------------------------------------------------------------- Andrew M. Wallerstein 8,189 8,189 0 * - ---------------------------------------------------------------------------------------- Michael F. Walsh 7,808 7,808 0 * - ---------------------------------------------------------------------------------------- Hillel Weinberger 96,472(71) 96,472 0 * - ---------------------------------------------------------------------------------------- Steven Weis 93,548(72) 93,548 0 * - ---------------------------------------------------------------------------------------- Thomas Wiegand 21,772 21,772 0 * - ---------------------------------------------------------------------------------------- E. Kenneth Williams, 562 562 0 * Jr - ---------------------------------------------------------------------------------------- Bill Y. Wong 37,571(73) 37,571 0 * - ---------------------------------------------------------------------------------------- Gary Woolley 6,294 6,294 0 * - ---------------------------------------------------------------------------------------- Word-Tronics 32,756 32,756 0 * Corporation - ---------------------------------------------------------------------------------------- Bennett Yanowitz 51,286 51,286 0 * - ---------------------------------------------------------------------------------------- Yorkton Securities, Inc. 140,000(74) 140,000 0 * ========================================================================================
- 24 - 26 (1) Includes shares of Common Stock underlying warrants or stock options exercisable as of June 9, 1997 or exercisable within 60 days after June 9, 1997, unless otherwise indicated. (2) Asterisk indicates less that 1%. (3) Although the Selling Shareholder table assumes the sale of all shares and all shares underlying warrants and options by each Selling Shareholder, certain of the Shares being registered hereby are subject to a lock-up which permits such Shares to be sold gradually until September 26, 1998, when all such restrictions expire. All of the 6,119,130 Merger Shares, 406,415 of the Option Shares and 1,197,879 of the Warrant Shares are subject to this lock-up. See "Securities to be Registered; Lock-up Provision." (4) Includes 15,000 shares issuable upon the exercise of outstanding warrants. (5) Includes 5,000 shares issuable upon the exercise of outstanding warrants. (6) Includes 10,000 shares issuable upon the exercise of outstanding warrants. (7) Mr. Barrett is a director of the Company. (8) Includes 58,060 shares issuable upon the exercise of outstanding options and 33,747 shares issuable upon the exercise of outstanding warrants. (9) Includes 7,500 shares issuable upon the exercise of outstanding warrants. (10) Mr. Briody is a partner of Gallagher, Briody & Butler, the Company's outside general counsel. (11) Mr. Butler is the Chief Financial Officer of the Company. (12) Represents 75,000 shares issuable upon the exercise of outstanding options. (13) Includes 10,000 shares issuable upon the exercise of outstanding warrants. (14) Includes 10,000 shares issuable upon the exercise of outstanding warrants. (15) Represents 7,257 shares issuable upon the exercise of outstanding options. (16) Includes 25,000 shares issuable upon the exercise of outstanding warrants. (17) Includes 37,500 shares issuable upon the exercise of outstanding warrants. (18) Mr. Dror is the former Chairman and Chief Executive Officer of the Company; he resigned on November 15, 1996. (19) Represents 15,000 shares issuable upon the exercise of outstanding stock options. (20) Includes 750,000 shares issuable upon the exercise of outstanding stock options and 90,000 shares issuable upon the exercise of outstanding warrants. In addition, the exercisability of 250,000 options held by Elk is subject to certain conditions. Elk may be deemed to have been part of a "control group" prior to Mr. Dror's resignation as Chairman and Chief Executive Officer on November 15, 1996. See "Certain Relationships and Related Transactions." (21) Represents 60,000 shares issuable upon the exercise of outstanding warrants. (22) Includes 3,629 shares issuable upon the exercise of outstanding options and 14,732 shares issuable upon exercise of outstanding warrants. (23) Mr. Finnegan is a director of the Company. (24) Includes 58,060 shares issuable upon the exercise of outstanding options and 30,118 shares exercisable upon the exercise of outstanding warrants. (25) Includes 15,000 shares issuable upon the exercise of outstanding warrants. (26) Includes 40,804 shares issuable upon the exercise of outstanding warrants. - 25 - 27 (27) Includes 32,658 shares issuable upon the exercise of outstanding stock options. (28) Gallagher, Briody & Butler is the Company's outside counsel. (29) Mr. Gallagher is a partner of Gallagher, Briody & Butler, the Company's outside general counsel. (30) Includes 9,797 shares issuable upon the exercise of outstanding warrants. (31) Includes 68,510 shares issuable upon the exercise of outstanding warrants. (32) Represents 10,000 shares issuable upon the exercise of outstanding options. (33) Includes 135,500 shares issuable upon the exercise of outstanding warrants. (34) Includes 32,000 shares issuable upon the exercise of outstanding warrants. (35) Includes 40,000 shares issuable upon the exercise of outstanding warrants. (36) Includes 20,000 shares issuable upon the exercise of outstanding warrants. (37) Includes 34,110 shares issuable upon the exercise of outstanding warrants and 7,257 shares issuable upon the exercise of outstanding options. (38) Represents 75,000 shares issuable upon the exercise of outstanding warrants. (39) Includes 50,802 shares issuable upon the exercise of outstanding options. (40) Includes 5,000 shares issuable upon the exercise of outstanding warrants. (41) Includes 19,353 shares issuable upon the exercise of outstanding warrants. (42) Includes 36,287 shares issuable upon the exercise of outstanding options. (43) Represents 14,515 shares issuable upon the exercise of outstanding warrants. (44) Includes 15,000 shares issuable upon the exercise of outstanding warrants. (45) Includes 5,806 shares issuable upon the exercise of outstanding warrants and 10,886 shares issuable upon the exercise of outstanding options. (46) Includes 50,802 shares issuable upon the exercise of outstanding stock options. (47) Represents 20,000 shares issuable upon the exercise of outstanding stock options. (48) Represents 62,000 shares issuable upon the exercise of outstanding stock options, 14,000 of which are covered by a separate Registration Statement filed on Form S-8. (49) Mr. Mourad is a former director and executive officer of the Company; he resigned from these positions on March 26, 1997. (50) Represents 232,368 shares issuable upon the exercise of outstanding stock options, 12,000 shares of which are covered by a separate Registration Statement filed on Form S-8. (51) Includes 73,750 shares issuable upon the exercise of outstanding warrants. (52) Mr. Oliva is Chairman, Chief Executive Officer and President of the Company. (53) Includes 130,633 shares issuable upon the exercise of outstanding options and 615,384 shares issuable upon the exercise of outstanding warrants. - 26 - 28 (54) Includes 3,629 shares issuable upon the exercise of outstanding options and 14,732 shares issuable upon the exercise of outstanding warrants. (55) Includes 3,628 shares issuable upon the exercise of outstanding options, and 14,730 shares issuable upon the exercise of outstanding warrants. (56) Represents 4,354 shares issuable upon the exercise of outstanding warrants. (57) Includes 25,401 shares issuable upon the exercise of outstanding options, and 68,655 shares issuable upon the exercise of outstanding warrants. (58) Includes 11,322 shares issuable upon the exercise of outstanding warrants. (59) Mr. Reifler is the former Chief Financial Officer of the Company. (60) Includes 30,000 shares under option issuable upon Mr. Reifler's termination of employment on September 19, 1997. (61) Includes 40,000 shares issuable upon the exercise of outstanding warrants. (62) Includes 23,750 shares issuable upon the exercise of outstanding warrants. (63) Mr. Runyon is a director of the Company. (64) Includes 88,664 shares issuable upon the exercise of outstanding warrants and 58,060 shares issuable upon the exercise of outstanding stock options. (65) Represents 5,806 shares issuable upon the exercise of outstanding warrants. (66) Represents 7,257 shares issuable upon the exercise of outstanding options. (67) Represents 75,000 shares issuable upon the exercise of outstanding warrants. (68) Mr. Talan is a director of the Company. (69) Includes 5,000 shares issuable upon the exercise of outstanding options. (70) Includes 25,401 shares issuable upon the exercise of outstanding options. (71) Includes 8,709 shares issuable upon the exercise of outstanding warrants. (72) Represents 93,548 shares issuable upon the exercise of outstanding warrants. (73) Includes 32,658 shares issuable upon the exercise of outstanding stock options. (74) Represents 140,000 shares issuable upon the exercise of outstanding warrants. - 27 - 29 PLAN OF DISTRIBUTION The Shares held by the Selling Shareholders (or to be acquired by the Selling Shareholders upon exercise of options or warrants) may be sold from time to time by the Selling Shareholders, subject to a current and effective prospectus. The Shares may be sold by the Selling Shareholders from time to time in one or more transactions (which may involve block transactions) in the over-the-counter market, in negotiated transactions, or in a combination of such methods of sale, at fixed prices, at market prices prevailing at the time of sale, at prices related to the prevailing market prices or at negotiated prices. The Shares may be sold by one or more of the following methods: (a) a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal in order to consummate the transaction; (b) a purchase by a broker or dealer as principal, and the resale by such broker or dealer for its account pursuant to this Prospectus, including resale to another broker or dealer; or (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers. In effecting sales, brokers or dealers engaged by a Selling Shareholder may arrange for other brokers or dealers to participate. Any such brokers or dealers will receive commissions or discounts from a Selling Shareholder in amounts to be negotiated immediately prior to the sale. Such brokers or dealers and any other participating brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act. Any gain realized by such a broker or dealer on the sale of shares which it purchases as a principal may be deemed to be compensation to the broker or dealer in addition to any commission paid to the broker by a Selling Shareholder. Some of the Shares covered by the Registration Statement may be sold under Rule 144 instead of by the Registration Statement. The Company will not receive any portion of the proceeds of the Shares sold by the Selling Shareholders. The Selling Shareholders are not required to actually sell any of the Shares held by the Selling Shareholders. The Selling Shareholders have been advised that during the time each is engaged in sales of the Shares covered by this Prospectus, each must comply with, among other things, Regulation M, promulgated under the Exchange Act, as amended, and pursuant thereto: (i) shall not engage in any improper stabilization activity in connection with the Company's securities; (ii) shall furnish each broker through which securities covered by this Prospectus may be offered the number of copies of this Prospectus which are required by each broker; and (iii) shall not bid for or purchase any securities of the Company or attempt to induce any person to purchase any of the Company's securities other than as permitted under the Exchange Act. - 28 - 30 SECURITIES TO BE REGISTERED The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, par value $0.0033 per share, and 10,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"). At August 18, 1997, there were 11,392,216 shares of Common Stock outstanding and no shares of Preferred Stock outstanding. COMMON STOCK Each share of Common Stock entitles the holder to one vote on all matters that are required or otherwise come before a vote of the stockholders of the Company. The Common Stock carries no preemptive, conversion, redemption or similar rights. The shares of Common Stock outstanding are fully paid and non- assessable. The holders of shares of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available. In the event of liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of Preferred Stock, if any, then outstanding. The Company has never paid any dividends. PREFERRED STOCK The Company is authorized to issue up to 10,000,000 shares of Preferred Stock from time to time in one or more series as may be designated by the Board of Directors from time to time. In the event of liquidation, dissolution or winding up of the Company, the holders of the Preferred Stock will be entitled to a liquidation preference over the Common Stock. Any Preferred Stock issued in the future will be entitled to such dividends, redemption rights, liquidation rights, conversion rights and voting rights as the Board of Directors, in its discretion, may determine, in a resolution or resolutions providing for the issuance of any such stock. Preferred Stock can thus be issued without the vote of the holders of Common Stock. Preferred Stock can be issued in the future with rights which could reduce the attractiveness of the Company as a potential takeover target, make the removal of management more difficult, or adversely impact the rights of holders of Common Stock. Under certain circumstances the issuance of Preferred Stock containing such rights could have the effect of decreasing the market price of the Common Stock. The Company has no present plans to issue Preferred Stock. CLASSIFICATION OF THE BOARD OF DIRECTORS The Company's Certificate of Incorporation provides for three classes of directors, with the number of members in each as nearly equal in number as the then total number of directors constituting the entire Board. Each class of directors have terms which expire in consecutive years. The Company's by-laws require the Board to consist of four (4) or more directors, and require an eighty (80%) percent affirmative vote of the holders of shares of - 29 - 31 Common Stock to reduce the number of directors. Presently, there are five Directors with terms expiring as follows: David Barrett, 1997; Jack Talan and Laurence P. Finnegan, Jr., 1998; and Carmine T. Oliva and Robert Runyon, 1999. Any vacancies in the Board for any reason, or any increase in the number of directors, may be filled only by an affirmative vote of the majority of directors then in office, even if less than a quorum, and such incoming director shall hold office until the expiration date of the class for which such director has been chosen. In addition, the Certificate of Incorporation provides that Directors may be removed only for cause. These provisions of the Certificate of Incorporation concerning the Board members may not be repealed or amended unless such action is approved by the affirmative vote of the holders of not less than sixty-seven (67%) percent of the Company's outstanding shares of Common Stock. STOCKHOLDERS' WRITTEN CONSENTS AND SPECIAL MEETINGS The Company's Certificate of Incorporation provides that any action required or permitted to be taken by the stockholders of the Company must be effected by a duly called annual or special meeting, and may not be effected by the written consent of stockholders. This provision of the Certificate of Incorporation may not be repealed or amended unless such action is approved by the affirmative vote of the holders of not less than sixty-seven (67%) percent of the Company's outstanding shares of Common Stock. The Company's by-laws provide that special meetings may be called only by the President, the Board of Directors or the holders of shares of Common Stock entitled to cast not less than 10% of the votes at any such meeting. SECTION 203 OF THE DELAWARE CORPORATION LAW The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law. That section provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person or affiliate, or associate of such person, who is an "interested stockholder" for a period of three years from the date that such person became an interested stockholder unless the transaction is approved in a prescribed manner. An "interested stockholder" is defined as any person who is (i) the owner of 15% or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation and was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. This statute could prohibit or delay a merger, takeover, or other change in control of the Company and therefore could discourage attempts to acquire the Company. LIMITATION OF LIABILITY As permitted by the Delaware General Corporate Law, the Company's Certificate of Incorporation, as amended, provides that directors of the Company shall not be personally - 30 - 32 liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporate Law, relating to prohibited dividends or distributions or the repurchase or redemption of stock, or (iv) for any transaction from which the director derives an improper personal benefit. WARRANTS AND RIGHTS Of the 12,682,260 Shares being registered hereby, 2,157,879 shares are Warrant Shares, and can be sold by the Selling Shareholders only after such Selling Shareholder has exercised such Common Stock purchase warrant. All of the warrants are immediately exercisable. Of the Warrant Shares, 1,657,879 are issuable upon the exercise of warrants at exercise prices ranging from $1.21 to $3.79, and expire during the year 2000. The remaining 500,000 Warrant Shares underly warrants issued in connection with the Yorkton Offering. Pursuant to the terms of these warrants, if the price of a share of the Company's Common Stock equals or exceeds 150% of the exercise price ($3.45) for ten consecutive trading days, then the Company can demand that the warrants be exercised. If such warrants are not exercised within thirty days of the demand, the warrants can be redeemed by the Company for $0.50 per warrant. The warrants do not contain provisions for adjustments to the exercise price, except for stock splits. As of September 23, 1997, there were outstanding warrants to purchase an additional 32,000 shares of Common Stock, exercisable at $2.50 per share. The shares underlying these warrants have not been registered by the Registration Statement of which this Prospectus is a part. Another 1,579,783 shares of the 12,682,260 shares being registered hereby are Option Shares, and can be sold by the Selling Shareholder only after such Selling Shareholder has exercised the Common Stock purchase option (the "Option") held by such Selling Shareholder. The Option Shares underlying the Options are exercisable at prices ranging from $1.625 to $5.00. Substantially all of the Options are currently exercisable. The Options do not contain provisions for adjustments to the exercise price, except for stock splits. As of September 23, 1997, there were outstanding options to purchase an additional 616,556 shares of Common Stock at exercise prices ranging from $1.625 to $5.00. The shares underlying these options have not been registered by the Registration Statement of which this Prospectus is a part. LOCK-UP PROVISION In connection with the merger by and between a wholly-owned subsidiary of the Company and XIT, the Company issued the Merger Shares to the former XIT shareholders. The Company also assumed all outstanding XIT warrants and all outstanding XIT options. The Merger Shares, the shares underlying the outstanding XIT warrants and the shares underlying the outstanding XIT options are subject to certain lock-up agreements preventing the transfer of such shares until the termination of such lock-up agreements. The lock-up agreements will terminate with respect to 25% of such shares on each of the following dates: the later of September 26, 1997 or the date on which the Registration Statement of which this Prospectus is a part is declared effective; March 26, 1998; June 26, 1998; and September 26, 1998. Of the 12,682,260 shares being registered hereby, 7,723,424 are subject to the aforementioned lock-up agreement. These shares consist of the 6,119,130 Merger Shares, 1,197,879 of the Warrant Shares, and 406,415 Option Shares. Aditionally, 80,000 shares issued to John Gorry, pursuant to the Second Amended Agreement of Settlement and Mutual Release, are subject to lock-up until April 1, 1998. EXPERTS The consolidated financial statements and schedule of MicroTel International, Inc. and subsidiaries (formerly known as XCEL Corporation and subsidiaries) as of September 30, 1996 and 1995 and for each of the years in the three-year period ended September 30, 1996, have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements for the six month period ended December 31, 1994, and for the years ended December 31, 1995 and December 31, 1996 for CXR Corporation (MicroTel International, Inc. pre-Merger) included - 31 - 33 in this Prospectus have been audited by BDO Seidman, LLP, independent certified public accountants, and have been so included in reliance upon the reports given upon the authority of that firm as experts in auditing and accounting. The financial statements of CXR Corporation for the year ended June 30, 1994 included in the Prospectus have been audited by Deloitte & Touche LLP, independent certified accountants, as stated in their report (which expresses an unqualified opinion and includes an explanatory paragraph concerning certain factors which raise substantial doubt about CXR's ability to continue as a going concern) appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. BUSINESS WHEN USED ANYWHERE IN THE DISCUSSION OF "BUSINESS" BELOW, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND," "SHOULD," "BELIEVE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN THE FOLLOWING SECTIONS BELOW: "OVERVIEW"; "INSTRUMENTATION AND TEST EQUIPMENT"; "CIRCUITS"; "COMPONENTS AND SYBSYSTEM ASSEMBLIES"; PRODUCT DEVELOPMENT AND ENGINEERING; "COMPETITION"; "REGULATION"; "EMPLOYEES"; AND "LEGAL PROCEEDINGS." PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. OVERVIEW The Company, through its various direct and indirect operating subsidiaries, designs, manufactures and distributes a wide range of electronics hardware products and provides related services. Approximately 60% of the Company's hardware sales are to customers in the telecommunications and information services industries, including AT&T, the Regional Bell Operating Companies ("RBOCs"), and Motorola. The remainder of the sales are for various industrial, medical, military and aerospace applications. The Company's objective is to become a leader in quality, cost effective solutions to meet the global requirements of telecommunications and information technology customers. The Company believes that it can achieve this objective through customer-oriented product development, superior product solutions, and excellence in local market service and support. In 1984, the Company began operations as CXR Telcom Corporation. In 1989, a holding company, CXR Corporation, a Delaware corporation, was formed with two operating subsidiaries, CXR Telcom Corporation, based in the United States, and CXR S.A., - 32 - 34 based in France (collectively, "CXR"). CXR manufactures and distributes telecommunications testing and transmission equipment. In 1995, CXR Corporation changed its name to MicroTel International, Inc. On March 26, 1997, the Company consummated the Merger pursuant to which XIT became a wholly-owned subsidiary of the Company. Because the Merger was accounted for as a reverse acquisition, historical financial information referred to herein as that of the Company shall refer to the historical financial information of XIT. Prior to 1991, XIT produced video display products, bare printed circuit boards, digital switches, keyboards, keypads and other components primarily for military applications. In 1991, XIT began a fundamental transition of its business operations by divesting $1.5 million in unprofitable bare printed circuit board volume and $3.5 million in low margin standard keyboards. During that year, XIT relocated its corporate headquarters, its Digitran Division's input and display component business, and its circuit division to California and focused its manufacturing on low volume, high margin double-sided and multi-layer circuit boards. Commencing in that year, XIT also began investing heavily in research and development in order to diversify its product line and reduce its dependence on military sales. Commencing in 1994, XIT began to implement a business strategy of acquiring strategically complementary businesses and product lines. In July 1994, XIT acquired approximately 84% of HyComp, Inc. through a share exchange with the majority shareholders. HyComp, formed in 1969, designs and manufacture hybrid circuits, resistor networks, and thin film components. HyComp's products are for high-reliability applications where they must withstand extremes of temperature, humidity, or environment. These products have a variety of uses in military, aerospace, medical, computer, industrial control and communications electronics. In December 1995 and January 1996, XIT acquired an additional approximate 7% of HyComp Common Stock through an exchange of XIT Common Stock for HyComp common shares. In May of 1995, XIT acquired certain work in process from a bankrupt printed circuit board operation, XCMD, located in Philadelphia, Pennsylvania. The Company continues to service certain of the XCMD customers from its Ontario facility. In July 1995, XIT sold its Computron Display Systems Division ("Computron") based in Forest Park, Illinois, a manufacturer of higher cost custom color and monochrome display monitors, for $1.8 million. Computron was sold based on XIT management's determination that the demand for its product lines was declining. Further, XIT's growth in the monitor product area is expected to be derived from its low cost standard color cathode ray tube ("CRT") product line, branded XCEL-Lite, as well as a full range of flat panel products manufactured at its Digitran Division. - 33 - 35 In September 1995, through a newly established wholly-owned subsidiary XCEL Arnold Circuits, Inc. ("XCEL Arnold"), XIT completed the acquisition of Arnold Circuits, Inc., a LaHabra, California manufacturer of complex multi-layer, surface mount circuit boards used in sophisticated electronic equipment for the computer, communications, instrumentation and industrial controls industries. XCEL Arnold's circuit boards are currently used principally in cellular telephone infrastructure, but can also be used in workstations, desktop and notebook computers, computer networking products, storage devices and medical equipment. In April 1996, XCEL Arnold completed the acquisition of Etch-Tek, Inc. ("Etch-Tek"), a manufacturer of quick turn and prototype quantities of double sided and high layer count multilayer printed circuit boards. Etch-Tek has been established as a division of XCEL Arnold, and operates as XCEL Etch Tek. Etch-Tek is located in Concord, California and maintains a direct sales office in San Jose, California. In September 1996, XCEL Corporation, Ltd. ("XCEL UK"), the Company's United Kingdom subsidiary, acquired Abbott Electronics, Ltd. ("Abbott"). XCEL UK operates Abbott as a wholly-owned subsidiary of XCEL UK trading as XCEL Power Supplies, Ltd. Abbott designs and manufactures high and low voltage, high specification, compact and micro-electronic power supplies to meet rugged environmental and high tolerance electrical requirements. In the fall of 1996, XIT began negotiations with respect to the Merger which was consummated on March 26, 1997. Management believes that the Merger will enhance the Company's ability to service its telecommunications and information technology customers, create additional marketing opportunities both geographically and across product lines, and provide some cost savings by the internal sourcing of components formerly purchased from third party vendors. Within the electronics industry, the Company manufactures and distributes three product lines which are discussed as follows below. INSTRUMENTATION AND TEST EQUIPMENT The Company's Instrumentation and Test Equipment products are manufactured by CXR. In addition, CXR S.A. performs network integration services. Their customers include AT&T, the RBOCS, interconnect carriers, independent telephone operating companies, private communications networks, banks, brokerage firms and Government agencies. TELECOM TEST INSTRUMENTS. The CXR line of test instruments measure the transmission characteristics of telephone circuits. The market for this test equipment has expanded as a result of the AT&T divestiture of the RBOCS and the trend towards user ownership of equipment. As a result of the AT&T divestiture, local telephone operating - 34 - 36 companies have been forced to develop their own internal capacity to identify and isolate troubles in the network transmission facilities in both telephone company owned or subscriber owned equipment. The current line of test equipment manufactured and sold by CXR is as follows: The Model 100 Series Responders allow telephone companies and end users to remotely and automatically monitor, and actively test, the quality of transmission facilities. These products are compatible with the AT&T Centralized Automatic Reporting on Trunk (CAROT) testing system and are used by common carriers and private network operators to test their circuit interfaces to the AT&T toll network. The basic components of the Model 100 Series testing systems are a Near End responder (NER), a Far End responder (FER) and an access Switch. An NER is a device that acts as the master in a master slave concept. An NER initiates a test by transmitting a test message to the FER at the other end of the circuit. A series of tests are coordinated through a routine sequence controlled by a PC based "Autoroutining System" software program usually located at the master site or the control center. The system program generates reports for all the test data, exception reports, trouble tickets, and marginal performance lines. The 700 Series of Transmission test sets are used principally by telephone companies to perform analog measurements on voice grade and wide band circuits applications involving Digital Data Service (DDS) and High Capacity Digital Subscriber Loops (HDSL). The primary use of this product line is in metallic telephone loop qualification testing. The Model 5200 Universal Transmission Analyzer incorporates Digital Signal Processing (DSP) measurement technology and has replaced the LES 8000 Test Set formerly marketed by the Company. This product is marketed to the maintenance organizations of telephone companies and private network operators and performs all the functions of a Data Transmission Impairment Analyzer, a DS1 BERT Tester, a VF Signaling Network Access Unit, a T-1 Channel access Test Unit, and a DDS private line and switched digital service test product. The Model 5200 is designed for qualifying, commissioning and maintaining digital baseband leased lines, mono and stereo radio channels and basic and primary rate voice, and soon will be enhanced to service Integrated Services for the Digital Network (ISDN) subscriber loops. It is capable of making at very high transmission speeds all of the necessary measurements according to the international CCITT recommendations. The Model 5200 covers the specialized installation and maintenance of all circuits involving voice, signalling transmission, 64Kb/s data, and 1.5Mb/s data, and shortly will cover ISDN circuits. The Model 5200 is the first product of its kind to offer all these testing capabilities within one package. An added feature is the use - 35 - 37 of an internal battery power source in order to accommodate special hard-to-reach environments. The Model 5200 constituted approximately 70% of CXR's instrument sales for the year ended December 31, 1996. DATACOM TEST INSTRUMENTS. Datacom test instruments are used to test and monitor the performance of computers and communications equipment to insure proper function in receiving or transmitting data over wide area or local area networks. Datacom instruments monitor, emulate and perform digital tests on protocol, code and transmission functions of computers, terminals, modems, multiplexers, front-end processors and other computer and communications equipment. The Datacom instruments manufactured and sold by CXR for testing wide area networks are the CXR Telcom 840A and 841A Network Signalling Analyzers. The 804A is a hand-held field service instrument having limited emulation capability and full monitor capability. The 841A is an easy-to-use field service tool used primarily by telecommunications carriers for installation and maintenance of the new ISDN. The 841A also tests and monitors the Common Channel Signalling System 7 (CCSS7) which is a worldwide standard protocol developed for the purpose of transmitting information between digital central office switches. TRANSMISSION PRODUCTS. CXR develops, manufactures, and sells a broad line of Anderson Jacobson ("AJ") modem products. These include modem models operating at data rates from 2400 bits per second (bps) through 33,600 bps. These are sold as rackmount modems for use at central communication/computer sites, stand-alone modems at central communication/computer sites, or as stand-alone modems for use at remote sites. All of the AJ models are "feature rich" modems that generally offer more capabilities and flexibility than competing products. The ability to transmit digital data to and from computers is an important element in the computer industry. Communications and data interconnect capabilities are fundamental requirements for maximization of computer systems uses. The large volume of information to be exchanged between computer networks in geographically disperse locations require rapid, accurate and economical communications capabilities and the AJ product line is designed to meet and satisfy such needs. The market for V.34 bis dialup 33,600 bps products is believed to be a major growth area and much of CXR's modem development effort is being concentrated on the V.34 bis, V.32ter and V.34 protocol, which include a 33,600 bps product line of modems with integral time division channels multiplexer ports. The AJ 14,400/19,200 series is a true V.32 bis/V.32ter compatible product line, with full duplex operation on standard dial-up lines or on 2-wire or 4-wire leased lines. The series features trellis coded modulation and local and remote echo cancellation, with - 36 - 38 capabilities to cope with satellite delay of multiple hops in long distance transmission. Also, the series is equipped with multiple number storage capacity via a V.25 bis synchronous dialer for computer controlled application. In leased line operation the series features unattended automatic dial backup using the dial-up network in the event of lease line failures. The series is also available in either stand alone desktop applications or as a card for chassis rackmount configuration. The AJ Smart Rack is a modem management enclosure that accommodates 16 modular card modems that allow the data center managers to keep track of configurations, diagnostics, alarms and system status at all times through a menu driven user interface. The main advantage of the Smart Rack is the simplicity of keeping track of all activities with real time monitoring and reporting using simple easy to read display screens. Also an on-board modem allows access from remote locations and the ability to dial a predefined sequence of numbers for alarm reporting. The AJ 5900 series offers intelligent T-1 Channel Service Units which provide access to D4 and Extended Super Frame (ESF) on High Capacity Digital Service (HCDS), in either a single line or rack mount configuration. The AJ 5900 series offers a single termination interface to the Data Terminal Equipment (DTE), providing continuous monitoring for bipolar violations and multiple error events. The user can select thresholds for error rates, with separate levels for the network and the equipment. The series provide complete access to both the network side and the user side, along with the appropriate diagnostic tests in order to maintain network integrity. In March 1997, CXR introduced a new product line, the AJ 6900 series for T1 and fractional T1 CSU-DSU application. These newly introduced products provide for the direct interface between the customer's equipment and the T1 facilities. The AJ 6900 series operates at any multiple 56K or 64K b/s, including current Frame Relay data rates. Built-in multiplexer ports allow simultaneous connections to a PBX or channel bank which shares the same T1 facility. The AJ 6900 series has an integrated Simple Network Management Protocol (SNMP) and therefore can easily be used by any network management system using SNMP. NETWORKING SYSTEMS. In 1996, CXR S.A. formed a new business unit to market several lines of products used to build data and voice networks. All of these products are sourced from third-party vendors under distributorship or OEM arrangements. The "product" marketed to its customers is a turn-key solution using these products and includes network design, installation and maintenance. The product lines marketed consist of four primary types as follows: a) multiplexing equipment used to transport data, voice and local area network traffic over point-to-point leased lines and frame relay networks; b) statistical multiplexers, terminal servers and routers for local area network interconnections; c) data compression equipment used to - 37 - 39 compress and encrypt data streams prior to network access to maximize transmission speed and secure the transmission and to decompress and decipher upon transmission receipt; and d) ISDN routers used to link remote offices to corporate office local area networks. CXR ANDERSON JACOBSON LTD. Following the Merger, the Company has established a new United Kingdom subsidiary, CXR Anderson Jacobson, Ltd., for the purpose of marketing the products and services offered by CXR S.A. in the United Kingdom. CIRCUITS The Company's printed circuit boards are produced by XCEL Arnold Circuits, Inc. ("XCEL Arnold"), a wholly-owned subsidiary of XIT based in LaHabra, California and Concord, California, XCEL Circuits, a division of XIT based in Monrovia, California and HyComp, Inc. ("HyComp"), an approximately 89% owned subsidiary based in Marlborough, Massachusetts. Printed circuit boards are essential components in virtually all sophisticated electronic products. The circuit board is the basic platform used to interconnect and mount electronic components such as microprocessors, resistor networks and capacitors. Circuit boards consist of copper traces on an insulating (dielectric) base, which provide electrical interconnections for electronic components. The development of more sophisticated electronic equipment by OEMs combining higher performance and reliability with reduced size and cost has created a demand for increased complexity, miniaturization and density in the circuit traces. In response to this demand, multi-layer boards have been developed in which several layers of circuitry are laminated together to form a single board with both horizontal and vertical electrical interconnections. The technology required to manufacture electronic products is becoming increasingly costly and complex. Traditionally, manufacturers used the so-called "through-hole" technology in assembling printed circuit boards. However, a newer technology, known as "surface-mount" technology ("SMT") has gained acceptance in the manufacture of these products. The Company has invested in new manufacturing equipment to accommodate the increased business for SMT equipment. SMT allows for production of a smaller circuit board, with greater component and circuit density, resulting in increased performance. Management believes that SMT will continue to constitute an increasing percentage of printed circuit board production and assembly. - 38 - 40 The circuit boards produced at XIT's La Habra, California facility (known as "Arnold Circuits") are high density, multi-layer printed circuit boards of up to 12 layers. The majority of the Arnold Circuits' multi-layer rigid circuit boards are manufactured on a standard base laminate material. Arnold Circuits also produces high performance circuit boards constructed from speciality materials. Arnold Circuits gained ISO 9002 certification in 1995. XCEL Etch-Tek is a division of XCEL Arnold located in Concord, California. Etch-Tek is a manufacturer of sophisticated high multi-layer, quick turn, and prototype printed circuit boards. HyComp manufactures hybrid circuit products which must, because of the applications in which they are used, endure extreme environmental conditions. HyComp's hybrid circuits combine components, such as resistors, capacitors and integrated circuit chips, into one functional unit in a single sealed package. HyComp also has a line of thick film hybrid circuits which are manufactured by HyComp's strategic partner SIMESA in its automated cassette to cassette production facility located in Vitoria, Spain. COMPONENTS AND SUBSYSTEM ASSEMBLIES The Components and Subsystem Assemblies products are produced and/or sold by XIT's Digitran Division, based in Ontario, California, XCEL Corp. Ltd. and XCEL Power Supplies Ltd., wholly-owned subsidiaries of XIT based in England, and XCEL Japan, Ltd. Components XIT's Digitran Division manufactures and sells digital switch products serving aerospace, communications, industrial and commercial applications. Thumbwheel, push button, and lever modules, together with assemblies, are manufactured in 16 different model families. The Digitran Division also offers a wide variety of custom keypads and keyboards. The Digitran Division also produces the XCEL-Lite display color monitor product. Each monitor is customized to meet the needs of OEMs or sold "off the shelf" as lower cost color standard XCEL-Lite models. The monitors also come with a range of options, including: a wide range of phosphors, customer headers, video to all standard formats or customized, front access controls for brightness, contrast, and power, ruggedized exteriors, EMI/RFI shielding, low energy power and universal power supplies. The predominant - 39 - 41 market segments for these displays are medical, test instruments and rugged continuous use ATMs. Color and monochrome monitors (including XCEL-Lite) are sold in Europe through XCEL UK, Ltd. Subsystems Based on industry data, the Company believes that OEMs are increasingly relying upon independent manufacturers of complex electronic interconnect products rather than on in-house production. The Company believes that the current trend towards increased reliance by OEMs on independent manufacturers reflects the OEMs' recognition that, for complex electronic interconnect products, independent manufacturers can provide greater specialization, expertise, responsiveness and flexibility and can offer shorter delivery cycles than can be achieved by internal production. In addition, the use of independent manufacturers allows OEMs to focus their efforts and resources on other areas such as product research and development and marketing. Other factors which lead OEMs to utilize contract manufacturers include: Reduced Time-to-Market. Due to intense competitive pressures in the electronics industry, OEMs are faced with increasingly shorter product life-cycles and therefore have a growing need to reduce the time required to bring a product to market. OEMs can reduce their time-to-market by using a contract manufacturer's established manufacturing expertise and infrastructure. Reduced Capital Investment Requirements. As electronic products have become more technologically advanced, the manufacturing process has become increasingly sophisticated and automated, requiring a greater level of investment in capital equipment. By using contract manufacturers, OEMs can reduce their overall capital equipment requirements while maintaining access to advanced manufacturing facilities. Focused Resources. Because the electronics industry is experiencing greater levels of competition and rapid technological change, many OEMs increasingly are seeking to focus their resources on activities and technologies in which they add the greatest value. By offering comprehensive electronic assembly and turnkey manufacturing services, contract manufacturers allow OEMs to focus on core technologies and activities such as product development, marketing and distribution. Access to Leading Manufacturing Technology. Electronic interconnect products and electronic interconnect product manufacturing technology have become increasingly sophisticated and complex, making it difficult for OEMs to maintain the necessary technological expertise in process development and control. OEMs are motivated to work - 40 - 42 with a contract manufacturer in order to gain access to the contract manufacturer's process expertise and manufacturing know-how. Improves Inventory Management and Purchasing Power. Electronics industry OEMs are faced with increasing difficulties in planning, procuring and managing their inventories efficiently due to frequent design changes, short product life-cycles, large investments in electronic components, component price fluctuations and the need to achieve economies of scale in materials procurement. OEMs can reduce production costs by using a contract manufacturer's volume procurement capabilities. By utilizing a contract manufacturer's expertise in inventory management, OEMs can better manage inventory costs and increase their return on assets. The Company offers complete manufacturing solutions to OEMs, including concurrent engineering, assembly of printed circuit boards incorporating its input and display components, assembly of subsystems, test engineering, software development and accessory packaging. The Company believes that its ability to manufacture various electronic components, combined with its engineering integration capability, provides it with a number of competitive advantages in providing custom subsystem assemblies that can enable it to capture a significant portion of this growing market. In addition, the Company's manufacturing technologies and processes now include, in addition to SMT, tape automated binding full grid arrays, and chip on board chip in flux. By integrating the Company's printed circuit boards and components, the Company is able to engineer and manufacture communications equipment, medical testing equipment, industrial machine controllers, and military weapons subsystems. Medical equipment, gasoline service point of sales terminals, and machine tools use the Company's proprietary PF-Shield, a thin, tough PolyFilm which provides environmental protection from dust and most fuels, solvents and petroleum-based products without detracting from the equipment's cosmetic appearance or performance. Furthermore, the shield is highly resistant to puncture, is flame retardant and remains flexible from -75 degrees Celsius to 150 degrees Celsius. XIT's industrial machine controller products eliminate interference and cross-talk between adjacent monitors, utilize high grade plastics (Digidome) that will not deteriorate when exposed to petrochemicals, and offer custom panels and keycaps that withstand the abusive industrial environment. XIT's military products utilize the highest quality materials to withstand nuclear, biological, and chemical contamination and extreme environmental conditions encountered in worldwide military deployment including rigorous shock and vibration. CUSTOMERS AND MARKETING Customers for the Company's Instrumentation and Test product line include AT&T, the RBOCS, international telephone companies (including France Telecom), and private communications networks. Datacom test equipment and modem equipment are purchased - 41 - 43 by telecommunications equipment manufacturers and used in the design, manufacture, installation and maintenance of the electronic equipment they provide. Telecom test instruments are purchased by the major long distance carriers. The principal customer for the Circuits Sector is the Cellular Infrastructure Group of Motorola. Substantially all manufacturing for Motorola is done at Arnold Circuits. During the year ended September 30, 1996, and the six months ended June 30, 1997, sales to Motorola accounted for 41% and 22%, respectively, of the Company's sales. The Company has commenced efforts to market its products to other customers to reduce its reliance on Motorola and has commenced sales to other customers who it believes will become significant customers. The loss of Motorola as a customer, or a significant reduction in the dollar amount of orders from Motorola, would have a material adverse affect on the Company. See "Risk Factors; Dependence on Major Customer." The principal customers for Components and Subsystems are OEMs in the electronics industry, including manufacturers of communications equipment, industrial and business computers, automatic teller machines, medical devices, industrial instruments and test equipment, and aerospace and military products. The Company markets its products through a combination of direct sales engineers, distributors and independent sales representatives primarily in the United States, Europe and Japan. BACKLOG The Company's business is not generally seasonal, with the exception that the printed circuit board industry generally slows in the last calendar quarter of each year. The Company's backlog of firm, unshipped orders was as follows by business sector at June 30, 1997 and September 30, 1996 and 1995, respectively.
( in thousands ) June 30, 1997 Sept 30, 1996 Sept 30, 1995 --------------- --------------- --------------- Circuits $ 4,720 $ 11,019 $ 14,087 Components and Subsystem Assemblies 7,770 9,187 2,937 Instrumentation and Test Equipment 3,079 - 0 - - 0 - --------------- --------------- --------------- $ 15,569 $ 20,206 $ 17,024 =============== =============== ===============
The decline in backlog for the Circuits Sector is principally the result of Arnold Circuit's major customer, Motorola, changing its ordering pattern, compounded in 1997 by a deferral of orders by the customer pending correction of late delivery problems. Motorola as - 42 - 44 a matter of policy has reduced its order quantities from a 12 month supply in the September 30, 1995 time frame to a 3 to 6 month supply beginning in the September 30, 1996 time frame and forward. The increase in backlog for the Components and Subsystem Assemblies Sector beginning at September 30, 1996 is due to the backlog of Abbott, acquired in September 1996, of $5,217,000 and $5,992,000 at June 30, 1997 and September 30, 1996, respectively. Order backlog for Abbott is volatile and the decline from September 30, 1996 to June 30, 1997 is not indicative of an adverse trend. The remainder of the decline in backlog for the sector from September 30, 1996 to June 30, 1997 of approximately $642,000 is due to a general decline in orders for the rest of the Sector's products resulting from the aging of related customer programs. The backlog for the Instrumentation and Test Equipment Sector at June 30, 1997 is that of CXR, acquired on March 26, 1997. Backlog for CXR is not deemed a significant measure of its business, as its customers generally order on a just-in-time basis; however, at June 30, 1997, CXR had one significant order which had been placed on an extended contract basis. The order backlog at June 30, 1997 is expected to be shipped during the year ended December 31, 1997, with the exception of approximately $2,600,000 of Abbott orders whose fulfillment extends beyond that date. MANUFACTURING The Company purchases the electronic components required for the manufacture of its various product lines from a number of vendors and has experienced no significant difficulties in obtaining timely delivery of components. In addition, the Company has begun internal sourcing of certain electronic components following the Merger. Management has determined that there would be little, if any, cost savings from outside manufacturing. PRODUCT DEVELOPMENT AND ENGINEERING The Company's product development and engineering is critical in view of rapid technological innovation in the electronics hardware industry. Current research and development efforts are concentrated in the Instrumentation and Test Equipment Sector (CXR) and at HyComp. For the years ended September 30, 1996, September 30, 1995, and September 30, 1994, product development costs of XIT were approximately $309,000, $328,000 and $639,000, respectively. The product development costs of CXR were $2,612,000 and $2,373,000 during the years ended December 31, 1996 and December 31, 1995, respectively. These product development costs were related primarily to development of new telecommunications test equipment, trunk testing system products and data communications equipment. Current research expenditures are directed principally towards enhancements to the current test instrument product line and development of increased band width (faster speed) transmission products. These expenditures are intended to improve market share and gross margins, although no assurances may be given that such improvements will be achieved. CXR also makes use of the latest CAD (Computer Aided Design) equipment to design and package its products. This puts CXR in the position to take full advantage of the latest CAE (Computer Aided Engineering), and EDA workstation tools (Engineering Design Automation) to design, simulate and test its advanced product features or product enhancements - 43 - 45 for custom circuits and miniaturization purposes. With the above mentioned tools, product developments are turned around very quickly, keeping the highest quality and reliability integrated as part of the overall development process. This kind of capability also allows CXR to offer custom featured designs for the potentially expanding Original Equipment Manufacturers (OEM) customers, whose needs require the integration of CXR's products with their own. In 1992, HyComp began investigating the feasibility of a lower cost alternative flip chip assembly process than that developed by IBM in the 1980s. The HyComp process called "adhesive flip chip" uses conductive adhesives as interconnections, instead of deposited metals. The adhesive flip chip process promises all the benefits of the flip chip, but with substantially lower capital investment and manufacturing costs. In 1995, HyComp received a contract from the Advanced Research Projects Agency of the Department of Defense ("ARPA") to study the feasibility of commercializing flip chip technology. In 1996, HyComp received a contract continuation in the amount of $750,000 from the ARPA to set up and operate an adhesive flip chip assembly line. In microelectronic applications, packaging has become a primary focus. As chips approach the limits of on-chip densities, packaging which spaces chips closely becomes key to increasing performance while decreasing size. Flip chip technology gives the highest chip density of any packaging method. Instead of placing chips in space wasting individual packages, they are assembled face down onto matching connections on a substrate or board. Since the connections are under the chip, no additional space is required for bonded wires or leads. Company management believes that adhesive flip-chip has significant potential size, performance and cost advantages for hybrid circuit manufacture. It is expected that the two year ARPA program will make HyComp the only hybrid company experienced in adhesive flip chip assembly, a significant market advantage. Management believes that over the next five years, flip chip will be the microelectronic packaging of choice for high performance circuits. As of June 1997, a prototype production process has been implemented and initial commercial samples have been produced for potential customers. PATENTS AND TRADEMARKS The Company regards its software, hardware and manufacturing processes as proprietary and relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions, including employee and third-party nondisclosure agreements, to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford some limited protection. The laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. The - 44 - 46 Company requires that its employees enter into confidentiality agreements as a condition of employment. COMPETITION The Instrumentation and Test Equipment Sector has numerous competitors with greater technological, financial and marketing resources than those possessed by the Company. The ability of the Company to compete in the Instrumentation and Test product lines is dependent on several factors including price, technology, product performance, service and its ability to attract and retain qualified management and technical personnel. The market for printed circuit boards in the United States is fragmented and very competitive. The Company believes there are over 700 companies producing circuit boards in the United States. XIT competes primarily against other independent manufacturers. There are no dominant manufacturers in the segment of the industry served by XIT. XIT believes that relatively few producers in the United States have the technological competence, manufacturing processes, and facilities to produce complex multi-layer surface mount circuit boards in commercial volumes. The Company also faces competition in this sector from certain captive circuit board manufacturers. These manufacturers may seek orders in the open market to fill excess capacity, thereby increasing price competition. A number of the Company's competitors are larger than the Company and have greater financial, marketing and other resources. The Company believes that competition in circuits manufacturing is based on product quality, technological capability, responsiveness to customers in delivery and service, and price. The Company's Components and Subsystem Assemblies Sector competes in a highly fragmented market composed of a diverse group of U.S. based manufacturers. The Company believes that the primary bases of competition in this market segment are capability, price, manufacturing quality, advanced manufacturing technology, and reliable delivery. The Company believes that by focusing on low to medium-volume production, and by manufacturing subsystems using its inhouse manufactured components, the Company can compete effectively. Additionally, by taking on a wider range of systems than its larger competitors and by having access to a diversified customer base, the Company believes it is able to diversify its workload and is not as dependent as some of its competitors on individual contracts, customers or industries. REGULATION The Federal Communication Commission ("FCC") has adopted regulations with respect to the interconnection of communications equipment with telephone lines and radiation emanations of certain equipment. CXR has complied with these regulations and received all necessary FCC approvals for its line of trunk testing equipment. As additional products require certification, CXR believes it will be able to satisfy all such future requirements. CXR believes it complies with environmental regulations since it assembles, rather than manufactures, - 45 - 47 electronic components and therefore discharges into the environment are believed to be negligible. XIT's product lines are subject to certain federal and state statutes governing safety and environmental protection. XIT believes that it is in substantial compliance with all such regulations and XIT is not aware of any proposed or pending safety or environmental rule or regulation which, if adopted, would have a material impact on its business or financial condition. EMPLOYEES As of August 31, 1997, the Company employed 427 persons. Of these employees, 314 employees are employed in the United States and 113 are employed in Europe and Japan. None of the Company's employees are represented by unions and there have not been any work stoppages at any of the Company's facilities. The Company believes that its relationship with its employees is good. DESCRIPTION OF PROPERTY The Company leases or owns approximately 250,000 square feet of administrative, production, storage and shipping space. All of these facilities are leased other than the Melbourne, UK and Abondant, France facilities. The Ontario facility is owned by Capital Source Partners, a California real estate partnership in which XIT holds a 50% ownership interest.
Business Unit Location Function ------------- -------- -------- Digitran Division (Components and Ontario, Corporate Subsystem Assemblies) California headquarters/ Manufacturing XCEL Circuit Division (Circuits) Monrovia, Administrative/ California Manufacturing XCEL Corp. Ltd. Melbourne, Administrative (Components and Subsystem Assemblies) United Kingdom XCEL Power Supplies Ashford, Administrative/ (Components and subsystem United Manufacturing assemblies) Kingdom
- 46 - 48 XCEL Japan, Ltd. (Components and Higashi- Administrative/ Subsystem Assemblies) Gotanda, Assembly Tokyo, Japan Arnold Circuits (Circuits) La Habra, Administrative/ California Manufacturing HyComp, Inc. (Circuits) Marlborough, Administration/ Massachusetts Manufacturing CXR S.A. (Instrumentation and test Paris, France Administrative equipment) CXR Fremont, Administrative/ (Instrumentation and California Manufacturing test equipment) CXR, S.A. Abondant, Manufacturing (Instrumentation France and Test Equipment)
The lease for the Fremont facility will expire in or about September of 2002, with one five year renewal option. The lease for the Paris, France facility expires in May 1998. The Ontario facility is covered by a lease that expires in September 2000, with options to extend until September 2010. The Monrovia facility is covered by a lease that expires on October 31, 1997, with an option to renew until October 31, 1998. The LaHabra facility is leased from four separate property owners pursuant to leases, each of which terminates in March 2000. Each of these leases may be extended for five years subject to agreement on a minimum monthly rental. The Concord facility is subject to a lease that expires in September 2001, with options to renew until April 2016. The Marlborough facility is subject to a lease which expires in October 2000, and the Tokyo facility is subject to a lease which expires in March 1998. The Ashford facility is subject to a fifteen year lease which expires on September 6, 2011, subject to the right of the Company to terminate the lease after five years, and the rights of the Company or the landlord to terminate the lease after ten years. The Company believes that these facilities are adequate for the current business operations. - 47 - 49 LEGAL PROCEEDINGS In September 1994, Raymond Jacobson, a former officer and director of the Company and a participant in the Company's deferred compensation plan, brought an action against the Company in the California Superior Court, Santa Clara County, alleging that the Company had breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August 1994. The 1993 Agreement superseded a previous deferred compensation agreement dated April 1, 1977 (the "1977 Agreement") which had provided for twice the level of payments. Mr. Jacobson was claiming damages of approximately $1,200,000, which he purported to be the present value of all payments to be made under the 1993 Agreement. In June 1995, the Company paid Mr. Jacobson all amounts past due under the contract plus interest and reinstated the bi-weekly payments, which have continued to date. On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against Mr. Jacobson in the District Court for Galveston County, Texas alleging damages arising from DDC's investment of more than $2,000,000 for the purchase of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr. Jacobson, through his attorney, demanded that the Company indemnify him, hold him harmless and pay for the cost of defense, including reasonable attorney's fees and costs in connection with the litigation instituted against him by DDC. This suit was subsequently dismissed by DDC. On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the Company that he believed that the litigation instituted against him by DDC provided a basis for him to rescind the 1993 Agreement and assert his rights to full payment under the 1977 Agreement. A motion for leave to amend the claim against the Company to include this assertion has been filed with the court. Notwithstanding the above, the Company management and Mr. Jacobson have conducted settlement discussions since June 1996, and the Company believes that an enforceable settlement was reached on January 22, 1997. Mr. Jacobson apparently disclaims this agreement based on the actions noted above. On February 28, 1997 the Company filed a motion for leave to file a cross-claim asserting that the January 22, 1997 agreement supersedes all previous agreements with Mr. Jacobson. A motion for leave to amend the claim against the Company to include this assertion has been filed with the court. A court supervised settlement conference with Mr. Jacobson was held on March 26, 1997. Although a tentative settlement was reached, the settlement was subject to fulfillment of a number of conditions subsequent which did not occur and therefore was not binding on either party. Subsequent thereto, several alternative settlement offers have been proposed by Mr. Jacobson's counsel, none of which are acceptable to the Company. Currently, both the Company's motion for leave to cross-claim and Mr. Jacobson's motion for leave to amend his complaint have been granted, and a trial date has been set for February 9, 1998. - 48 - 50 The Company does not believe that the value of a settlement of the above matter or alternatively a trial judgment will be materially in excess of the amount already recorded by the Company for the deferred compensation arrangement, which approximates $1,000,000 at June 30, 1997. The recorded amount approximates the value of the tentative settlement reached on March 26, 1997. In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of the Company, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by Mr. Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company cannot issue unrestricted shares (absent registration), the Company answered Mr. Scheinfeld's motion and sought to compel him to serve a complaint upon the defendants. On June 30, 1997, the complaint was served. The Company has subsequently answered, denying the material allegations of the complaint, and discovery is proceeding in the case. Although the ultimate outcome of the matters noted above cannot be predicted with certainty, pending actual resolution, in the opinion of management, the disposition of these matters will not have a material adverse affect on the consolidated results of operations, financial position or cash flows. MARKET INFORMATION Since September 11, 1996, the Company's Common Stock has been trading on the NASDAQ SmallCap Market under the symbol MCTL. Prior to that date, the shares of the Company's Common Stock had been listed on the American Stock Exchange under the symbol MOL. Accordingly, the tables below reflect the high and low sales prices for a share of the Company's Common Stock during the period they were listed on the AMEX, and the high and low bid information for the period during which they were listed on the NASDAQ SmallCap Market. The quotations below for dates commencing September 11, 1996 reflect inter-dealer prices, without retail mark-ups, mark-downs or commissions, and may not represent actual transactions. - 49 - 51 On August 15, 1996, the shareholders of the Company ratified a one-for-five reverse stock split effective for holders of record on August 29, 1996. The sales prices below have been restated to give effect to the reverse split.
1997 High Low - ---- ---- --- September 19, 1997 $ 2.1875 $ 2.0625 Second Quarter 2.8125 1.875 First Quarter 3.4375 1.4375 1996 - ---- Fourth Quarter $ 3.25 $ 1.0625 Third Quarter 5.625 3.125 Second Quarter 8.75 4.6875 First Quarter 9.375 5.3125 1995 - ---- Fourth Quarter $ 6.5625 $ 4.0625 Third Quarter 7.50 5.3125 Second Quarter 6.25 3.75 First Quarter 4.375 3.125
(b) Shareholders: As of September 18, 1997, the Company had approximately 3,850 shareholders of record. (c) Dividends: The Company has not declared or paid any cash dividend since its inception. It has been the general policy of the Board of Directors to retain all earnings in the Company to support the expansion and development of new products. SELECTED FINANCIAL DATA The following table summarizes selected consolidated financial data for the Company for the five years ended September 30, 1996; the three month periods ended December 31, 1996 and 1995 respectively and the six month periods ended June 30, 1997 and 1996. The data has been derived from and should be read in conjunction with the Company's Consolidated Financial Statements and Consolidated Condensed Financial Statements and the related Notes thereto. Management's Discussion and Analysis of Financial Condition and Results of Operations for these periods which follows. The financial data as of and for the three month periods ended December 31, 1996 and 1995 and six months ended June 30, 1997 and 1996 are unaudited, but have been prepared on the same basis as the audited Consolidated Financial Statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring accruals, necessary - 50 - 52 for the fair presentation of the data presented. Results of operations for the six months ended June 30, 1997 are not necessarily indicative of results that may be expected for the full year. All amounts are in thousands, except per share data. MicroTel International, Inc. and Subsidiaries Selected Financial Data (in thousands, except per share data)
Six Months Three Months Ended Ended June 30 December 31 Year Ended September 30 ---------------------- ---------------------- ----------------------------------------------------------- 1997 1996 1996 1995 1996 1995 1994 1993 1992 Net sales $19,736 $15,973 $7,887 $6,796 $31,249 $19,602 $14,237 $13,766 $15,993 Net income (Loss) $(2,038) $825 $(889) $151 $1,083 $337 $(672) $1,430 $382 Net income (Loss) $(.24) $.13 $(.15) $.02 $.17 $.07 $(.14) $.33 $.13 per share Total Assets $32,148 $17,193 $20,564 $15,298 $19,613 $15,955 $11,137 $10,716 $10,631 Long Term $4,556 $3,523 $4,343 $2,288 $3,453 $2,358 $740 $762 $4,027 Obligations Stockholders' $12,742 $5,678 $5,062 $4,572 $5,846 $4,464 $3,263 $3,769 $1,245 Equity Shares Outstanding 11,392 5,885 6,063 5,814 6,063 5,814 4,886 4,659 3,004 at Period End
No cash dividends were declared during any of the periods presented. Shares outstanding and net income (loss) per share have been restated to give effect to the recapitalization of XIT Corporation (the accounting acquiror) in the "reverse acquisition" of MicroTel International, Inc. by XIT Corporation on March 26, 1997. As discussed previously, the financial data above is that of XIT Corporation (the "Accounting Acquiror"). In conjunction with the reverse acquisition accounting treatment, XIT changed its fiscal year end from September 30 to December 31 to adopt the fiscal year end of MicroTel International, Inc. The three month period ended December 31, 1996 represents the "transition" period between XIT's year ended September 30, 1996 and the beginning of its new fiscal year, January 1, 1997. - 51 - 53 MICROTEL INTERNATIONAL, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS WHEN USED IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD", "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN THE FOLLOWING SECTIONS BELOW: RESULTS OF ACQUIRED COMPANIES IN THE SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996 UNDER RESULTS OF OPERATIONS-THE COMPANY, LIQUIDITY AND CAPITAL RESOURCES-THE COMPANY, THE THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996 UNDER RESULTS OF OPERATIONS-CXR, OUTLOOK FOR THE COMPANY, AND NEW ACCOUNTING PRONOUNCEMENTS. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. As discussed previously and in the notes to the accompanying consolidated financial statements, the consolidated financial statements presented are those of XIT Corporation because of the reverse acquisition by XIT of MicroTel International, Inc.(the Registrant) and its subsidiaries in a merger on March 26, 1997. The pre-merger company and "accounting acquiree" is described as CXR in the discussion below. XIT Corporation is referred to as "XIT" or "the Company". The Company conducts its operations out of various facilities in the U.S., France, England, and Japan and organizes itself in three product line sectors- Circuits, Components and Subsystem Assemblies, and Instrumentation and Test Equipment. The Circuits Sector operates principally in the Company's U.S. market, the Components Sector operates in its U.S., European and Asian markets, and the Intrumentation and Test Equipment Sector operates principally in its U.S. and European markets. The Components and Subsystems Assembly Sector is referred to as "the Components Sector" in the discussion below for brevity. In conjunction with the merger of XIT and CXR, XIT changed its fiscal year end from September 30 to December 31 to conform to CXR's. Consequently, its financial statements discussed herein are for each of the three years ended September 30, 1996, the three months ended December 31, 1996 (the transition period), and the six months ended June 30, 1997 (its post-change first half). The Company's Instrumentation and Test Equipment Sector business is conducted solely by CXR and therefore its results of operations are not included in the results of operations for the years ended September 30, 1996, 1995 and 1994 or the three months ended December 31, 1996. Due to the relative significance of CXR to the new merged entity, however, a discussion and analysis of its financial condition and results of operations for the two years ended December 31, 1996 and 1995 and the two months and twenty-six days ended March 26, 1997 is included later herein. - 52 - 54 RESULTS OF OPERATIONS-THE COMPANY YEAR ENDED SEPTEMBER 30, 1996 VERSUS YEAR ENDED SEPTEMBER 30, 1995 AND YEAR ENDED SEPTEMBER 30, 1995 VERSUS YEAR ENDED SEPTEMBER 30, 1994 SALES Consolidated net sales grew by $11,647,000 or 59.4% in 1996 over 1995 and by $5,365,000 or 37.7% in 1995 over 1994. The growth in sales was due in large part to the net effects of acquisition and disposition activity during the respective periods. The table below depicts the composition of consolidated net sales by business sector, separately identifying operations which were acquired or disposed of during the three year period ended September 30, 1996.
( in thousands) 1996 1995 1994 ------- ------- ------- Circuits Sector HyComp (acquired 7/6/94) $ 3,027 $ 2,696 $ 752 Arnold Circuits(acquired 8/1/95) 13,586 2,827 Etch-Tek (acquired 5/1/96) 1,648 Other 605 469 318 ------- ------- ------- 18,866 5,992 1,070 Components Sector Computron (disposed of 5/31/95) 2,905 4,273 XCMD (established 5/95) 365 343 Abbott (acquired 9/1/96) 328 Other 11,690 10,362 8,894 ------- ------- ------- 12,383 13,610 13,167 ------- ------- ------- Total Sales $31,249 $19,602 $14,237 ======= ======= =======
Net sales in 1996 for the Circuits Sector increased by $12,874,000 or 214.9% and net sales for the Components Sector declined by $1,227,000 or 9% from the respective sales levels in 1995. The growth in Circuits Sector sales was comprised principally of the incremental sales of $12,407,000 from the inclusion in 1996 of Arnold Circuits' full year results, versus two months in 1995, and five months of operations for Etch-Tek. The remaining growth of $467,000 was comprised of market share gains by HyComp and XCEL Circuits. The sales volume for Arnold Circuits for 1996 of $13,586,000 is lower than that expected by annualizing the two months' sales of $2,827,000 in 1995, due not only to normal seasonal softness in the circuits industry in the last calendar quarter of each year, but also to a significant decline in product demand from its major customer, Motorola. Sales for Arnold Circuits in 1996 declined by approximately $1,008,000 from its sales for the entire year ended September 30, 1995, including the two months its operations were included in the Company's consolidated results. The decline in net sales in 1996 for the Components Sector was the net result of the loss of revenues from Computron, which had sales of $2,905,000 in 1995 prior to its disposal, being partially offset by the incremental sales from the acquisition of Abbott in 1996 of $328,000 and sales gains by the other Sector operations of $1,350,000. The sales gains for the other Sector operations in 1996 were comprised of a) an increase in sales of XCEL- - 53 - 55 Lite display monitors of approximately $1,177,000, principally to the Sector's one major account for this product line, and b) a net improvement in sales for other Sector products of $173,000. The latter improvement was also the combined result of several factors, with a general decline in sales in the Sector's Asian markets due to price competition being more than offset by an increase in sales in the Sector's U.S. and European markets due principally to a favorable product mix shift to higher priced digital switches than those sold in 1995. Net sales in 1995 for the Circuits Sector increased by $4,922,000 or 460% over those in 1994. This growth resulted principally from the incremental sales of $4,771,000 from the inclusion in 1995 of a full year's operations for HyComp, versus three months in 1994, and two months of Arnold Circuits' operations subsequent to its acquisition. Net sales in 1995 for the Components Sector improved by $443,000 or 3.4% over those in 1994, with a decline in revenues from Computron of $1,368,000, which was sold on May 31, 1995, being more than offset by the incremental revenues of the start-up operations of XCMD of $343,000 and gains of $1,468,000 for the remainder of the Sector's operations in all of its geographic markets. The latter gains were comprised principally of an increase in sales of XCEL-Lite display monitors of $1,123,000, as a result of a major new account, and to both improved pricing and market share gains for the Sector's subsystem manufacturing businesses. GROSS PROFIT The composition of consolidated gross profit by business sector and the percentages of related net sales (in parentheses) are as follows for the three years ended September 30, 1996, 1995 and 1994, respectively.
(dollars in thousands) 1996 1995 1994 ---- ---- ---- Circuits Sector $3,570 (18.9%) $1,445 (24.1%) $ 163 (15.2%) Components Sector 4,622 (37.3%) 3,825 (28.1%) 4,051 (30.8%) ------ ------ ------ Total Gross Profit $8,192 (26.2%) $5,270 (26.9%) $4,214 (29.6%) ====== ====== ======
Consolidated gross profit as a percentage of sales declined by .7% from 26.9% in 1995 to 26.2% in 1996, as the effects of a 9.2% improvement in gross profit percentage for the Components Sector was more than offset by the effects of a 5.2% decline for the Circuits Sector due to the Circuits Sector's greater weighting in the consolidated sales mix. The improvement for the Components Sector was the combined result of a) the favorable product mix shift to higher priced (and higher margin) switches noted above under SALES, b) improved absorption of fixed manufacturing costs and material pricing resulting from the increase in sales and production of XCEL-Lite monitors, c) relatively higher margins for products sold by Abbott (acquired in 1996), than those historically achieved for Sector products, and d) the inclusion in 1995 of product sales by Computron, prior to its disposition, at lower margins than the average for the Sector. The decline in gross profit for the Circuits Sector was caused by a) higher costs for Arnold Circuits' product sales due to the underabsorption of fixed manufacturing costs related to declining sales levels and manufacturing inefficiencies from a product mix change to higher technical content circuit boards, and b) relatively lower margins on 1996 Etch-Tek product sales, after its acquisition, than historically achieved by the Sector. - 54 - 56 Consolidated gross profit as a percentage of sales declined by 2.7% from 29.6% in 1994 to 26.9% in 1995, as an increase of 8.9% for the Circuits Sector was outweighed by a 2.7% decline for the Components Sector due to the Components Sector's greater weighting in the consolidated sales mix. The improvement for the Circuits Sector in 1995 versus 1994 was due principally to the inclusion in 1995 of a full year of HyComp's sales and two months of Arnold Circuits' operations, as both of these unit's sales have higher margins than the average achieved by the Sector in 1994. The decline in the Components Sector was due principally to the replacement of lost Computron sales with lower margin XCEL-Lite product sales. OPERATING EXPENSES Operating expenses for the years ended September 30, 1996, 1995 and 1994 were comprised of the following:
( in thousands) 1996 1995 1994 ------ ------ ------ Commissions $1,438 $ 517 $ 149 Other Selling 971 974 1,106 ------ ------ ------ Total Selling Expense 2,409 1,491 1,255 General & Administrative Expense 3,970 3,379 2,831 ------ ------ ------ Total Selling, General & Administrative $6,379 $4,870 $4,086 ====== ====== ====== Engineering, research & development $ 309 $ 328 $ 639 ====== ====== ======
Total selling expense as a percentage of net sales was 7.7%, 7.6% and 8.8% for the years ended September 30, 1996, 1995 and 1994, respectively. Commissions as a percentage of sales increased from 1.1% in 1994 to 2.6% in 1995 and to 4.6% in 1996, as a result of and in direct relation to the increase in Circuits Sector sales during these periods. In contrast to Components Sector sales which are primarily achieved through direct selling, substantially all Circuits Sector sales are made through manufacturer representatives. Other selling expense, which consists of sales and marketing departmental costs, was comparable between 1996 and 1995, with the incremental costs of acquired operations being offset by the elimination of Computron's costs after its disposal in May 1995. The reduction in other selling expense of $132,000 from 1994 to 1995 was the combined result of a) a $104,000 increase in costs representing the net effects of acquired operations and the disposal of Computron on the periods, and b) a $236,000 reduction in costs due to cutbacks in sales administration and direct sales personnel. General and administrative expense increased by $591,000 in 1996 versus 1995, and by $548,000 in 1995 versus 1994. Excluding the incremental effects of acquired operations net of the disposal of Computron of $836,000 and $439,000 in 1996 and 1995, respectively, general and administrative expense declined by $245,000 in 1996 versus 1995, and increased by $109,000 in 1995 versus 1994. The decline in 1996 was the combined result of reversals of accruals of $399,000 related to the favorable disposition in 1996 of certain long-disputed administrative costs, offset by a general increase of $154,000 in administrative expense levels, principally in personnel costs. The increase in 1995 was due to incremental legal fees related to acquisition and disposition activities. Engineering, research and development costs originated solely from the research and product development activities of HyComp in 1996 and 1995 and were relatively comparable between the periods. Such costs in 1994 included - 55 - 57 the activities of a Components Sector project engineering group which was discontinued in that year and product development activities at Computron to develop a lower cost monitor, which were also discontinued in 1994. The costs of these latter activities of $541,000, less the effects of only a partial year of HyComp's research and development activities being included in 1994, resulted in a $311,000 decline in engineering, research and development costs in 1995 versus 1994. OTHER INCOME AND EXPENSE The increase in interest expense of approximately $102,000 in 1996 compared to 1995, and of approximately $67,000 in 1995 compared to 1994, resulted principally from increased average borrowings during the respective periods. Fluctuations in other income(expense),net resulted principally from differences in foreign currency exchange gains and losses incurred during the respective periods. Other income in 1995 also includes as a separate line item the gain on the sale of the Computron Division of $479,783. INCOME TAXES Income taxes are nominal in the respective periods as the Company is in a loss carryforward position for U.S. Federal tax purposes, as well as in most foreign jurisdictions. THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS THREE MONTHS ENDED DECEMBER 31, 1995 EFFECTS OF ACQUISITIONS ON THE THREE MONTHS ENDED DECEMBER 31, 1996 The consolidated results of operations for the three months ended December 31, 1996 include the results of operations of two companies acquired since December 31, 1996. They include the full quarterly results of both Etch-Tek, a manufacturer of printed circuit boards acquired on May 1, 1996, and Abbott, a British manufacturer of power supplies acquired on September 1, 1996. The table below separates the results of the acquired entities from the consolidated totals for the three months ended December 31, 1996 in order to provide a more meaningful basis for a comparative discussion of these results versus the three months ended December 31, 1995. - 56 - 58
( in thousands ) Three Months Ended December 31 1996 1995 -------------------------------------------- ------- Consolidated Acquisitions Comparative ------------ ------------ ----------- Net sales $ 7,887 $ 2,200 $ 5,687 $ 6,796 Cost of sales 6,524 1,668 4,856 5,073 ------- ------- ------- ------- Gross profit 1,363 532 831 1,723 Selling expense (693) (105) (588) (554) General & administrative (1,282) (425) (857) (817) Engineering & product development (68) (68) (76) Interest expense (183) (72) (111) (98) Other income (expense) (12) 1 (13) (27) Income taxes (14) (14) ------- ------- ------- ------- Net income (loss) $ (889) $ (69) $ (820) $ 151 ======= ======= ======= =======
As can be seen from the table, the consolidated results of operations for the three months ended were significantly impacted by the results of the acquired companies. Net sales, gross profit, and operating expenses (selling, general and administrative, and engineering and product development) of these companies represented 27.9%, 39%, and 25.9%, respectively, of the consolidated totals. The table following summarizes by company the incremental results related to the acquired companies for the three months ended December 31, 1996:
(in thousands) Etch-Tek Abbott Total -------- ------ ----- Net sales $ 1,013 $ 1,187 $ 2,200 ------- ------- ------- Gross profit $ 124 $ 408 $ 532 Operating expenses (182) (348) (530) Other income (expense) 1 1 Interest expense (16) (56) (72) ------- ------- ------- Net income(loss) $ (73) $ 4 $ (69) ======= ======= =======
COMPARATIVE RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1996 VERSUS THREE MONTHS ENDED DECEMBER 31, 1995 The following discussion relates to the comparison of the results of operations for the three months ended December 31, 1996, excluding the results of the acquired companies, to the results for the same period of the prior year (see the first table above under EFFECTS OF ACQUISITIONS ON THE THREE MONTHS ENDED DECEMBER 31, 1996). Net sales for the three months ended December 31, 1996 declined by $1,109,000 or 16.3% from those in the same period of the prior year. The decline was principally in the Components Sector, whose sales were down by $1,183,000 or 37%. Approximately $640,000 of the decline in the Sector's sales was due to the loss of a major account for display monitors, and the remaining decline - 57 - 59 resulted principally from the timing of orders from a significant subsystem assembly customer. Gross profit, as a percentage of sales, declined from 25.4% in the three months ended December 31, 1995 to 14.6% for the three months ended December 31, 1996. This decline was the combined result of (a) the lower sales volume for the Components Sector noted above and the consequential decline in absorption of fixed manufacturing costs and (b) manufacturing inefficiencies incurred by the Circuits Sector because of a product mix change to higher technical content circuit boards. Operating expenses (selling, general and administrative, and engineering and product development) increased by $66,000 in total from $1,447,000 in the three months ended December 31, 1995 to $1,513,000 in the three months ended December 31, 1996. Selling expense, as a percentage of sales, was 10.8% in 1996 versus 9.4% in 1995. Selling expense consists principally of commissions for Circuits Sector sales and fixed departmental costs for Components Sector sales. The increase in percentage in 1996 is consequently due to the decline in sales for the Components Sector noted above. General and administrative and engineering and product development expenses were relatively comparable between the periods. The apparent flat level of general and administrative expenses, however, was the combined result of the positive effects in 1996 of the streamlining of the administrative structure in the Circuits Sector being offset by the inclusion in 1995 of a reversal of an accrual of $176,000 related to the favorable disposition of certain long-disputed administrative costs. Interest expense increased by only $13,000, as a result of significantly higher average borrowings in 1996 being mitigated by lower interest rates due to the refinancing of the Company's bank facilities in January 1996. Other income (expense) is principally comprised of foreign currency exchange gains and losses incurred during the respective periods, and in 1996, includes equity in the loss of a real estate partnership of $13,000. Income taxes are nominal in the respective periods as the Company is in a loss carryforward position for Federal income tax purposes. SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996 EFFECTS OF ACQUISITIONS ON THE SIX MONTHS ENDED JUNE 30, 1997 The consolidated results of operations for the six months ended June 30, 1997 include the full or partial results of operations of two companies acquired since June 30, 1996. They include the full results of Abbott and the results of CXR since its acquisition on March 26, 1997. The table below separates the results of the acquired entities from the consolidated totals ("the comparative results") for the six months ended June 30, 1997 in order to provide a more meaningful basis for a comparative discussion of these results with that of the prior year periods. - 58 - 60
( in thousands ) Six Months Ended June 30 ------------------------ 1997 1996 -------------------------------------------- -------- Consolidated Acquisitions Comparative ------------ ------------ ----------- Net sales $ 19,736 $ 7,311 $ 12,425 $ 15,973 Cost of sales 14,972 4,231 10,741 11,541 -------- -------- -------- -------- Gross profit 4,764 3,080 1,684 4,432 Selling expense (2,174) (1,009) (1,165) (1,207) General & administrative (3,381) (1,187) (2,194) (2,048) Engineering & product development (792) (667) (125) (157) Interest expense (460) (125) (335) (244) Other income (expense) 7 (11) 18 81 Income taxes (2) 6 (8) (32) -------- -------- -------- -------- Net income (loss) $ (2,038) $ 87 $ (2,125) $ 825 ======== ======== ======== ========
Additionally, the Company acquired Etch-Tek, Inc.("Etch-Tek"), a manufacturer of printed circuit boards on May 1, 1996. The effects of the inclusion of its results of operations for only the two months ended June 30, 1996 in the comparative prior periods is discussed in explanation of the fluctuations in the comparative results from the related prior period. COMPARATIVE RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 VERSUS SIX MONTHS ENDED JUNE 30, 1996 The following discussion relates to the comparison of the results of operations for the six months ended June 30, 1997, excluding the results of the acquired companies, to the results for the same period of the prior year. Net sales for the six months ended June 30, 1997 declined by $3,548,000 or 22.2% from those in the same period of the prior year. This decline was comprised of lower net sales for the Company's Circuits and Components Sectors of $1,688,000 and $1,860,000, respectively. The decrease for the first half of 1997 in the Circuits Sector was comprised of a) an increase in Sector sales of $377,000 due to the inclusion of Etch-Tek's operations for the entire second quarter in 1997 versus two months in the 1996 second quarter subsequent to its acquisition on May 1, 1996, and b) a decline in sales for the remainder of the Sector of $2,065,000. This latter decline was due principally to lower demand from the major customer of the group, Motorola. Lower demand in the first quarter of 1997 was based on reduced customer requirements and the effects on the Sector were compounded by an inability to ship the lower level of orders received as a result of material sourcing problems. Due to strained trade credit and lack of available borrowing in the first quarter of 1997, this Sector was unable to procure all the materials needed in time to ship all of its sales orders to Motorola in accord with related delivery requirements. Although management believes customer requirements increased in the second quarter of 1997, the Sector continued to experience lower demand due to order cutbacks by Motorola precipitated by the previous shipment performance problems. The decrease in the Components Sector was due to a) the loss in July 1996 of a major account for display monitors, b) a significant digital switch program in place in the first two quarters of 1996 which did not repeat in 1997, and c) a general decline in sector product sales, which accelerated in the second quarter of 1997, due to the aging of related customer programs. Gross profit, as a percentage of sales, declined from 27.7% in the first six months of 1996 to 13.6 % for the first six months of 1997. This decline was - 59 - 61 due primarily to the lower sales volume noted above and the consequential decline in absorption of the Company's fixed manufacturing costs, and secondarily to higher than average margins on the 1996 digital switch program that did not repeat in 1997. Operating expenses (selling, general and administrative, and engineering and product development) increased by only $72,000 in total from $3,412,000 in the first half of 1996 to $3,484,000 in the first half of 1997. Selling expenses as a percentage of sales increased from 7.6% in 1996 to 9.4% in 1997, although they include a significant commissions component and are therefore largely variable. The increase was due to a higher mix of house account to manufacturer's representative sales, principally in the second quarter of 1996 versus the second quarter of 1997, and to the effects on the 1997 percentage of spreading fixed departmental costs over the lower sales volume for the first half. General and administrative expenses increased by $146,000 or 7.1% in 1997 over 1996 as the positive effects of the streamlining of the administrative structure in the Circuits Sector in the second half of 1996, which approximated $247,000 for the first six months of 1997, were more than outweighed by higher corporate administrative costs. The latter corporate cost increases relate principally to incremental legal fees associated with public reporting and integration matters following and resulting from the merger of XIT and the Company, and secondarily to higher personnel costs and the implementation of a new computer system in 1997. Engineering and product development expenses declined by $32,000 from 1996 to 1997 due principally to an increase in the amount of such costs billable to specific contracts. Interest expense increased by $91,000 in the first six months of 1997 versus the first six months of 1996 principally reflecting higher average borrowings during the second quarter of the respective periods. Other income (expense) is principally comprised of foreign currency exchange gains and losses incurred during the respective periods. Income taxes are nominal in the respective periods as the Company is in a loss carryforward position for Federal income tax purposes. RESULTS OF ACQUIRED COMPANIES The table following summarizes by company the incremental results related to the acquired companies for the six months ended June 30, 1997:
( in thousands ) Abbott CXR Total ------ --- ----- Net sales $ 2,153 $ 5,158 $ 7,311 ======= ======= ======= Gross profit $ 857 $ 2,223 3080 ======= ======= ======= Operating expenses (689) (2174) (2863) Other expenses (94) (36) (130) ======= ======= ======= Net income (loss) $ 74 $ 13 $ 87 ======= ======= =======
Abbott's results of operations for the six months ended June 30, 1997 are reasonably comparable to those achieved in the six months ended June 30, 1996 prior to its acquisition by the Company. During 1996 and continuing through the second quarter of 1997, domestic sales for CXR were negatively impacted by delays in buying by its principal - 60 - 62 customers, as a result of the consolidation and/or restructuring of these companies in the wake of the passage of the Telecommunications Bill of 1996, and European sales were negatively impacted by a decline in sales to France Telecom during its pre-privatization reorganization and a generally weak French economy. Additionally, sales for both operating subsidiaries have been negatively impacted by the rapid obsolescence of the analog-based components of their product lines, particularly older transmission products; and further, both sales and margins have been impacted by extreme price competition for transmission products in general. CXR's results of operations above consist of the three months and five days ended June 30, 1997 subsequent to its acquisition on March 26, 1997. In addition to CXR's results of operations for the second quarter of 1997 discussed previously, CXR results above include net earnings of $105,000 on net sales of $500,000 for the five day period ended March 31, 1997, including amortization of goodwill originating in the merger of $5,000. For the entire three months ended March 31, 1997, however, CXR incurred a net loss of $(1,909,000) on net sales of $3,496,000. Included in these quarterly results prior to March 26, 1997, CXR incurred certain significant unusual charges totalling $749,000. Even considering these charges, CXR's results for the first quarter of 1997 exhibited a significant deterioration from the first quarter of 1996, in which it incurred a net loss of $715,000 on net sales of $4,134,000. This deterioration resulted from the continuing and worsening impact on CXR of the industry and economic factors noted above. (See the Discussion and Analysis of Financial Condition and Results of Operations of CXR following for additional commentary on its results for the first quarter of 1997.) In the second quarter of 1997, CXR's results of operations have, however, improved from those of its prior year quarter and significantly from those of its first quarter of 1997. It incurred a loss from operations (gross profit less operating expenses) for the three months ended June 30, 1997 of $56,000 on net sales of $4,658,000 versus a loss from operations of $201,000 on net sales of $3,960,000 in the comparable prior year quarter. The results for the 1997 quarter also included $83,000 of amortization of the goodwill originating in the merger with XIT Corporation. Although revenues for CXR Telcom, CXR's U.S. operating subsidiary, remained flat between the respective second quarters of 1996 and 1997, its gross profit improved in 1997 contributing to CXR's improvement in results. CXR Telcom's margins were favorably impacted by initial shipments of a high margin product on an order received from AT&T in April 1997 and also to the positive effects of personnel cutbacks made in the first quarter of 1997. Of the total AT&T order of $2,340,000, CXR Telcom shipped approximately $241,000 in the second quarter. It is expected that the remainder of the order will be shipped in the fourth quarter of 1997. To overcome the negative factors impacting CXR S.A., CXR's European operation, it has implemented several changes to its business strategy. It has introduced a new line of ISDN Terminal Adapters to its transmission product line, diversified its test equipment offerings, begun a new business unit which provides networking solutions to the business user utilizing O.E.M. products, and refocused its marketing to expand its markets outside of France, including the establishment of a subsidiary in England. The revenue improvement for CXR S.A. in the second quarter of 1997 over the prior year are the result of these efforts, with the profit on the increased volume also contributing to the reduction in the 1997 operating loss from that incurred in 1996. - 61 - 63 Combining the results of operations for its first two quarters in 1997, CXR incurred a net loss of $2,001,000 on net sales of $8,154,000 for the six months ended June 30, 1997 versus a net loss of $812,000 on net sales of $8,094,000 in the first half of 1996. Although not necessarily indicative of the results that would have occurred or of results which may occur in the future, Note 2 to the consolidated condensed financial statements for the six months ended June 30, 1997 presents summary pro forma results as if the merger had taken place at the beginning of 1997. LIQUIDITY AND CAPITAL RESOURCES-THE COMPANY Cash provided by operations was approximately $793,000, $282,000 and $908,000 for the years ended September 30, 1996, 1995 and 1994, respectively. The principal non-cash item contributing to these cash flows is depreciation and amortization which was approximately $589,000, $278,000 and $212,000 in 1996, 1995 and 1994, respectively, with the increasing trend due principally to acquired operations. The increase in cash provided by operations of $511,000 in 1996 versus 1995 was due principally to the positive effects of the improvement in results of operations, the increase in depreciation and amortization, and the inclusion in 1995 of the non-cash gain on the sale of Computron, offset by a decrease in accrued expenses in 1996 related principally to the accrual reversals discussed above under Results of Operations. Cash provided by operations in 1995 decreased by $626,000 from 1994, although results of operations improved. This was due to the non-cash gain on Computron in 1995, and to a greater extent, a decline in 1994 of the level of accounts receivable at year-end caused by a significant decline in sales by Computron and XCEL Japan in the fourth quarter of that year versus the comparable period of the prior year. Cash of $660,000 was used in operations in the three months ended December 31, 1996 versus cash of $197,000 being provided by operations in the same period of 1995. The increase in cash use was caused by the decline in results of operations, coupled with changes in working capital management during the respective periods. During the three months ended December 31, 1995, the Company had reduced inventory levels and elongated its payables cycle due to cash flow constraints. During the three months ended December 31, 1996 and again due to cash flow difficulties, the Company also reduced its inventory levels and its payables generally aged, but it borrowed $225,000 from a related party to bring certain vendors more current to insure availability of material supply for pending orders. Cash of $2,766,000 was used in operations in the first half of 1997 versus cash of $374,000 being provided by operations in the first half of 1996. The increase in cash use was caused by the decline in results of operations, coupled with changes in working capital management during the respective periods. In the first half of 1996, the Company had refinanced its bank borrowings on more favorable terms and had obtained a $750,000 bank term loan secured by the assets of Etch-Tek, acquired on May 1, 1996. The net proceeds of these borrowings were used principally for the cash consideration paid for the Etch-Tek acquisition and to pay down older accounts payable. Subsequently in the first half of 1996, the Company used the trade credit availability from - 62 - 64 paying down the accounts payable to fund the increase in accounts receivable and inventories accompanying the growth during the period. In the first quarter of 1997, the Company reduced its inventory levels and elongated its payables cycle due to lack of available borrowings. In the second quarter of 1997, the Company further reduced its inventories to respond to the decline in business volume and used a portion of the proceeds of the Yorkton private placement (discussed below) to pay down the aging payables and to repay its related party borrowings. The increase in accounts receivable which resulted principally from CXR's increased business volume in the second quarter was also financed by the proceeds of the private placement. In the third quarter of 1997, the Company reborrowed $100,000 from the above noted related party to assist in financing the production of accelerating orders from Motorola. Cash used for the acquisitions of Arnold Circuits in 1995 and Etch-Tek in 1996 was obtained from additional bank borrowings, collaterallized by their assets, and the acquisition of Abbott in 1996 was financed by cash from operations. Proceeds from the sale of Computron were used principally to retire bank debt. The Company's investment in and loan to a real estate partnership in December 1996 (see Note 5 to the Consolidated Condensed Financial Statements for the Three Months Ended December 31, 1996 and 1995) was financed by a $100,000 loan from its partner as to the investment and a bank loan of $750,000 as to the loan to the partnership. Capital expenditures were approximately $23,000, $155,000, $786,000, $94,000 and $165,000 in the first half of 1997, the three months ended December 31, 1996, and the fiscal years ended September 30, 1996, 1995 and 1994, respectively, with the substantial increase in fiscal 1996 and the three months ended December 31, 1996 due principally to purchases by the capital intensive Circuits Sector. There are currently no formal commitments for future capital expenditures, however, planned expenditures, again principally for the Circuits Sector, approximate $800,000. All of the Company's banking facilities are asset-based borrowing arrangements, with substantially all availability borrowed at any given time. Further, as discussed in Note 4 to the consolidated condensed financial statements for the six months ended June 30, 1997, the bank lines of credit for both XIT Corporation and one of its subsidiaries were to expire under current extension arrangements on August 30, 1997. The lines of credit were renewed on August 11, 1997 with more favorable advance rates against related collateralized assets and with less restrictive financial covenants, with which XIT Corporation and its subsidiary are in compliance. Based on the collateral base as of the renewal date, the new terms provided approximately $473,000 in additional available borrowings. On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company were $4,258,000. The Units were issued to European institutional investors pursuant to the exemption afforded by Regulation S under the Securities Act of 1933, as amended. The offering, which was structured to - 63 - 65 accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 is contracted or ii) the currently extended termination date of May 31, 1997. The offering expired on May 31, 1997 with no additional closings. The proceeds of the closing of the Yorkton private placement have alleviated the most immediate cash flow problems of the Company, however management believes that future cash flows from operations for the next twelve months may need to be supplemented to support its future working needs and will definitely need to be supplemented for planned business development and acquisition activities. Management is actively seeking additional funds through an additional private placement of debt or equity securities. There can be no assurance, however, that alternative financing will be available, or if available, that it will be on terms favorable to the Company. There are two significant legal proceedings pending against the Company (see Note 5 to the Consolidated Condensed Financial Statements for the Three and Six Months ended June 30, 1997 and 1996). Management believes that the outcome of these pending litigations will not have a material adverse effect on the results of operations or financial position of the Company. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CXR As discussed previously, the merger of XIT and CXR has been accounted for as a purchase of CXR by XIT in a "reverse acquisition" because the existing shareholders of CXR prior to the merger will not have voting control of the combined entity. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company, the Company, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. Therefore, the Consolidated Financial Statements and Consolidated Condensed Financial Statements discussed below will not appear in future filings of the Company. Rather, the separate financial statements of XIT for periods prior to the merger will be included in future financial reports of the Company. The financial statements of CXR discussed below are referred to as "Pre-Merger" financial statements. The Pre-Merger Consolidated Financial Statements and the Pre-Merger Consolidated Condensed Financial Statements are the Consolidated Financial Statements for MicroTel International, Inc. (Pre-merger) for the Years Ended December 31, 1996 and 1995, the Six Months Ended December 31, 1994, and the Year Ended June 30, 1994 and the Consolidated Condensed Financial Statements for MicroTel International, Inc. (Pre-merger) for the Two Months and Twenty-six Days Ended March 26, 1997, respectively, included in the Financial Statement section of this Prospectus. RESULTS OF OPERATIONS-CXR As revenues for CXR have historically been higher towards the end of each quarter due to the buying patterns of its principal customers, results of operations for the two months and twenty-six days ended March 26, 1997 are not considered representative of its quarterly results. Therefore, CXR's results of operations for the three months ended March 31, 1997 are presented - 64 - 66 below for comparison to the first quarter of 1996. For the two months and twenty-six days ended March 26, 1997, CXR incurred a net loss of $2,014,000 or $.66 per share on net sales of $2,996,000. The condensed consolidated statements of operations data below include financial data derived for the three months ended March 31, l997 and 1996 from the financial records of CXR, and for the years ended December 31, 1996 and 1995, from the Pre-Merger Consolidated Financial Statements. The data for the three months ended March 31, 1997 is comprised of the results of operations included in the Pre-Merger Consolidated Condensed Financial Statements combined with the five days of operations included in the post-merger consolidated results of operations of XIT and CXR. The weighted average number of shares outstanding used in the net loss per share computation for the quarter ended March 31, 1997 does not include the shares issued in conjunction with the merger on March 26, 1997. Consolidated statements of operations data (in thousands, except per share amounts):
Quarter Ended Year Ended March 31, December 3l, (Unaudited) 1997 1996 1996 1995 -------- -------- -------- -------- Sales $ 3,496 $ 4,134 $ 16,303 $ 18,352 -------- -------- -------- -------- Cost of Sales 2,663 2,527 10,819 11,322 Engineering and Product Development 552 543 1,817 1,674 Marketing and Selling 896 1,038 3,715 3,928 Administration 1,172 793 3,115 2,211 Severance & Related Settlement Costs 78 1,567 Other (Income) Expense - Net 38 (52) (48) 35 -------- -------- -------- -------- 5,399 4,849 20,985 19,170 -------- -------- -------- -------- Loss before Income Tax (Benefit) (1,903) (715) (4,682) (818) Income Tax (Benefit) 6 (85) (151) -------- -------- -------- -------- Net Loss $ (1,909) $ (715) $ (4,597) $ (667) ======== ======== ======== ======== loss per Share $ (.63) $ (.26) $ (1.65) $ (.25) ======== ======== ======== ======== Weighted Average Number of Shares Outstanding 3,038 2,763 2,783 2,678 ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995 OVERVIEW CXR incurred a net loss of $4,597,000 in 1996 versus a net loss of $667,000 in 1995 and net sales declined by 11% in 1996 from those in 1995. The loss in 1996 included significant fourth quarter charges totaling $3,048,000 as described below. - 65 - 67 SIGNIFICANT FOURTH QUARTER 1996 ADJUSTMENTS In the fourth quarter of 1996, CXR incurred severance and related settlement costs totaling $1,567,000 related to the resignation of its Chairman and settlement with its principal shareholder in anticipation of the merger with XIT (see Note 2 to the Pre-Merger Consolidated Financial Statements). CXR also reduced the carrying value of certain inventory and capitalized software development costs by $376,000 and $630,000, respectively, to their net realizable value. These write-downs, charged to cost of sales, resulted from CXR's reassessment of the anticipated continuing near-term impact of industry and economic factors which effected its 1996 operations. Net realizable value was based on estimated undiscounted future cash flows from the related assets. As discussed previously, sales for CXR Telcom have been negatively impacted by delays in buying by its principal customers, as a result of the consolidation and/or restructuring of these companies in the wake of the passage of the Telecommunications Bill of 1996; and sales for CXR SA have been impacted by a decline in sales to France Telecom during its pre-privatization reorganization and a generally weak French economy. Additionally, sales for both operating subsidiaries have been negatively impacted by the rapid obsolescence of the analog-based components of their product lines, particularly older transmission products; and further, both sales and margins have been impacted by extreme price competition for transmission products in general. Additionally, CXR recorded estimated litigation settlement costs totaling $475,000, comprised of expected incremental costs of $344,000 to settle a dispute regarding a former officer's deferred compensation agreement and $131,000 for a contingent payment related to a price guarantee in a stock based settlement of another dispute reached in the fourth quarter of 1996. These estimated costs are included in administrative expenses in the related Pre-Merger Consolidated Financial Statements. SALES Consolidated sales for the years ended December 31, 1996 and 1995 were comprised of the following for CXR Telcom and CXR S.A.(in thousands):
1996 l995 ---- ---- CXR Telcom $ 6,825 $ 8,255 CXR S.A. 9,478 10,097 ------- ------- $16,303 $18,352 ======= =======
Consolidated sales for 1996 declined by $2,049,000 or 11% from those in 1995, comprised of declines for CXR Telcom and CXR S.A. of $1,430,000 or 17% and $619,000 or 6%, respectively. These overall declines were caused by the factors discussed above under SIGNIFICANT FOURTH QUARTER 1996 ADJUSTMENTS. Lower transmission product sales accounted for all of CXR Telcom's decline, while a decline in transmission product sales of $2,658,000 for CXR S.A. was substantially mitigated by increased revenues from its new network systems business unit. - 66 - 68 GROSS PROFIT Consolidated gross profit and its percentage of sales for the years ended December 31, 1996 and 1995 was $5,484,000 or 34% and $7,030,000 or 38%, respectively. Gross profit for 1996 was impacted by the write-downs described above under SIGNIFICANT FOURTH QUARTER 1996 ADJUSTMENTS. Excluding the effects of the write-downs totaling $1,006,000, the gross profit percentage for 1996 would have been 40%. The improvement of this adjusted margin percentage over that of 1995 was due to improved margins on upgraded test instrument product offerings by CXR Telcom more than compensating for the decline in margins on transmission product sales and the relatively lower margins achieved on CXR S.A.'s new network systems sales than those historically achieved from transmission product sales that they have replaced. EXPENSES Engineering and product development costs for the years ended December 31, 1996 and 1995 are as follows (in thousands):
Period Total Cost Capitalized Software Net Expense - ------ ---------- -------------------- ----------- 1996 $2,612 $795 $1,817 1995 2,373 699 1,674
Engineering and product development costs relate to both the development and maintenance of CXR's product lines. Current development efforts are directed primarily toward enhancements to the current test instrument product line and development of increased bandwidth (faster speed) transmission products. The level of engineering and product development expenditures has remained relatively constant over the two year period ended December 31, 1996, with the capitalization of software development costs varying by year depending on the mix of product development versus product maintenance efforts. Marketing and selling costs in relation to sales increased to 23% in 1996 from 21% in 1995. The increase in 1996 over 1995 is due principally to the decline in sales levels, with approximately the same level of fixed departmental expenses. Administrative expenses increased by $904,000 in 1996 over 1995. In addition to the estimated litigation settlement costs of $475,000 discussed above under SIGNIFICANT FOURTH QUARTER 1996 ADJUSTMENTS, 1996 costs reflect increased legal fees related to litigations and general corporate matters, increased business development efforts, and increased personnel costs. - 67 - 69 OTHER INCOME AND EXPENSE Other (income) expense is comprised of the following for the years ended December 31, 1996 and 1995 (in thousands):
1996 1995 ----- ----- Interest income $(371) $(117) Interest expense 319 164 Other 4 (12) ----- ----- $ (48) $ 35 ===== =====
Interest income in 1996 and 1995 was comprised principally of interest and/or extension fees of $350,000 and $107,000, respectively, on the promissory note taken in payment of the stock subscription from Elk International Corporation Ltd. (see Note 2 to the Pre-Merger Consolidated Financial Statements). Interest expense is comprised principally of interest related to deferred compensation liabilities and to short-term borrowings. Fluctuations between the periods is related primarily to the level of borrowings during the respective periods. "Other" (income) expense relates principally to foreign currency exchange gains and losses. INCOME TAXES The income tax benefit for 1996 and 1995 are due to recovery of prior year taxes in France resulting from research tax credits. CXR has gross deferred tax assets of $9,841,000 and $8,017,000 at December 31, 1996 and 1995, respectively. The most substantial portion of the gross deferred tax assets represent the future benefits of net operating loss carryforwards which expire as detailed in Note 7 to the Pre-Merger Consolidated Financial Statements. A valuation allowance has been provided to reduce recorded total possible future tax benefits to zero as CXR's recent history of operating losses does not support a judgment that the deferred tax assets are more likely than not to be realized in the future. Consequently, no tax benefits were recognized for CXR's domestic and foreign operating losses during the periods presented. Tax benefits will be recognized the earlier of when realized in future periods or when future profitability of CXR appears sufficiently probable that it appears more likely than not that the benefits will be realized. Further, the gross deferred tax assets will decline significantly in 1997 as a result of restrictions on the use of the net operating loss carryforwards arising from the ownership change for tax purposes accompanying the merger with XIT. THREE MONTHS ENDED MARCH 31, 1997 VERSUS THREE MONTHS ENDED MARCH 31, 1996 During the three months ended March 31, 1997, CXR's results of operations were significantly effected by certain significant charges as follows: Stock-based compensation $462,000 Write-down of assets 209,000 Severance costs 78,000 -------- $749,000 ========
- 68 - 70 The stock-based compensation is comprised of restricted stock grants to certain officers and directors whose corporate capacities would terminate or change at the date of the merger with XIT. The write-down of assets consists of reductions of $97,000 and $112,000 in the carrying value of certain inventory and capitalized software development costs, respectively, to their net realizable value. These write-downs were charged to cost of sales and net realizable value was based on estimated undiscounted future cash flows from the related assets. The severance costs relate to personnel cutbacks at both CXR Telcom and CXR S.A. Both the write-downs and the cutbacks resulted from CXR's reassessment of the anticipated near-term impact of the adverse industry and economic factors discussed previously for the year ended December 31, 1996, which continue to effect the Company's operations. Although the Company believes based on its current assessment that the write-downs are adequate, no assurance can be given should actual business conditions deteriorate. Consolidated sales and gross margins for the quarters ended March 31, 1997 and 1996, respectively, were comprised of the following results for CXR Telcom and CXR S.A. (in thousands):
1997 1996 ------ ------ Sales CXR Telcom $ 761 $1,796 CXR S.A 2,735 2,338 ------ ------ Total $3,496 $4,134 ====== ====== Gross Margins CXR Telcom $ (152) $ 645 CXR S.A 985 962 ------ ------ Total $ 833 $1,607 ====== ======
Consolidated sales for the three months ended March 31, 1997 declined by $638,000 or 15% as compared to the first quarter of l996. A severe decline in CXR Telcom's sales of $1,025,000 was partially offset by an increase in sales for CXR S.A. of $397,000. The decline in sales for CXR Telcom resulted from the continuing and worsening impact of the industry and economic factors discussed previously for the year ended December 31, 1996. CXR S.A.'s improvement is the result of growth in its new networking business unit (begun in 1996) and in test equipment sales, due to new product introductions, outpacing the continuing decline in transmission product sales caused by the factors discussed previously. Consolidated gross margins declined from 39% in the three months ended March 31,1996 to 24% in the first quarter of 1997. Excluding the effects of the asset write-downs noted above, the gross profit percentage for 1997 would have been 30%. The write-downs effected only CXR Telcom and excluding their impact, its margins declined from 36% in 1996 to (20)% in 1997. This decline resulted principally from the underabsorption of fixed manufacturing costs due to the decline in sales volume. CXR's margins also declined, from 41% in 1996 to 36% in 1997. This decline was due to the combined result of the continuing pricing pressures in the transmission product market and to relatively lower margins achieved on sales in its growing businesses, test equipment - 69 - 71 and networking, than historically achieved on the transmission product sales that they are replacing. The latter effect results from the growth in test equipment and networking sales relating to O.E.M. product sales versus higher margin manufactured transmission products. Net engineering and product development costs decreased were comparable between the respective quarters of 1997 and 1996. Gross engineering and product development costs, prior to capitalization of software development costs, were also comparable at $669,000 and $652,000 for the three months ended March 31, 1997 and 1996, respectively. Selling and marketing costs, which are largely variable due to a significant commissions component, were comparable as a percentage of sales at 26% in 1997 and 25% in 1996. Administrative expenses increased by $379,000 due principally to the stock-based compensation costs incurred in 1997, as discussed above. Other (income) expense is comprised of the following for the quarters ended March 31, 1997 and 1996 (in thousands):
1997 1996 ---- ---- Interest income $(88) Interest expense $ 47 66 Other (9) (30) ---- ---- $ 38 $(52) ==== ====
Interest income in the first quarter of 1996 related to interest and/or extension fees on the promissory note taken in payment of the stock subscription from Elk International Corporation Ltd., which note was discharged in settlement in the fourth quarter of 1996. Interest expense declined by $19,000 in the first quarter of 1997 compared to the first quarter of 1996 due to lower average borrowings during the current quarter. Other income is comprised principally of net foreign currency exchange gains and losses. LIQUIDITY AND CAPITAL RESOURCES-CXR Cash provided by operations was $687,000 for the two months and twenty-six days ended March 26, 1997 compared to cash used in operations of $201,000 for the year ended December 31,1996 and cash provided by operations of $145,000 for the year ended December 31,1995. CXR had $190,000, $519,000 and $540,000 in depreciation and amortization expense which did not require cash outlay for the two months and twenty-six days ended March 26, 1997 and for the years ended December 31, l996 and 1995, respectively. In addition, during the two months and twenty-six days ended March 26, 1997, CXR incurred non-cash charges totaling $755,000, including $749,000 related to stock-based compensation and certain asset write-downs and severance accruals as discussed above. In the 1996 year, CXR incurred non-cash charges totaling $2,760,000, including $2,573,000 related to stock based costs of severance and related settlements and certain asset write-downs as discussed above, as well as certain other stock-based payments of expenses. The remaining fluctuations in cash provided (used) in operations between the periods relates principally to the changes in operating results, changes in working capital elements arising from business levels immediately preceding the respective period ends, and to the collection in the two months - 70 - 72 and twenty-six days ended March 26, 1997 of approximately $592,000 of a foreign tax receivable. CXR's cash uses during 1996 were financed through short-term bank borrowings, the proceeds from the exercise of warrants and options on the Company's common stock, and the collection of approximately $380,000 of the stock subscription by Elk International Corporation Limited. During the two months and twenty-six days ended March 26, 1997, CXR supplemented cash flows from operations, which continue to be depressed for CXR Telecom in the U.S., with a $500,000 loan from an officer. At December 31, 1996 and March 26, 1997, CXR had no significant commitments for future capital expenditures. On February 20, 1997, CXR accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. On April 14, 1997 subsequent to CXR's merger with XIT, a closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company were $4,258,000. Refer to the previous LIQUIDITY AND CAPITAL RESOURCES - THE COMPANY of this Management's Discussion and Analysis and the OUTLOOK section following for additional information concerning the liquidity and capital resources of and prospects for CXR in the context of the new merged entity. EFFECTS OF INFLATION The impact of inflation and changing prices has not been significant on the financial condition or results of operations of either the Company or CXR. OUTLOOK FOR THE COMPANY In the Circuits Sector, the Company's delivery performance has improved and sales demand for product from Motorola has increased in the subsequent period, although still not to historical levels. Further, sales efforts for the Sector have been intensified, with initial success, to both increase sales volume and to dilute the Sector's concentration in and consequential dependence on Motorola. The Company has also implemented yield improvement measures, reductions in overtime and outsourcing, and improved cost controls in the Sector's operations. Further, the Sector has obtained higher pricing in the subsequent period for certain digital products sold to Motorola as expiring contracts are renewed and will continue to seek price increases as current contracts are renewed. There can be no assurance, however, that the Sector will retain business that comes up for renewal. The combination of the above factors and the positive effects of anticipated increased volume on absorption of fixed manufacturing costs is expected to improve gross profit margins in the future. In the Components Sector, the Company is in the process of qualifying itself and its products with new prospective customers for display monitors. If obtained, revenues from such customers should replace the loss in revenue which resulted from the loss of the major display monitor account in 1996. - 71 - 73 Additionally, it is actively seeking new programs with existing customers and new accounts to replace the decline in revenues related to the aging of its current customers' programs. In August 1997, the Sector implemented a partial layoff of both administrative and factory personnel, pending an increase in business volume. Estimated quarterly savings in personnel costs related to these layoffs is $165,000. In the Test Equipment Sector, the negative impact of the reorganizations of the Sector's domestic customers continues, but is believed to be a temporary phenomenon. The industry repositioning is expected to result in growth as the changed entities emerge and the long distance carriers vie for the local loop business of the RBOC's and as the RBOC's compete for long distance services. Final implementation guidance on the deregulation provided for in the Telecommunications Bill of 1996 was released in late August 1996 by the federal government, allowing the local and long distance telephone companies to begin entering each others' markets. CXR Telcom has been working with its customers to prepare for their future needs in the expansion of their markets. The first major order received in support of such expansion was the previously discussed $2,340,000 order from AT&T for equipment to support AT&T's expansion into the local markets. In the fourth quarter of 1996 and in the first quarter of 1997 prior to the merger, CXR reduced the carrying value of certain inventory and capitalized software by $1,006,000 and $209,000, respectively. These write-downs resulted from its reassessments of the anticipated continuing near-term impact of the industry and economic factors noted previously on asset realizability. Although, the Company believes based on its current assessment that the write-downs are adequate, there can be no assurance that further write-downs of operating assets, as well as write-downs of the goodwill originating in the merger, will not be necessary should actual business conditions deteriorate. At September 30, 1996, the Company had net operating loss carryforwards for Federal income tax purposes of approximately $7,800,000 available to reduce future taxable income. Additionally, at December 31, 1996, CXR had net operating loss carryforwards for Federal and state tax purposes of approximately $19,900,000 and $4,800,000, respectively. The expiration of these net operating loss carryforwards is detailed in the notes to the applicable financial statements included elsewhere herein. As a result of the merger, both entities have undergone a change in control for tax purposes, which will limit the use of these domestic net operating loss carryforwards to approximately $825,000 per year until their expiration. NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 is effective for fiscal years beginning after December 15, 1995 and encourages, but does not require, a fair market based method of accounting for employee stock options or similar equity instruments. SFAS No. 123 allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), but requires pro forma disclosures of net earnings and earnings per share as if the fair value based method of accounting had been applied. The Company has adopted SFAS No. 123 in fiscal 1997, electing to continue to measure compensation costs under - 72 - 74 APBO No. 25 and to comply with the pro forma disclosure requirements. Consequently, SFAS No. 123 had no effect on the Company's financial position or results of operations. In February 1997 the FASB issued SFAS No. 128 "Earnings per Share", which will become effective for the Company for its year ending December 31, 1997, requiring restatement of quarterly and prior year financial information, if applicable. This pronouncement provides a different method of presenting and calculating earnings per share (EPS) than is currently used in accordance with APBO No. 15 "Earnings per Share" and modifies existing disclosure requirements. The principal difference is that SFAS No. 128 provides for the calculation and presentation of Basic and Diluted EPS. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share of APB No. 15. As common stock equivalents have historically been antidilutive, implementation is expected to have no effect on previously reported EPS. However, based on the current trading value of the Company's common stock and assuming the Company is profitable, it is expected that future presentations of EPS will include differing values for Basic and Diluted EPS due to the effects of common stock equivalents. - 73 - 75 DIRECTORS AND EXECUTIVE OFFICERS The current directors and executive officers of MicroTel are as follows:
Name Age Titles - ---- --- ------ Carmine T. Oliva 54 Chairman of the Board of Directors, President and Chief Executive Officer David Barrett 45 Director Laurence P. Finnegan, Jr. 59 Director James P. Butler 49 Chief Financial Officer Robert Runyon 71 Secretary and Director Jack Talan 72 Director
CARMINE T. OLIVA was appointed Chairman of the Board, President and Chief Executive Officer of MicroTel upon consummation of the Merger on March 26, 1997. He has been the Chairman, President and Chief Executive Officer of XIT since its founding in 1983. From 1980 to 1983, he was Senior Vice President and General Manager, ITT Asia Pacific Inc. Prior to that position, Mr. Oliva held a number of executive positions with ITT Corporation and its subsidiaries over an eleven-year period. Mr. Oliva is the founder of XIT. Mr. Oliva attained the rank of Captain in the United States Army and is a veteran of the Vietnam War. DAVID BARRETT was appointed as a Director of MicroTel upon consummation of the Merger on March 26, 1997. He has been a partner at Baldwin Brothers, Inc., of Marion, Massachusetts, an investment advisory firm, since January 1982. He also serves as Chairman of the Finance Committee of Tobey Health Systems, Inc., as a member of the Board of Advisors of Pell Rodman Venture Partners LP of Boston, Massachusetts; as Trustee and Treasurer of Friends Academy and on the Investment Committee of Tabor Academy. LAURENCE P. FINNEGAN, JR. was appointed as a Director of MicroTel upon consummation of the Merger on March 26, 1997. In addition to being a director of XIT since 1985, Mr. Finnegan joined XIT as its Chief Financial Officer on a part-time basis in 1994. Mr. Finnegan has held positions with ITT (1970-74) as controller of several divisions, Narco Scientific (1974-1983) as Vice President Finance, Chief Financial Officer and Executive Vice President, and Fischer & Porter (1986-1994) as Senior Vice President, Chief Financial Officer and Treasurer. Since 1994, he has been a principal of Gwyn Allen Partners, Bethlehem, Pennsylvania, an executive management consulting firm, and President of GA Pipe, Inc., a manufacturing company based in Langhorne, Pennsylvania. - 74 - 76 JAMES P. BUTLER was appointed Chief Financial Officer of MicroTel on August 18, 1997. From 1996 to such appointment in 1997, Mr. Butler was the Chief Financial Officer and Chief Operating Officer of Peritronics Medical, Inc., a publicly-traded provider of turnkey clinical computer systems to hospitals. From 1995 through 1996, Mr. Butler was the Chief Financial Officer of InnoServ Technologies, Inc., a publicly-traded supplier of products and services in the high-tech diagnostic imaging marketplace. From 1994 to 1995, Mr. Butler was the Chief Financial Officer of InnerSpace, Inc., a public company which manufactured and distributed electronic monitoring devices to the hospital critical-care environment. From 1989 to 1994, Mr. Butler was the Chief Financial Officer of Corus Medical Corporation, a provider of specialty blood products and services. Since 1986, Mr. Butler has been a member of the State Bar of California. ROBERT RUNYON was appointed as a Director and Secretary of MicroTel upon consummation of the Merger on March 26, 1997. He is the owner and principal of Runyon and Associates, a human resources and business advisor firm since 1990. Prior to the Merger, Mr. Runyon served XIT both as a director and as consultant in the areas of strategic development and business planning, organization, human resources, and administrative systems. He also consults for companies in environmental products, marine propulsion systems and architectural services sectors in these same areas. From 1970 to 1978, Mr. Runyon held various executive positions with ITT Corporation including Vice President, Administration of ITT Grinnell, a manufacturing subsidiary of ITT. From 1963 to 1970, Mr. Runyon held executive positions at BP Oil including Vice President, Corporate Planning and Administration of BP Oil Corporation, and director, organization and personnel for its predecessor, Sinclair Oil Corporation. Mr. Runyon was Senior Vice President, Human Resources at the Great Atlantic & Pacific Tea Company from 1978 to 1980. JACK TALAN has been a director of MicroTel since 1995 and was the interim Chairman and Chief Executive Officer of MicroTel from November 15, 1996 until the appointment of Mr. Oliva as Chairman, President and Chief Executive Officer on March 26, 1997. Since March 1993, Mr. Talan has been a Director of World Wide Collectibles, a public company which markets a system designed to assure and protect the integrity of limited edition collectibles, and was the President of that company until his resignation in December 1996. Since 1990, Mr. Talan has been the Principal and President of Jack Talan, Inc., a sales and marketing consulting company. Additionally, Mr. Talan was the co-founder, major shareholder, director and Senior Vice President of Arista Corp., a publisher and distributor of educational materials until it was sold in 1985. - 75 - 77 EXECUTIVE COMPENSATION The cash compensation paid by the Company during the year ended December 31, 1996 to its Chief Executive Officers and other executive officers earning salary and bonus exceeding $100,000 is presented in the Summary Compensation Table below. SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------- Name and Principal Year Salary Other Restricted Options/SARs All Other Position Annual Stock Shares Compensation Compensation Awards $ $ $(5) - --------------------------------------------------------------------------------------------------------------- Jack Talan, Ended 12/31/96 (1) -0- 10,000 155,000 CEO, from 11/15/96 to 3/26/97 -------------------------------------------------------------------------------------------- Ended 12/31/95 -0- 10,000 15,625 5,000 -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Daniel Dror, CEO, Ended 12/31/96 -0- (2) Until 11/15/96 -------------------------------------------------------------------------------------------- Ended 12/31/95 174,417 78,125 25,000 966,846 (3) -------------------------------------------------------------------------------------------- Six Months Ended 11,077 (2) 12/31/94 -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Henry Mourad, Ended 12/31/96 150,000 82,000 President until 3/26/97 -------------------------------------------------------------------------------------------- Ended 12/31/95 150,000 15,625 5,000 -------------------------------------------------------------------------------------------- Six Months Ended 72,263 40,000 12/31/94 -------------------------------------------------------------------------------------------- Ended 6/30/94 150,000 20,000 -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- Jacques Moisset, VP Ended 12/31/96 173,106 12,000 (4) -------------------------------------------------------------------------------------------- Ended 12/31/95 181,132 48,000 -------------------------------------------------------------------------------------------- Six Months Ended 76,478 12/31/94 -------------------------------------------------------------------------------------------- Ended 6/30/94 139,132 - ---------------------------------------------------------------------------------------------------------------
(1) Jack Talan became Chairman and Chief Executive Officer on 11/15/96, upon Daniel Dror's resignation. At that time, Mr. Talan was authorized $3,000 in fees for previous Board service and $2,500 per month in compensation to serve as Chairman and Chief -76- 78 Executive. Mr. Talan received both the back fees of $3,000 and two months of compensation totaling $5,000 in restricted stock issued at a 20% discount to the market on the date of issuance (for a value of $10,000). (2) The Board of Directors awarded Daniel Dror $144,000 per year beginning July 1, 1994. In 1994, Mr. Dror received four weeks payment of $11,077 and waived the remaining payments. In 1996, Mr. Dror waived all salary payments. (3) Upon his resignation on November 15, 1996, Mr. Dror was awarded a severance package which included a) 50,000 shares of restricted stock with a market value of $118,750, (b) options to acquire 250,000 shares of common stock at an exercise price of $2.375 per share, and (c) options to acquire 300,000 shares of common stock at $.01 per share. The fair market value of the two option grants is estimated at $848,096 using the Black-Scholes Model as a computation methodology. (4) Jacques Moisset is paid in French Francs, which are translated hereon at annual average exchange rates. (5) At 12/31/96, the number and value of the aggregate restricted stock awards for the above named executives was Mr. Talan-5,000 shares valued at $7,500; Mr. Dror-75,000 shares (including those noted in footnote 3 above) valued at $112,500; and Mr. Mourad-5,000 shares valued at $7,500. The shares of Messrs. Talan and Mourad vest ratably over three years beginning March 16, 1995, and Mr. Dror's shares all vested immediately upon his resignation on 11/15/96. The following two tables depict stock option grants and exercises by named executives for the year ended December 31, 1996 and the status of outstanding stock options to them at December 31, 1996. OPTIONS/SAR GRANTS GRANTED DURING THE YEAR ENDED DECEMBER 31, 1996
=================================================================================================== (a) (b) (c) (d) (e) (f) - --------------------------------------------------------------------------------------------------- Name Options/SARs % of Total Exercise or Expiration Date Grant Date Granted (#) Options/SARs Base Price Present Value Granted to ($/Sh) ($) (3) Employees in Fiscal Year - --------------------------------------------------------------------------------------------------- Jack Talan CEO 5,000 .3% 3.125 3-16-98 4,512 50,000 3.4% 2.00 12-31-96 23,474 100,000 6.7% 1.80 12-31-96 47,440 - --------------------------------------------------------------------------------------------------- Daniel Dror, 25,000(1) 1.7% 3.125 11-14-99 18,878 Former CEO 250,000(2) 16.8% 2.375 11-14-01 288,236 300,000(1) 20.1% .01 12-3-99 559,860 - --------------------------------------------------------------------------------------------------- Henry Mourad 4,000 .3% 3.125 5-14-01 4,993 President 8,000 .5% 3.125 5-2-02 10,843 20,000 1.3% 3.125 7-1-98 16,216 50,000 3.4% 1.80 12-31-96 23,798 - --------------------------------------------------------------------------------------------------- Jacques Moisset, 2,000 .1% 3.125 8-23-00 2,439 VP 4,000 .3% 3.125 5-14-01 5,214 6,000 .4% 3.125 5-2-02 1,895 ===================================================================================================
(1) 10,000 options of the 25,000 option repricing and all of the 300,000 option grant were assigned to others by Mr. Dror. (2) This option is exercisable only after Mr. Dror repays a certain indebtedness to the Company approximating $211,000, which amount is due in 5 annual installments and which may be repaid by surrendering the options for value equivalent to the lesser of the future appreciation of the underlying stock over the exercise price or $.50 per share. (3) Grant date value was determined using a modified Black-Scholes pricing model assuming no dividend yield, expected volatility of approximately 56%, risk-free rate of return 6.6%, and time of exercise generally at 2/3 of the remaining exercise period. -77- 79 AGGREGATED OPTION/SAR EXERCISES IN 1996 AND OPTION/SAR VALUES AT DECEMBER 31, 1996
================================================================================================================== (a) (b) (c) (d) (e) - ------------------------------------------------------------------------------------------------------------------ Name Shares Acquired on Value Realized ($) Number of Securities Value of Unexercised Exercise (#) Underlying Unexercised In-the-money Options/SARs at 12/31/96 Options/SARs at (#) 12/31/96 ($) Exercisable/ Exercisable/ Unexercisable Unexercisable - ------------------------------------------------------------------------------------------------------------------ Jack Talan CEO 105,556 43,750 5000/0 0/0 - ------------------------------------------------------------------------------------------------------------------ Daniel Dror Former 265,000/0 0/0 CEO (1) - ------------------------------------------------------------------------------------------------------------------ Henry Mourad 50,000 22,500 72,000/0 0/0 President - ------------------------------------------------------------------------------------------------------------------ Jacques Moisset VP 60,000/38,400 0/0 ==================================================================================================================
(1) Does not include options assigned by Mr. Dror to others; of the options assigned to others, 300,000 options were exercised in 1996 for value realized of $484,500. COMPENSATION OF DIRECTORS. During the year ended December 31, 1996, there were no standard arrangements for compensation of directors. However, on November 15, 1996, the Board authorized the payment of $3,000 in fees for past service on the Board of Directors to Mr. Talan and $2,500 per month to serve as Chairman and Chief Executive Officer. Additionally, on that date the Board authorized the payment of $15,000 to Mr. Lewisham for past Board service and $4,000 in expense reimbursement. Mr. Talan received his total fees for 1996 of $8,000 in restricted stock of the Company issued at a 20% discount to market (4,445 shares), and Mr. Lewisham received his in cash. Since the Merger, the Compensation Committee has been considering the issue of non-employee director compensation but no policy has yet been adopted. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS. Pursuant to the employment agreement dated April 12, 1994, as amended between the Company and Henry A. Mourad (the "Mourad Agreement"), Mr. Mourad is employed as President of CXR Telcom. The Mourad Agreement provides for an annual salary of $150,000. The Mourad Agreement is for a rolling term of two years, such that on April 1 of each year it shall have an unexpired term of two years. In the event of the termination of Mr. Mourad's employment by the Company without cause, or by Mr. Mourad for cause (which does not include a change of control), Mr. Mourad shall be entitled, until the expiration date of the employment agreement (or up to two years), to receive his salary, at an annual amount equal to the average of the three highest annual incentive compensation payments made to Mr. Mourad by the company prior to such termination, medical care, pension and similar benefits. -78- 80 In the event of a termination for cause, Mr. Mourad is entitled to salary and benefits only through the date of termination. Pursuant to the employment agreement dated July 1, 1995 between the Company and Jacques Moisset, Mr. Moisset is employed as President of CXR S.A. for a term of three years at an annual salary of 885,000 French Francs. There are no provisions in Mr. Moisset's employment agreement for payments upon termination of employment or upon a change in control. Pursuant to the employment agreement between the Company and Barry E. Reifler, dated February 9, 1996, as amended (the "Reifler Agreement"), Mr. Reifler was employed as Chief Financial Officer at an annual salary of $150,000. The Reifler Agreement contains a change-in-control arrangement such that within three months of a change-in-control, Mr. Reifler can elect to terminate the Reifler Agreement and receive the following benefits: (i) payments based on an annual salary of $125,000 plus current employee benefits payable for a period of two years; (ii) the issuance of 30,000 shares of common stock pursuant to a stock option Mr. Reifler holds, the Company deeming such exercise price paid; (iii) the issuance of 10,000 shares of common stock pursuant to a restricted stock award and (iv) the payment by the Company to Mr. Reifler of all income tax liabilities associated with such stock issuance. The merger between a wholly-owned subsidiary of the Company and XIT Corporation constituted a change-in-control as defined in the Reifler Agreement. Mr. Reifler exercised his right to terminate the Reifler Agreement and his employment terminated on September 19, 1997. On August 18, 1997, Mr. Butler was employed as the Chief Financial Officer of the Company, replacing Mr. Reifler. Pursuant to the employment agreement dated January 1, 1996 between the Company and XIT Corporation (the "Oliva Agreement"), Carmine T. Oliva is employed as Chairman, President and Chief Executive Officer of XIT Corporation for a term of five years at an annual salary of $250,000. On May 6, 1997, the Board of Directors of the Company voted to assume the obligations of XIT under this Agreement in light of the appointment of Mr. Oliva to the positions of Chairman of the Board, President and Chief Executive Officer of the Company. The Agreement is subject to automatic renewal for three successive two year terms commencing on January 1, 2001, unless, during the required notice periods as provided therein, either party gives written notice of its desire not to renew. Mr. Oliva had deferred $104,000 in salary prior to the effective date of the Oliva Agreement. This and any other Deferred Salary shall be due and payable upon any Redesignation, as defined in the Oliva Agreement, of Mr. Oliva by the Board, to offices or positions other than, or in addition to, Chairman, President and Chief Executive Officer and a subsequent resignation by Mr. Oliva due to such Redesignation. If any such Redesignation occurs during the initial term of the Oliva Agreement, XIT shall pay Mr. Oliva his annual salary for three years following the effective date of such resignation or until January 1, 2001, whichever is longer. In the event of Mr. Oliva's termination for cause, the Company's obligation to pay any compensation, severance allowance, or other amounts payable under the Agreement terminates on the date of such termination. In the event of a termination without cause, Mr. Oliva shall be paid his annual salary for two and one-half years following the effective date of such termination or until January 1, 2001, whichever is longer. If such termination occurs during a renewal period, Mr. -79- 81 Oliva shall be paid his annual salary through the expiration of that particular renewal period as well as any and all other amounts payable pursuant to the Agreement, including deferred salary. XIT may terminate the Agreement upon thirty days written notice in the event of a merger or reorganization of XIT in which the shareholders of XIT immediately prior to such reorganization receive less than fifty percent of the outstanding voting shares of the successor corporation. The Merger did not trigger the application of that termination provision, since, pursuant to the Merger, the former shareholders of XIT were issued approximately 6,119,130 shares of common stock of the Company or approximately 65% of the issued and outstanding common stock. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During the fiscal year ended December 31, 1996, the Compensation Committee of the Board of Directors consisted of William Lewisham and Jack Talan. From November 15, 1996 through the end of the fiscal year, Mr. Talan also served as President and Chief Executive Officer of the Company. See "Compensation of Directors" and "Certain Relationships and Related Transactions" for a description of certain transactions between the Company and Messrs. Talan and Lewisham. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding the beneficial ownership of the Company's common stock as of September 23, 1997 by the following: (i) each person who is beneficial owner of more than five percent (5%) of the Company's outstanding common stock; (ii) each Director; (iii) each of the named executive officers of the Company; and (iv) all Directors and executive officers as a group.
================================================================================== Name and Address Number of Shares of Beneficial Owner Beneficially Percent of Class(1) Owned(1) - ---------------------------------------------------------------------------------- The Bertrand Family Trust 595,106 5.22% c/o Robert J. Bertrand and Docas L. Bertrand, Trustees 851 Arbolando Drive Fullerton, CA 92835 - ---------------------------------------------------------------------------------- Carmine T. Oliva 1,863,422(2) 16.36% c/o MicroTel International, Inc. 4290 East Brickell Street Ontario, CA 91761 - ---------------------------------------------------------------------------------- Samuel J. Oliva 705,284(3) 6.19% 80 Brandywyne Drive Florham Park, NJ 07932 - ----------------------------------------------------------------------------------
-80- 82
================================================================================== Name and Address Number of Shares of Beneficial Owner Beneficially Percent of Class(1) Owned(1) - ---------------------------------------------------------------------------------- Laurence P. Finnegan, Jr. 132,349(4) 1.16% 3 Woods Lane Ambler, PA 19002 - ---------------------------------------------------------------------------------- Robert Runyon 327,302(5) 2.87% 10 Eagle Claw Drive Hilton Head, SC 29926 - ---------------------------------------------------------------------------------- David A. Barrett 268,471(6) 2.36% 7 Barnabas Road Marion, MA 02738 - ---------------------------------------------------------------------------------- Jack E. Talan 166,000(7) 1.47% 26 E. 63rd, #11E New York, NY 10021 - ---------------------------------------------------------------------------------- James P. Butler 75,000(8) * 7716 E. Fieldcrest Lane Orange, CA 92869 - ---------------------------------------------------------------------------------- Elk International 1,395,000(9) 12.25% Corporation Limited Post Office Box No. 3247 Nassau, Bahamas - ---------------------------------------------------------------------------------- Daniel Dror 1,395,000(10) 12.25% 1412 North Blvd. Houston, TX 77006 - ---------------------------------------------------------------------------------- All executive 2,832,544 24.86% officers and directors as a group (6 persons) ==================================================================================
*(less than 1%) (1) Includes shares of MicroTel Common Stock underlying the warrants, options and convertible securities outstanding and held by the beneficial owner with respect to whom the calculation is made, but does not include shares of Common Stock that may be acquired within more than 60 days after September 1, 1997 upon the exercise or conversion of such warrants, options or convertible securities. -81- 83 (2) Includes 478,670 shares held jointly by Mr. Oliva and his wife, as well as 81,889 shares held individually by Mr. Oliva's wife. Also includes 764,378 shares, which will be issuable to Mr. Oliva upon the exercise of MicroTel options and warrants. (3) Includes 94,056 shares which will be issuable to Mr. Oliva upon the exercise of MicroTel options and warrants. (4) Includes 4,789 shares held jointly by Mr. Finnegan and his wife, and 88,178 shares which will be issuable to Mr. Finnegan upon the exercise of MicroTel options and warrants. (5) Includes 147,217 shares which will be issuable to Mr. Runyon upon the exercise of MicroTel options and warrants. (6) Includes 91,807 shares which will be issuable to Mr. Barrett upon the exercise of MicroTel options and warrants; 43,639 shares held by various trusts of which Mr. Barrett is the trustee, and members of Mr. Barrett's immediate family are beneficiaries; and 4,595 shares held by Mr. Barrett's wife. (7) Includes 5,000 shares issuable to Mr. Talan upon the exercise of MicroTel options and warrants, 5,000 shares authorized on March 16, 1995 to Mr. Talan as an incentive award to be earned for continuing services over a three-year period. (8) Represents 75,000 shares which will be issuable to Mr. Butler upon the exercise of MicroTel options. (9) Includes 540,000 shares owned by Elk International Corporation Limited, and 750,000 shares issuable upon the exercise of MicroTel warrants. Also includes 15,000 shares issuable upon the exercise of MicroTel stock options owned by Mr. Dror and 90,000 shares issuable to Elk upon the exercise of warrants owned by Elk. See footnote 10 below. (10) Includes 15,000 shares issuable upon the exercise of MicroTel stock options, and the shares and shares underlying options and warrants of Elk International Corporation Limited as set forth in footnote (9) above. Elkana Faiwuszeiwicz, the President and control person of Elk International Corporation Ltd. ("Elk"), is the brother of Mr. Dror. Based upon information contained in Elk's Schedule 13D filed with the Securities and Exchange Commission dated January 25, 1994, Mr. Dror may be deemed a "control" person of Elk and Mr. Dror, Daniel Dror & Company, Inc. ("DDC") and Elk may be deemed to constitute a "group" as those terms are defined under the Securities Act and Exchange Act and the rules and regulations promulgated thereunder. Mr. Dror and DDC each disclaim any beneficial ownership in Elk and in stock of the Company owned by Elk. -82- 84 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Daniel Dror was the Company's Chairman and Chief Executive Officer from 1994 until his resignation on November 15, 1996. Elkana Faiwuszeiwicz, the President and control person of Elk, is the brother of Mr. Dror. Based upon information contained in Elk's Schedule 13D filed with the Securities and Exchange Commission dated January 25, 1994, Mr. Dror may be deemed a "control" person of Elk and Mr. Dror, Daniel Dror & Company, Inc. ("DDC") and Elk may be deemed to constitute a "group" as those terms are defined under the Securities Act of 1933, as amended, and Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Mr. Dror and DDC each disclaim any beneficial ownership in Elk and in stock of the Company owned by Elk. Pursuant to an agreement dated January 5, 1994, the Company issued 300,000 shares of the Company's common stock to the designees of DDC for $600,000 (or $2.00 per share) including 210,000 shares to Elk. Additionally, pursuant to the agreement, the Company issued to Elk warrants to purchase 100,000 shares for $2.50 per share, exercisable at any time prior to December 25, 1995. The Company also entered into a common stock purchase agreement with DDC on March 10, 1994 whereby DDC, or its designee, was to acquire 1,260,000 shares of the Company's common stock for an aggregate of $2,520,000 (or $2.00 per share), payable in cash, or at the option of the Company, in cash, cash equivalents, or marketable securities or any combination thereof. The stockholders of the Company approved the common stock purchase agreement (the Agreement) on April 16, 1994. The Agreement provided for a closing by June 30, 1994 contingent upon all conditions to closing being fulfilled. As permitted under the terms of the Agreement, the Board of Directors on July 27, 1994 amended the Agreement, following claims by DDC and its designee raised prior to June 30, 1994 that certain closing conditions had not been satisfied. The amended Agreement required the Company to issue and sell 911,484 shares to Elk as designee of DDC, for an aggregate purchase price of $1,882,967 (based on the previously agreed price of $2.00 per share), in cash, cash equivalents or marketable securities. In September 1994, Elk tendered the assignment of an interest-free promissory note in the amount of $805,555 secured by shares of another public company and transferred a brokerage account to the Company consisting of cash and common stock of $1,077,412 amounting to an aggregate of $1,882,967 (the Company assumed the liability for certain financial instruments amounting to $506,250 which were secured by the cash and common stock investments in the brokerage account). Subsequent to this transfer, a loan of $226,000 was made from the brokerage account to another entity controlled by DDC which loan was payable with 15% interest on December 31, 1995. Although no formal agreements were signed, DDC indicated its intent to reimburse the Company for any loss resulting from the settlement of the financial instruments and indebtedness from the related party. The acceptance of the consideration received and subsequent loan were authorized by Daniel Dror in his capacity as Chairman of the Company's investment committee prior to formal review by the Board of Directors. The Board of Directors subsequently reviewed the consideration tendered under the amended Agreement and determined that it would be in the best interests of the Company to accept payment from Elk with securities less likely to experience significant fluctuations in value. On November 8, 1994 the Company executed a second amendment to the Agreement dated October 16, 1994 with DDC whereby the transactions under the previous amendment -83- 85 were effectively rescinded and the Company agreed to issue and sell 668,725 shares to Elk as designees of DDC, for the aggregate purchase price of $1,337,449 (or $2.00 per share) on or before December 31, 1994. In payment of the purchase price under the second amendment to the Agreement, the Company accepted assignment of a promissory note payable to Elk from a limited partnership in the aggregate amount of $1,444,444 payable on December 31, 1995. The face amount of the promissory note includes the purchase price of $1,337,449 plus $106,995, representing interest on the purchase price at an interest rate of 8% per annum for the period commencing on December 31, 1994, through December 31, 1995. At a board meeting held in December 1995 the Company agreed to accept $250,000 to extend the note to December 15, 1996 and $100,000 as prepaid interest for the extension period. The $350,000 was recognized as income in 1996 over the extension period of the note. As a result of this agreement the Board extended the option period of the remaining 90,000 Elk warrants for two years. Payment of the promissory note was secured by escrowed shares of another public company and the shares issued to Elk were being held in escrow and were to be delivered to Elk when the promissory note had been fully satisfied. In June 1996, Elk was given the right to make alternative cash payment to the Company for the stock subscription through December 15, 1996 releasing shares from escrow at the price of $2.00 per share, and to receive a corresponding assignment of proceeds from the promissory note when collected. Elk made payments against the stock subscription aggregating $380,000 through November 14, 1996, releasing 190,000 shares of common stock from the escrow. On November 15, 1996, the Company and Elk entered into an agreement pursuant to which Elk received (i) an option exercisable for a period of three years to purchase 500,000 shares of Common Stock at an exercise price of $2.375 per share, (ii) the extension of an outstanding warrant to purchase 90,000 shares of Common Stock for three years, and (iii) the return to Elk of the $1,444,444 promissory note. In exchange for the foregoing, the remaining shares held in escrow by the Company and the subscription right were cancelled. The costs of this settlement totalling $807,000, including the valuation of the option grant of $700,000, was recorded in the fourth quarter of 1996. Also on November 15, 1996, Mr. Daniel Dror resigned as Chairman and Chief Executive Officer of the Company in anticipation of the pending merger with XIT. Mr. Jack Talan, a director of the Company, was appointed interim Chairman and Chief Executive Officer until consummation of the transaction. Upon his resignation, Mr. Dror (or his designee) received as a severance award for past service: (a) 350,000 shares of the Company's common stock; (b) an extension of the exercise period to November 14, 1999 on options he currently holds to purchase 25,000 shares of the Company's common stock; and (c) options to purchase 250,000 shares of the Company's common stock at a price of $2.375 per share. The latter options are exercisable for a period of 5 years, but only after Mr. Dror repays a certain indebtedness to the Company of approximately $211,000, which amount is due in 5 annual installments and which may be repaid by surrendering the options for value equivalent to the lesser of the future appreciation of the Company's common stock over the exercise price or $.50 per option. On December 3, -84- 86 1996, it was mutually agreed between the Company and Mr. Dror to substitute an option to acquire 300,000 shares of the Company's Common stock at an exercise price of $.01 per share for 300,000 shares of the previous award and on December 23, 1996 these options were exercised. The compensation expense associated with this grant of $560,000, as well as the value of the 50,000 shares awarded of $119,000 and other costs totaling $82,000 related to the immediate vesting of previous stock based deferred compensation to Mr. Dror and the settlement of certain amounts due the Company by Mr. Dror, were recognized in the fourth quarter of 1996. Additionally, during 1996 and 1995, the Company granted 18,000 and 43,000 shares, respectively, as incentive stock awards principally to certain directors and officers, which vest generally over a three-year period. The total value of these shares based on the market price of the Company's common stock on the date of grant totalled $192,000. Compensation expense recognized by the Company for the awards totalled $106,000 and $46,000 for 1996 and 1995, including amortization of related deferred compensation. In October and November of 1996, the Company granted non-qualified stock options to acquire approximately 156,000 shares of the Company's Common Stock to certain officers at an exercise price equal to 80% of the market value on the date of the grant. Compensation expense associated with these grants approximated $48,000. On February 19, 1997, in recognition of past and future services to the Company, Mr. Talan was granted 150,000 restricted shares of the Company's common stock with a market value as of that date of $337,500 ($2.25 per share). On February 25, 1997 through March 5, 1997, Mr. Talan loaned the Company an aggregate of $500,000. Such loans bear interest at the rate of 6% per annum and were repaid in full in April 1997. In September, 1997, Robert Bertrand, the Trustee of The Bertrand Family Trust, a beneficial owner of more than five percent (5%) of the Company's outstanding common stock, loaned the Company an aggregate of $100,000, on a demand basis, to assist the Company in financing the production of accelerating orders from Motorola. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES There are no indemnification provisions for directors, officers or controlling persons of the Company against liability under the Securities Act. However, as permitted by Section 145 of the Delaware General Corporation Law (the "DGCL"), Article XI of the Company's By-laws provides for the indemnification of officers, directors and certain other persons acting on behalf of the Company (a) against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person by reason of the fact that such person was or is and authorized representative of the company, in connection with a threatened, pending or completed third-party proceeding, whether civil or criminal, administrative or investigative, if such individual acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Company, and, if the action was a criminal proceeding, if such person had no reasonable cause to believe that such person's conduct was unlawful; and (b) against expenses actually and reasonably incurred by such person in connection with the defense or settlement of a threatened, pending or completed corporate proceeding, by reason of the fact such person was or is an authorized representative of the -85- 87 Company, if such person acted under the standards set forth in section (a) above and if such person was not found liable for negligence or misconduct in the performance of a duty to the Company (or if so found liable, if a proper court found such person to be fairly and reasonably entitled to indemnification). The Company's By-laws further provide for mandatory indemnification of authorized representatives of the Company who have been successful in defense of any third-party or corporate proceeding or in defense of any claim, issue or matter therein, against expenses actually and reasonably incurred in connection with such defense. In addition, Article Fifth of the Company's Certificate of Incorporation provides that, to the fullest extent permitted by the DGCL, a director of the Company shall not be liable to the Company or its stockholders for monetary damages for breach of fiduciary duties. Section 102(b)(7) of the DGCL allows for the elimination or limiting of the personal liability of a director for monetary damages for breaches of fiduciary duties as a director except for situations involving: (i) breach of the duty of loyalty; (ii) bad faith or misconduct; (iii) unlawful dividends; or (iv) transactions were directors received an improper personal benefit. As a result of this provision, the Company and its stockholders may be unable to obtain monetary damages from a director for breach of his duty of care. Although stockholders may continue to seek injunctive or other equitable relief for any alleged breach of fiduciary duty by a director, stockholders may not have any effective remedy against the challenged conduct if equitable remedies are unavailable. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted against the Company by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. -86- 88 INDEX TO FINANCIAL STATEMENTS Page ---- Consolidated Financial Statements of MicroTel International, Inc. (Registrant) Independent Auditors' Report (KPMG Peat Marwick LLP) F-2 Independent Auditors' Report (Hardcastle Burton) F-3 Consolidated Balance Sheets at September 30, 1996 and 1995 F-4 Consolidated Statements of Operations for the Years ended September 30, 1996, 1995 and 1994 F-5 Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 1996, 1995 and 1994 F-6 Consolidated Statements of Cash Flows for the Years Ended September 30, 1996, 1995 and 1994 F-7 Notes to Consolidated Financial Statements for the Years Ended September 30, 1996, 1995 and 1994 F-8 Consolidated Financial Statement Schedule II- Valuation and Qualifying Accounts for the Years Ended September 30, 1996, 1995 and 1994 F-26 Consolidated Condensed Balance Sheets at December 31, 1996 and September 30, 1996 (Unaudited) F-27 Consolidated Condensed Statements of Operations for the Three Months Ended December 31, 1996 and 1995 (Unaudited) F-28 Consolidated Condensed Statements of Cash Flows for the Three Months Ended December 31, 1996 and 1995 (Unaudited) F-29 Notes to Consolidated Condensed Financial Statements (Unaudited) F-30 Consolidated Condensed Balance Sheets at June 30, 1997 and December 31, 1996 (Unaudited) F-36 Consolidated Condensed Statements of Operations for the Three and Six Months Ended June 30, 1997 and 1996 (Unaudited) F-37 Consolidated Condensed Statements of Cash Flows for the Three and Six Months Ended June 30, 1997 and 1996 (Unaudited) F-38 Notes to Consolidated Condensed Financial Statements (Unaudited) F-39 Consolidated Financial Statements of MicroTel International, Inc. (Pre-merger) Report of Independent Certified Public Accountants (BDO Seidman, LLP) F-45 Independent Auditors' Report (Deloitte & Touche LLP) F-46 Consolidated Balance Sheets at December 31, 1996 and 1995 F-47 Consolidated Statements of Operations for the Years ended December 31, 1996 and 1995, the Six Months Ended December 31, 1994 and the Year ended June 30, 1994 F-48 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1996 and 1995, the Six Months Ended December 31, 1994 and the Year ended June 30, 1994 F-49 Consolidated Statements of Cash Flows for the Years ended December 31, 1996 and 1995, the Six Months Ended December 31, 1994 and the Year ended June 30, 1994 F-50 Notes to Consolidated Financial Statements for the Years ended December 31, 1996 and 1995, the Six Months Ended December 31, 1994 and the Year ended June 30, 1994 F-51 Consolidated Financial Statement Schedule II- Valuation and Qualifying Accounts for the Years ended December 31, 1996 and 1995, the Six Months Ended December 31, 1994 and the Year ended June 30, 1994 F-71 Consolidated Condensed Balance Sheets at March 26, 1997 and December 31, 1996 (Unaudited) F-72 Consolidated Condensed Statements of Operations for the Two Months and Twenty-Six Days Ended March 26, 1997 (Unaudited) F-73 Consolidated Condensed Statements of Cash Flows for the Two Months and Twenty-Six Days Ended March 26, 1997 (Unaudited) F-74 Notes to Consolidated Condensed Financial Statements (Unaudited) F-75 Unaudited Pro Forma Combined Condensed Financial Statements Explanatory Description F-79 Unaudited Pro Forma Combined Condensed Statement of Operations For the Year Ended September 30, 1996 F-80 Unaudited Pro Forma Combined Condensed Statement of Operations for the Six Months Ended June 30, 1997 F-81 Notes to Unaudited Pro Forma Combined Condensed Financial Statements F-82 F-1 89 INDEPENDENT AUDITORS' REPORT The Board of Directors MicroTel International, Inc.: We have audited the accompanying consolidated balance sheets of MicroTel International, Inc. and subsidiaries (formerly known as XCEL Corporation and subsidiaries) as of September 30, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We did not audit the consolidated financial statements of XCEL Corporation Ltd. and subsidiaries, which statements reflect total assets constituting 20% and 7% in 1996 and 1995, respectively, and total revenues constituting 7%, 8% and 10% in 1996, 1995 and 1994, respectively, of the related consolidated totals. Those consolidated financial statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for XCEL Corporation Ltd. and subsidiaries, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MicroTel International, Inc. and subsidiaries (formerly known as XCEL Corporation and subsidiaries) as of September 30, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Orange County, California December 13, 1996, except as to Note 13, which is as of June 18, 1997 F-2 90 XCEL CORPORATION LIMITED REPORT OF THE AUDITORS TO THE SHAREHOLDERS OF XCEL CORPORATION LIMITED We have audited the financial statements on pages four to fifteen which have been prepared under the historical cost convention, as modified by the revaluation of certain fixed assets, and the accounting policies set out on page seven. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As described on page two the company's directors are responsible for the preparation of financial statements. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. OPINION In our opinion the financial statements give a true and fair view of the state of the company's affairs as at 30 September 1996 and of its profit for the year then ended and have been properly prepared in accordance with the provisions of the Companies Act 1985 applicable to small companies. /s/ Hardcastle Burton Hardcastle Burton Chartered Accountants Registered Auditor Lake House Market Hill Royston Herts SGB 9JN Dated: 22 November 1996 F-3 91
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Consolidated Balance Sheets September 30, 1996 and 1995 ASSETS (NOTES 5 AND 7) 1996 1995 ------------ ----------- Current assets: Cash $ 785,149 978,112 Accounts receivable, net of allowance for doubtful accounts of $46,585 in 1996 and $57,091 in 1995 4,568,308 3,448,215 Inventories (note 2) 6,504,736 4,620,682 Prepaids and other current assets 555,979 688,826 ------------ ----------- Total current assets 12,414,172 9,735,835 Goodwill, net of accumulated amortization of $2,330,485 in 1996 and $2,120,066 in 1995 1,903,130 2,113,543 Property, plant and equipment, net (note 3) 5,059,920 3,868,773 Other assets 236,244 236,543 ------------ ----------- $ 19,613,466 15,954,694 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,143,445 3,923,386 Accrued expenses 1,331,720 1,756,733 Notes payable to institutional lenders (note 5) 2,837,220 1,750,200 Notes payable to officers, directors and stockholders (note 6) 27,000 287,181 Current portion of long-term debt (note 7) 911,875 1,003,315 ------------ ----------- Total current liabilities 10,251,260 8,720,815 Long-term debt, less current portion (note 7) 2,677,617 1,523,392 Minority interest (note 4) 63,839 411,937 ------------ ----------- Total liabilities 12,992,716 10,656,144 Series A redeemable preferred stock, no par value. Authorized, issued and outstanding 1,000 shares (aggregate liquidation preference of $390,000 in 1996)(notes 4 and 9) 332,185 357,688 Series B redeemable preferred stock, no par value. Authorized, issued and outstanding 1,000 shares (aggregate liquidation preference of $520,000 in 1996) (notes 4 and 9) 442,914 476,917 Stockholders' equity: Common stock, no par value. Authorized 10,000,000 shares; issued and outstanding 4,177,417 and 4,005,591 shares in 1996 and 1995, respectively (note 9) 9,018,077 8,551,264 Accumulated deficit (3,200,679) (4,203,097) Equity adjustment from foreign currency translation 28,253 115,778 ------------ ----------- Total stockholders' equity 5,845,651 4,463,945 Commitments and contingencies (note 11) ------------ ----------- $ 19,613,466 15,954,694 ============ ===========
See accompanying notes to consolidated financial statements. F-4 92
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Consolidated Statements of Operations Years ended September 30, 1996, 1995 and 1994 1996 1995 1994 ----------- ---------- ---------- Net sales $31,248,596 19,602,271 14,237,032 Cost of sales 23,056,559 14,332,550 10,023,203 ----------- ---------- ---------- Gross profit 8,192,037 5,269,721 4,213,829 ----------- ---------- ---------- Operating expenses: Selling, general and administrative 6,378,797 4,870,245 4,085,633 Engineering, research and development 309,151 327,844 639,319 ----------- ---------- ---------- Operating income (loss) 1,504,089 71,632 (511,123) Other income (expense): Interest expense (506,591) (404,554) (337,282) Gain from sale of asset (note 8) -- 479,783 -- Minority interest in net income of consolidated subsidiary (4,072) (2,857) (4,005) Other, net 111,623 202,126 180,628 ----------- ---------- ---------- Income (loss) before income taxes 1,105,049 346,130 (671,782) Income taxes (note 10) 22,137 9,251 -- ----------- ---------- ---------- Net income (loss) $ 1,082,912 336,879 (671,782) =========== ========== ========== Net income (loss) per common share $ .17 .07 (.14) =========== ========== ========== Weighted-average common shares 5,841,394 4,995,374 4,713,501 =========== ========== ==========
See accompanying notes to consolidated financial statements. F-5 93
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Consolidated Statements of Stockholders' Equity Years ended September 30, 1996, 1995 and 1994 FOREIGN COMMON STOCK CURRENCY ------------------------- ACCUMULATED TRANSLATION SHARES AMOUNT DEFICIT ADJUSTMENTS TOTAL --------- ------------ ----------- ----------- --------- Balance at September 30, 1993 3,210,131 $ 7,531,125 (3,858,399) 95,860 3,768,586 Stock issued in connection with HyComp acquisition 156,275 156,111 -- -- 156,111 Foreign currency translation adjustment -- -- -- 10,429 10,429 Net loss -- -- (671,782) -- (671,782) --------- ------------ ---------- ------- --------- Balance at September 30, 1994 3,366,406 7,687,236 (4,530,181) 106,289 3,263,344 Stock issued in connection with Arnold Circuits, Inc. acquisition 440,000 656,281 -- -- 656,281 Stock issued for debt conversion (note 9) 199,185 207,747 -- -- 207,747 Accretion of preferred stock -- -- (9,795) -- (9,795) Foreign currency translation adjustment -- -- -- 9,489 9,489 Net income -- -- 336,879 -- 336,879 --------- ------------ ---------- -------- --------- Balance at September 30, 1995 4,005,591 8,551,264 (4,203,097) 115,778 4,463,945 Stock issued in connection with acquisition of minority interest 48,760 343,747 -- -- 343,747 Stock issued for debt conversion (note 9) 123,066 123,066 -- -- 123,066 Accretion of preferred stock -- -- (80,494) -- (80,494) Foreign currency translation adjustment -- -- -- (87,525) (87,525) Net income -- -- 1,082,912 -- 1,082,912 --------- ------------ ---------- ------- --------- Balance at September 30, 1996 4,177,417 $ 9,018,077 (3,200,679) 28,253 5,845,651 ========= ============ ========== ======= ==========
See accompanying notes to consolidated financial statements. F-6 94
MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Consolidated Statements of Cash Flows Years ended September 30, 1996, 1995 and 1994 1996 1995 1994 ----------- ---------- --------- Cash flows from operating activities: Net income (loss) $ 1,082,912 336,879 (671,782) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 589,681 277,969 211,603 Amortization of goodwill 210,413 210,413 204,233 Gain on sale of Computron -- (479,783) -- Changes in operating assets and liabilities: (Increase) decrease in accounts receivable 11,898 (140,629) 772,443 (Increase) decrease in inventory (210,217) 217,293 (2,826) (Increase) decrease in prepaids and other assets 145,772 (85,231) 156,785 Increase (decrease) in accounts payable (296,166) 118,307 234,278 Increase (decrease) in accrued expenses (740,046) (172,816) 3,582 ----------- ---------- -------- Net cash provided by operating activities 793,247 282,402 908,316 ----------- ---------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (785,810) (94,260) (165,485) Cash paid for purchase of Arnold Circuits, Inc. -- (1,026,720) -- Cash paid for purchase of Etch-Tek (428,493) -- -- Cash paid for purchase of Abbott Electronics (734,429) -- -- Cash paid for purchase of HyComp, Inc. -- -- (90,745) Proceeds from sale of Computron -- 1,157,210 -- Minority interest (4,072) 27,857 4,005 ----------- ---------- -------- Net cash provided by (used in) investing activities (1,952,804) 64,087 (252,225) ----------- ---------- -------- Cash flows from financing activities: Net increase (decrease) in notes payable to institutional lenders 248,735 (216,481) (218,797) Proceeds from other borrowings 2,000,000 1,333,693 606,646 Payments on other borrowings (1,054,616) (710,811) (980,140) Redemption of preferred stock (140,000) -- -- ----------- ---------- -------- Net cash provided by financing activities 1,054,119 406,401 (592,291) ----------- ---------- -------- Effects of exchange rate changes on cash (87,525) 9,489 10,429 ----------- ---------- -------- Net increase (decrease) in cash (192,963) 762,379 74,229 Cash at beginning of year 978,112 215,733 141,504 ----------- ---------- -------- Cash at end of year $ 785,149 978,112 215,733 =========== ========== ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 490,091 410,839 337,282 Income taxes 12,097 4,579 3,763 =========== ========== ======== Supplemental disclosures of noncash investing and financing activities: Issuance of common stock, preferred stock and notes in connection with acquisitions $ 195,095 1,681,091 429,078 Issuance of common stock in conversion of debt to equity 123,066 207,747 -- ========== ========== ========
See accompanying notes to consolidated financial statements. F-7 95 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements September 30, 1996, 1995 and 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION On March 26, 1997, as more fully discussed in note 13, publicly-traded MicroTel International, Inc. (MicroTel) merged with privately-held XIT Corporation (XIT), formerly XCEL Corporation prior to its name change on November 25, 1996. The merger was accounted for as a purchase of MicroTel by XIT in a "reverse acquisition" because the existing shareholders of MicroTel prior to the merger do not have voting control of the combined entity after the merger. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company, MicroTel, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. Consequently, the accompanying consolidated financial statements include the accounts of XIT and its wholly and majority-owned subsidiaries, collectively referred to herein as the Company. Significant intercompany accounts and transactions have been eliminated in consolidation. In conjunction with this first issuance of the accompanying consolidated financial statements as the historical financial statements of a publicly-traded company, the Company is presenting earnings per share information and has retroactively revised the period over which previously recorded goodwill is amortized from 30 years to 20 years. The revision in amortization period is based on the Company's current assessment of the estimated useful life of the goodwill and all prior periods have been restated to reflect the revised amortization period to be consistent with the amortization policy to be used in future periods. Certain reclassifications and disclosures have also been made in the accompanying consolidated financial statements to conform the statements to expected future presentations, including conformance to the requirements of Regulation S-X of the Securities and Exchange Commission, with no effect on previously reported results of operations. In accord with the reverse acquisition accounting treatment, the capital accounts of XIT are recapitalized as of the acquisition date to give effect to the merger exchange ratio (1.451478 common shares of MicroTel for each common share of XIT) and to convert XIT's no par value common stock to $.0033 par value common stock of MicroTel. Net income (loss) per share computations give retroactive effect to the recapitalization. BUSINESS The Company is a manufacturer of discrete components for data input and displays, including digital switches, keyboards and keypads, color and monochrome video displays, and flat panel displays. The Company also produces subsystem engineered and manufactured products (SEM) which are assembled in custom configurations from two or more of the Company's discrete data input and display components, and micro-electronic power supplies. Additionally, the Company manufactures bare printed circuit boards for its own use and for outside customer applications, and hybrid microelectronic circuits for outside customer applications. F-8 96 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed principally using the straight-line method over the estimated useful lives of the assets (or lease term, if shorter) as follows: Buildings 50 years Machinery, equipment and fixtures 3-7 years Leasehold improvements 5 years Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized. GOODWILL Goodwill represents the excess of purchase price over the fair value of net assets acquired through business combinations accounted for as purchases. Goodwill is amortized on a straight-line basis over 20 years. The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," during fiscal 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of SFAS No. 121 did not have a material impact on the Company's financial position, results of operations or liquidity. NET INCOME (LOSS) PER SHARE Net income (loss) per common share for the years ended September 30, 1996, 1995 and 1994 was computed based on the weighted-average number of common shares outstanding. Common stock equivalents (shares assumed issued based on outstanding stock options and warrants) were anti-dilutive and therefore not included in the computations for all periods presented. The accretion of the excess of the redemption value over the carrying value of redeemable preferred stock (see note 9) of $80,494 and $9,795 have been deducted from net income for 1996 and 1995, respectively, in arriving at net income applicable to common stockholders used in the calculations of net income per share in those years. NEW ACCOUNTING PRONOUNCEMENTS In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective for fiscal years beginning after December 15, 1995 and encourages, but does not require, a fair market based method of accounting for employee stock options or similar equity instruments. SFAS No. 123 allows an entity to elect to continue to measure compensation cost under Accounting Principles Board Opinion No. 25 (APBO No. 25), "Accounting for Stock Issued to Employees," but requires pro forma disclosures of net earnings and earnings per share as if the fair value based method of accounting had been applied. The Company will adopt SFAS No. 123 in fiscal 1997. While the F-9 97 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued Company is still evaluating SFAS No. 123, the Company currently expects to elect to continue to measure compensation costs under APBO No. 25, and comply with the pro forma disclosure requirements. If the Company makes this election, SFAS No. 123 will have no impact on the Company's financial position or results of operations. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 specifies new standards designed to improve the earnings per share (EPS) information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the 3% materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. SFAS No. 128 also makes a number of changes to existing disclosure requirements. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company does not believe the implementation of SFAS No. 128 will have a material effect on net income (loss) per share. FAIR VALUE OF FINANCIAL INSTRUMENTS In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." SFAS No. 107 requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. SFAS No. 107 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of September 30, 1996, the fair value of all financial instruments approximated carrying value. REVENUE RECOGNITION Revenues are recorded when products are shipped. USE OF ESTIMATES Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities in conformity with generally accepted accounting principles. Actual results could differ from these estimates. INCOME TAXES The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109 (Statement No. 109), "Accounting for Income Taxes." Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured, using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company records a valuation allowance for certain temporary differences for which it cannot make the F-10 98 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued determination that realization of the related benefits is more likely than not. Under Statement No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. FOREIGN CURRENCY TRANSLATION Foreign assets and liabilities in the consolidated balance sheets have been translated at the current rate of exchange on the balance sheet date. Sales and expenses are translated at the average exchange rate for the year presented. Unrealized translation adjustments do not affect the results of operations and are reported as a separate component of stockholders' equity. The transaction gains and losses included in operations are not material. MAJOR CUSTOMERS In 1996, there were sales to one customer which accounted for approximately 41% of net sales during the year and 24% of accounts receivable at September 30, 1996. In 1995, there were sales to one customer which accounted for approximately 13% of net sales during the year and 15% of accounts receivable at September 30, 1995. In 1994, there were no sales to any individual customers which accounted for 10% or more of net sales. PRODUCT WARRANTIES The Company provides warranties for certain of its products for periods of generally one year. Estimated warranty costs are recognized at the time of the sale. (2) INVENTORIES Inventories are summarized as follows:
1996 1995 ---------- --------- Raw materials $3,071,931 2,604,511 Work-in-process 2,950,217 1,647,966 Finished goods 482,588 368,205 ---------- --------- $6,504,736 4,620,682 ========== =========
F-11 99 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued (3) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
1996 1995 ---------- --------- Land and buildings $ 224,439 227,931 Machinery, equipment and fixtures 7,172,176 5,416,694 Leasehold improvements 575,716 547,877 ---------- --------- 7,972,331 6,192,502 Less accumulated depreciation and amortization 2,912,411 2,323,729 ---------- --------- $5,059,920 3,868,773 ========== =========
(4) ACQUISITIONS On May 1, 1996, the Company acquired all of the assets and assumed all of the liabilities of Etch-Tek, Inc. (Etch-Tek) for $460,000 in cash and a $195,095 promissory note. Etch-Tek is a manufacturer of quick turn prototype quantity and medium production printed circuit boards. The acquisition of Etch-Tek has been accounted for as a purchase, and accordingly, the results of operations of Etch-Tek for the five months ended September 30, 1996 are included in the Company's consolidated statement of income for the year ended September 30, 1996. Supplementary information related to the acquisition of Etch-Tek for the September 30, 1996 consolidated statement of cash flows is as follows: Assets acquired $1,400,879 Liabilities assumed (745,784) Promissory note (195,095) ---------- Cash paid to sellers 460,000 Cash acquired (31,507) ---------- Net cash paid $ 428,493 ==========
On September 1, 1996, the Company acquired all of the common stock of Abbott Electronics Ltd. (Abbott), a British manufacturer of power supplies, for approximately $734,429, including transaction expenses. On August 1, 1995, the Company acquired all of the assets and assumed all of the liabilities of Arnold Circuits, Inc. (Arnold Circuits) for $1.2 million in cash, a $200,000 promissory note, 440,000 shares of XCEL common stock and 1,000 shares each of Series A and B redeemable preferred stock (note 9). Arnold Circuits is a manufacturer of printed circuit boards. The acquisition of Arnold Circuits has been accounted for as a purchase, and accordingly, the results of operations of Arnold Circuits for the two months ended September 30, 1995 are included in the F-12 100 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued Company's consolidated statements of income for the year ended September 30, 1995. The 440,000 shares of XCEL common stock were valued at $656,281 based on the net book value of the assets acquired, which approximated fair value, less the preferred stock and the promissory note. Supplementary information related to the acquisition of Arnold Circuits for the September 30, 1995 consolidated statement of cash flows is as follows: Assets acquired $ 5,665,346 Liabilities assumed (2,784,255) Promissory note (200,000) Series A preferred stock (353,490) Series B preferred stock (471,320) Common stock (656,281) ---------- Cash paid to sellers 1,200,000 Cash acquired (173,280) ---------- Net cash paid $ 1,026,720 ===========
Summarized below are the unaudited pro forma results of operations of the Company as though Arnold Circuits had been acquired at the beginning of the years ended September 30, 1995 and 1994.
1995 1994 ----------- ---------- Net sales $31,369,303 25,718,863 =========== ========== Net income $ 585,291 (417,196) ============ ==========
On July 6, 1994, the Company acquired 84.6% of the common shares outstanding of HyComp, Inc. (HyComp), a public company, by means of an exchange of the Company's common stock for HyComp common stock held by Metraplex Corporation and various other officers and directors of HyComp. HyComp is a manufacturer of thin film hybrid circuits for industrial, medical and military customers. The total purchase price was $306,521 (including acquisition costs of $150,410). The Company financed the acquisition through cash of $150,410, and 156,275 shares of the Company's common stock valued at $156,111 based on the net book value of assets acquired, which approximated fair value. In May 1996, the Company acquired an additional percentage of the common shares outstanding of HyComp, which increased the Company's ownership percentage to 90.7%. Also in May 1996, the Company acquired 96.1% of the preferred shares outstanding of HyComp. Each of these transactions was an exchange of the Company's common stock for the respective HyComp stock at recorded amounts that approximate fair value. F-13 101 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued The acquisition of HyComp has been accounted for as a purchase and accordingly, the results of operations of HyComp for the three months ended September 30, 1994 are included in the Company's consolidated statements of operations for the year ended September 30, 1994. For financial reporting purposes, HyComp's assets, liabilities and earnings are consolidated with those of the Company. Ownership interest in HyComp, other than that of the Company's, is included in the Company's financial statements as minority interest, and includes amounts applicable to HyComp's preferred stock of $6,123 and $157,000 at September 30, 1996 and 1995, respectively. Dividends on the preferred stock are cumulative at 8% per year, and minority interest at September 30, 1996 and 1995 includes cumulative dividends in arrears of $7,715 and $185,260, respectively. Supplementary information related to the acquisition of HyComp for the September 30, 1994 consolidated statement of cash flows is as follows: Assets acquired $ 1,582,912 Liabilities assumed (1,276,391) Acquisition costs (150,410) Common stock issued (156,111) ----------- Cash paid to sellers -- Acquisition costs 150,410 Less cash acquired (59,665) ----------- Net cash paid $ 90,745 ===========
(5) NOTES PAYABLE TO INSTITUTIONAL LENDERS
1996 1995 ---------- --------- Line of credit with Foothill Capital Corporation, with interest payable monthly at prime plus 4%, collateralized $ -- 1,444,700 Line of credit with Imperial Bank, with interest payable monthly at prime plus 1%, collateralized 1,998,935 305,500 Foreign subsidiary line of credit with bank, with interest at 6%, collateralized 784,230 -- Foreign subsidiary line of credit with bank, with interest at 2%, collateralized 54,055 -- ---------- --------- $2,837,220 1,750,200 ========== =========
F-14 102 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued The Company has a line of credit with Imperial Bank which provides for maximum borrowings of $4,750,000. The line of credit was to expire January 15, 1997, was extended to June 30, 1997, and is collateralized by certain assets of the Company. Borrowings of a domestic subsidiary are also guaranteed by an officer of the Company. The Imperial Bank line of credit bears interest at the bank's prime (8.25% at September 30, 1996) plus 1% and is payable on demand. The line of credit agreement requires maintenance of certain financial ratios and contains other restrictive covenants. The Company was in compliance with, or had obtained waivers for, all debt covenants at September 30, 1996. However, subsequent to September 30, 1996, the Company remained in violation of certain covenants. The Company intends to renew the line of credit under terms similar to the existing agreement with covenants with which they will be in compliance. (6) OBLIGATIONS TO OFFICERS, DIRECTORS AND STOCKHOLDERS The Company has obligations to various officers and stockholders which totaled $27,000 and $287,181 as of September 30, 1996 and 1995, respectively. The obligations are established as promissory notes with interest rates of 8% to 13.5% and are payable on demand. Included in the obligations are short-term, non-interest bearing advances from a related entity. Also, included in accrued expenses are obligations which total $35,000 as of September 30, 1995. The obligations were the result of consulting services performed by various officers and stockholders relating to the acquisition of Arnold Circuits, Inc. (7) LONG-TERM DEBT A summary of long-term debt follows:
1996 1995 ----------- ---------- Term note payable to Imperial Bank (a) $ 700,000 -- Term note payable to Imperial Bank (a) 1,125,000 -- Term note payable to Imperial Bank (b) 816,663 1,000,000 Term note payable to Foothill Capital Corporation (c) -- 510,333 Term notes payable (d) 193,823 367,977 Promissory notes 238,702 199,607 Capitalized lease obligations (e) (note 11) 515,304 448,790 ----------- ---------- 3,589,492 2,526,707 Less current portion (911,875) (1,003,315) ----------- ---------- $ 2,677,617 1,523,392 =========== ==========
(a) The term note to Imperial Bank bears interest at the bank's prime (8.25% at September 30, 1996) plus 1.25%. The note matures serially through fiscal 2001. (b) The term note to Imperial Bank is collateralized by all the assets of XCEL Arnold Circuits, Inc. This note bears interest at the bank's prime (8.25% at September 30, 1996) plus 1.25%. The note matures serially through fiscal 2001. F-15 103 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued (c) The term note to Foothill Capital Corporation was collateralized by all the assets of the Company and was repaid in fiscal 1996. (d) The Company has agreements with several foreign banks which include term borrowings which mature serially through fiscal 2001. Interest rates on the borrowings range from 2.7% to 11.25% and is payable monthly. Included in the other term notes is a $72,072 note, which is guaranteed by Tokyo Credit Guarantee Corporation on behalf of the Company's Japanese subsidiary. The term borrowings are collateralized by the assets of the subsidiary. Borrowings are also guaranteed by an officer of the subsidiary. (e) Capital lease agreements are calculated using interest rates appropriate at the inception of the lease and range from 10.53% to 12.31%. Lease liabilities are amortized over the lease term using the effective interest method. The leases all contain bargain purchase options and expire through 2001. (8) SALE OF COMPUTRON On May 31, 1995, XCEL sold its Computron Display System Division of Mount Prospect, Illinois to LPI Acquisition Corp. of Forest Park, Illinois. The principal terms of the sale include a cash purchase price of approximately $1.2 million, and the assumption of approximately $694,000 of the Computron Division's liabilities. The sale resulted in a gain of $479,783. (9) STOCKHOLDERS' EQUITY REDEEMABLE PREFERRED STOCK In connection with the Arnold Circuits, Inc. acquisition, XCEL Arnold Circuits, Inc. issued 1,000 shares each of Series A redeemable preferred stock (Series A) and Series B redeemable preferred stock (Series B). In preference to common shares of stock, each Series A and Series B share is entitled to a cumulative cash dividend of $120 and $160 per year, respectively. The Series A and B shares have a liquidation preference of and are subject to mandatory redemption by the Company on December 15, 1999 at a value of $30 and $40 per share, respectively, plus all accrued and unpaid dividends, whether or not declared, to the date of redemption. As of September 30, 1996, the accumulated dividends in arrears were $197,820. The redeemable preferred stock was recorded at fair value on the date of issuance using an imputed market rate dividend of 9.5%. The excess of the redemption value over the carrying value is being accreted by periodic charges to retained earnings over the original life of the issue. F-16 104 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued The following table reflects the redeemable preferred stock activity since August 1, 1995:
SERIES A SERIES B PREFERRED STOCK PREFERRED STOCK ---------------------------------- ---------------------------------- NUMBER NUMBER OF SHARES AMOUNT OF SHARES AMOUNT --------- -------- --------- -------- Balance at September 30, 1994 -- $ -- -- $ -- Preferred stock issued in connection with Arnold Circuits, Inc. 1,000 353,490 1,000 471,320 Accretion of preferred stock -- 4,198 -- 5,597 ------- -------- -------- -------- Balance at September 30, 1995 1,000 357,688 1,000 476,917 Accretion of preferred stock -- 34,497 -- 45,997 Redemption of preferred stock -- (60,000) -- (80,000) ------- -------- -------- -------- Balance at September 30, 1996 1,000 $332,185 1,000 $442,914 ====== ======== ======== ========
STOCK OPTIONS AND WARRANTS Options granted under the 1987 Employee Stock Option Plan (the Plan) may be either qualified or nonqualified stock options and are required to be granted at fair market value at the date of grant (depending upon the number of voting shares owned). Subject to termination of employment, options expire either five or ten years from the date of grant (depending upon the number of voting shares owned) and are nontransferable other than in the event of death. The Board of Directors adopted a resolution increasing the number of shares of the Company's common stock that may be granted pursuant to the Plan to a maximum of 750,000 shares. F-17 105 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued The Plan's qualified stock options consist of the following:
OPTION PRICE NUMBER OF --------------------------------- SHARES PER SHARE TOTAL --------- ------------- ---------- Balance outstanding, September 30, 1994 and 1993 198,000 $5.00 to 6.05 1,069,750 Options canceled (198,000) 5.00 to 6.05 (1,069,750) Options granted 412,500 2.75 1,134,375 --------- ------------- ---------- Balance outstanding, September 30, 1995 412,500 2.75 1,134,375 Options canceled -- -- -- Options granted -- -- -- --------- ------------- ---------- Balance outstanding, September 30, 1996 412,500 $ 2.75 1,134,375 ========= ============= ==========
The Plan's nonqualified stock options consist of the following:
OPTION PRICE NUMBER OF --------------------------------- SHARES PER SHARE TOTAL --------- -------------- -------- Balance outstanding, September 30, 1994 and 1993 77,500 $5.00 to 5.50 402,500 Options canceled (77,500) 5.00 to 5.50 (402,500) Options granted 190,000 2.75 522,500 --------- ------------- -------- Balance outstanding, September 30, 1995 190,000 2.75 522,500 Options canceled -- -- -- Options granted -- -- -- --------- ------------- -------- Balance outstanding, September 30, 1996 190,000 $ 2.75 522,500 ========= ============= ========
At September 30, 1996, all of the above stock options were exercisable and options for 147,500 were available for future grant. F-18 106 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued The Board of Directors has also authorized the issuance of common stock purchase warrants to certain officers, directors, stockholders, key employees and other parties as follows:
WARRANT PRICE NUMBER OF --------------------------------- SHARES PER SHARE TOTAL --------- ------------- ---------- Balance outstanding, September 30, 1993 450,281 $2.00 to 5.50 1,991,321 Warrants issued 185,000 2.75 to 5.00 621,250 -------- ---------- Balance outstanding, September 30, 1994 635,281 2.00 to 5.50 2,612,571 Warrants issued 17,700 1.75 to 2.75 45,975 -------- ---------- Balance outstanding, September 30, 1995 652,981 1.75 to 5.50 2,658,546 Warrants issued 250,000 5.00 1,250,000 Warrants canceled (50,333) 5.00 to 5.50 (251,832) -------- ---------- Balance outstanding, September 30, 1996 852,648 1.75 to 5.50 $3,656,714 ======== ==========
At September 30, 1996, the total number of shares reserved for issuance upon exercise of stock options and warrants or direct grants was 1,402,981 shares. DEBT TO EQUITY CONVERSION On September 30, 1996, the Company converted $123,066 in various promissory notes to 123,066 shares of common stock. On September 28, 1995, the Company converted $207,747 in various promissory notes to a current stockholder to 199,185 shares of common stock. (10) INCOME TAXES Income (loss) before income taxes for the years ended September 30, 1996, 1995 and 1994 were taxed under the following jurisdictions:
1996 1995 1994 ---------- ------- -------- Domestic $ 869,906 398,461 (228,310) Foreign 235,143 (52,331) (443,472) ---------- ------- -------- Total $1,105,049 346,130 (671,782) ========== ======= ========
F-19 107 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued Income tax expense consists of the following:
CURRENT DEFERRED TOTAL -------- -------- ------ 1996: Federal $ 6,000 -- 6,000 State 10,843 -- 10,843 Foreign 5,294 -- 5,294 ------- -------- ------ $22,137 -- 22,137 ======= ======== ====== 1995: Federal $ -- -- -- State 5,000 -- 5,000 Foreign 4,251 -- 4,251 ------- -------- ------ $ 9,251 -- 9,251 ======= ======== ======
Actual income tax expense differs from the amount obtained by applying the statutory Federal income tax rate of 34% to income (loss) before income taxes as follows:
1996 1995 1994 --------- --------- ------- Computed provision for taxes based on income at the statutory rate $ 295,768 135,477 (77,625) State taxes, net of Federal income tax benefit 7,156 5,000 -- Foreign income taxes 5,294 4,251 -- Net operating losses utilized (62,293) (191,081) -- Current benefit of deferred tax assets (307,129) -- -- Permanent differences 53,920 53,142 55,900 Other 29,421 2,462 21,725 --------- -------- ------- $ 22,137 9,251 -- ========= ======== =======
As of September 30, 1996, the Company had net operating loss carryforwards of approximately $7,839,468 for Federal income tax purposes expiring at various dates between 2002 and 2008. F-20 108 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows:
1996 1995 ----------- ------------------ Deferred tax assets: Allowance for doubtful accounts $ 20,172 13,879 Inventory reserves and uniform capitalization 237,706 290,542 Depreciation -- 82,888 Accrued vacation 136,878 128,986 Warranty reserve 3,102 6,928 Other accrued liabilities 8,142 62,940 Net operating loss carryforwards 2,788,599 2,838,567 ----------- ---------- Total deferred tax assets 3,194,599 3,424,730 Valuation allowance for deferred tax assets (2,985,753) (3,424,730) ----------- ---------- 208,846 -- Deferred tax liabilities - depreciation (208,846) -- ----------- ---------- Net deferred taxes $ -- -- =========== ==========
(11) COMMITMENTS AND CONTINGENCIES LEASES The Company conducts most of its operations from leased facilities under operating leases which expire at various dates through September 30, 2001. The leases generally require the Company to pay all maintenance, insurance and property tax costs and contain provisions for rent increases. Total rent expense for the years ended September 30, 1996 and 1995 was $1,134,548 and $643,313, respectively. The future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of September 30, 1996 are listed below. F-21 109 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued The Company leases production equipment under long-term leases and has the option to purchase the equipment for a nominal cost at the termination of the lease. Capitalized lease agreements are calculated using interest rates appropriate at the inception of the lease and range from 10% to 12%.
CAPITAL OPERATING LEASES LEASES -------- ---------- 1997 $271,286 1,152,149 1998 181,408 1,084,070 1999 74,606 989,985 2000 74,606 844,673 2001 54,275 93,643 -------- ---------- Total minimum lease payments 656,181 $4,164,520 ========== Less amount representing interest 140,877 -------- Present value of minimum lease payments 515,304 Less current installments of obligations under capital leases 209,309 -------- Long-term obligations $305,995 ========
PENSION PLAN The Company sponsors a defined contribution pension plan (401(k) Savings Plan) covering substantially all of its U.S. domestic employees. Participants may make voluntary pretax contributions to the plan up to the limit as permitted by law. The annual contribution to the plan by the Company is discretionary. No contribution by the Company has been made to the plan to date. F-22 110 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued (12) FOREIGN OPERATIONS A summary of the Company's net sales, operating income (loss) and identifiable assets by geographical area follows
YEAR ENDED SEPTEMBER 30, 1996 ------------------------------------------------------------------------------------- NORTH AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED ----------- ---------- --------- ------------ ------------ Net sales from unaffiliated customers $27,853,736 1,210,979 2,183,881 -- 31,248,596 Transfers between geographical areas 1,528,818 2,267 -- (1,531,085) -- ----------- --------- --------- ----------- ------------ Net sales $29,382,554 1,213,246 2,183,881 (1,531,085) 31,248,596 =========== ========= ========= ========== ============ Operating income (loss) $ 1,046,898 (53,717) 510,908 -- 1,504,089 =========== ========= ========= ========== ============ Identifiable assets $14,847,867 937,242 3,828,357 -- 19,613,466 =========== ========= ========= ========== ============
YEAR ENDED SEPTEMBER 30, 1995 ------------------------------------------------------------------------------------------- NORTH AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED ----------- --------- --------- ------------ ------------ Net sales from unaffiliated customers $16,118,474 1,858,935 1,624,862 -- 19,602,271 Transfers between geographical areas 2,414,696 295,548 -- (2,710,244) -- ----------- --------- --------- ---------- ------------ Net sales $18,533,170 2,154,483 1,624,862 (2,710,244) 19,602,271 =========== ========= ========= ========== ============ Operating income (loss) $ (104,950) 47,662 128,920 -- 71,632 =========== ========= ========= ========== ============ Identifiable assets $14,035,754 1,062,032 856,908 -- 15,954,694 =========== ========= ========= ========== ============
F-23 111 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued
YEAR ENDED SEPTEMBER 30, 1994 -------------------------------------------------------------------------------------- NORTH AMERICA ASIA EUROPE ELIMINATIONS CONSOLIDATED ----------- --------- --------- ------------ ------------ Net sales from unaffiliated customers $11,498,175 1,371,678 1,367,179 -- 14,237,032 Transfers between geographical areas 2,367,190 552,548 14,184 (2,933,922) -- ----------- --------- --------- ------------ ------------ Net sales $13,865,365 1,924,226 1,381,363 (2,933,922) 14,237,032 =========== ========= ========= ============ ============ Operating loss $ (197,016) (155,907) (158,200) -- (511,123) =========== ========= ========= ============ ============ Identifiable assets $ 9,399,968 1,008,809 728,041 -- 11,136,818 =========== ========= ========= ============ ============
In determining operating income (loss) for each geographic area, sales and purchases between geographic areas have been accounted for on the basis of prices set between the geographic areas, generally at cost plus 5%. Identifiable assets by geographic area are those assets that are used in the Company's operations in each location. Export sales included in the North America amounts shown in the summary table by geographic area above were not significant. (13) SUBSEQUENT EVENTS On December 19, 1996, XIT Corporation formed an equal partnership with P & S Development, a California general partnership. The partnership, "Capital Source Partners, A Real Estate Partnership," obtained ownership rights to a 93,000 square foot facility at 4290 East Brickell Street, Ontario, California. XIT Corporation presently occupies 63,000 square feet of this facility as a corporate headquarters and as an administrative and factory facility for its Digitran Division. Going forward, XIT will lease the same 63,000 square feet from the partnership under a long-term lease. On March 26, 1997, privately-held XIT merged with a wholly owned, newly formed subsidiary of MicroTel, a publicly-traded company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former shareholders of XIT were issued approximately 6,119,000 shares of common stock of MicroTel, or approximately 66% of the issued and outstanding common stock. In addition, holders of XIT stock options and warrants at the date of the merger collectively had the right to acquire an additional 2,153,240 shares of common stock. Collectively, then the former XIT shareholders owned, or had the right to acquire, approximately 65% of the common stock of MicroTel on a fully-diluted basis as of the date of the transaction. F-24 112 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Notes to Consolidated Financial Statements, Continued As described in note 1, the merger has been accounted for as a purchase of MicroTel by the Company. Accordingly, the purchase price consists of the value of the common stock outstanding of MicroTel at the date of the merger of $5,011,000 plus estimated direct costs of the acquisition of $636,000 and the acquired assets and liabilities of MicroTel will be recorded at their estimated fair values at the date of the merger. The excess of $4,904,000 of the purchase price over the preliminary valuation of the net assets acquired will be recorded as goodwill and will be amortized on a straight-line basis over 15 years. The preliminary purchase price allocation is subject to change when additional information concerning assets and liability valuations is obtained. The following represents the unaudited pro forma results of operations as if the merger had occurred at the beginning of the Company's year ended September 30, 1996 and combines the Company's results of operations for that year with MicroTel's results of operations for the year ended December 31, 1996, with adjustments to reflect amortization of the estimated excess purchase price over the fair value of the net assets acquired.
(In thousands, except per share amounts) Net sales $47,552 ======= Net loss $(3,841) ======= Net loss per common share $ (.42) =======
The pro forma results of operations above do not purport to be indicative of the results that would have occurred had the merger taken place at the beginning of the period presented or of results which may occur in the future. On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. The pricing of the units is based on a 20% discount from the ten day average closing bid price of the Company's common stock preceding the date of contracting with the institutional investors (the "Average Reported Price"), with a minimum price per unit of $2.50 and maximum price of $3.50. The investors warrants have an exercise price of 130% of the Average Reported Price. Additionally, Yorkton and one other intermediary earn an aggregate commission of 10% of the gross proceeds and warrants to acquire 10% of the shares purchased in the offering at an exercise price of the lesser of the Average Reported Price or $3.50 per share, and Yorkton further is reimbursed for accountable expenses of the offering up to 2% of the gross proceeds. On April 14, 1997, a first closing occurred on 2,000,000 investment units at $2.50 per unit, for gross proceeds of $5,000,000. Net proceeds to the Company approximated $4,258,000 after $600,000 for commissions and Yorkton's expenses noted above and $142,000 for other expenses incurred. The offering, which was structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 is contracted or ii) the extended termination date of May 31, 1997. The offering expired on May 31, 1997 with no additional closings. F-25 113 Schedule II MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES (Formerly known as XCEL Corporation and Subsidiaries) Valuation and Qualifying Accounts Years ended September 30, 1996, 1995 and 1994
BALANCE AT ADDITIONS BEGINNING OF CHARGED TO COSTS DEDUCTIONS WRITE BALANCE AT END DESCRIPTION PERIOD AND EXPENSES OFFS OF ACCOUNTS OF PERIOD ----------- ------------ ---------------- ---------------- -------------- Allowance for doubtful accounts: Year ended September 30, 1996 $ 57,091 17,247 (27,753) 46,585 Year ended September 30, 1995 123,479 40,968 (107,356) 57,091 Year ended September 30, 1994 131,500 105,512 (113,533) 123,479 Allowance for inventory obsolescence: Year ended September 30, 1996 419,060 210,905 (307,865) 322,100 Year ended September 30, 1995 677,234 265,000 (523,174) 419,060 Year ended September 30, 1994 812,250 81,233 (216,249) 677,234 ======== ======= ======== =======
F-26 114 PART 1-FINANCIAL INFORMATION MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
DEC. 31, SEPT. 30, 1996 1996 ---- ---- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 886 $ 785 Accounts receivable 4,734 4,568 Inventories 6,297 6,505 Other current assets 714 556 ------------------ -------------------- Total current assets 12,631 12,414 Plant and equipment-net 5,006 5,060 Goodwill-net 1,836 1,903 Other assets 1,091 236 ------------------ -------------------- $ 20,564 $ 19,613 ================== ==================== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to related parties $ 352 $ 27 Notes payable to institutional lenders 3,140 2,837 Current portion of long term debt 1,073 912 Accounts payable and accrued expenses 6,526 6,475 ------------------ -------------------- Total current liabilities 11,091 10,251 Long term debt 3,549 2,678 Minority interest 68 64 ------------------ --------------------- Total long-term liabilities 3,617 2,742 Redeemable preferred stock 794 775 Stockholders' equity: Common stock 9,018 9,018 Accumulated deficit (4,109) (3,201) Foreign currency translation adjustments 153 28 ------------------ -------------------- Total stockholders' equity 5,062 5,845 ------------------ -------------------- $ 20,564 $ 19,613 ================== ====================
See notes to consolidated condensed financial statements. F-27 115 MicroTel International, Inc. Consolidated Condensed Statements of Operations (Unaudited)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 1995 ---- ---- (in thousands except per share amounts) Net sales $ 7,887 $ 6,796 Cost of sales 6,524 5,073 ------------------ ------------------ Gross profit 1,363 1,723 Operating expenses: Selling, general and administrative 1,975 1,371 Engineering and product development 68 76 ------------------ ------------------ INCOME (LOSS) FROM OPERATIONS (680) 276 Other income (expense) Interest expense (183) (98) Other (12) (27) ------------------ ------------------ INCOME (LOSS) BEFORE INCOME TAXES (875) 151 Income taxes 14 ------------------ ------------------ NET INCOME (LOSS) $ (889) $ 151 ================== ================== NET INCOME (LOSS) PER COMMON SHARE $ (0.15) $ 0.02 ================== ================== WEIGHTED AVERAGE NUMBER OF SHARES USED IN CALCULATING NET INCOME (LOSS) PER SHARE 6,063 5,814 ================== ==================
See notes to consolidated condensed financial statements. F-28 116 MicroTel International, Inc. Consolidated Condensed Statements of Cash Flows (Unaudited)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 1995 ---- ---- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (889) $ 151 Reconciliation to cash provided by (used in) operations: Depreciation and amortization 209 134 Amortization of intangible assets 67 67 Minority interest 4 (5) Equity in loss of real estate partnership 13 Changes in operating assets and liabilities: Accounts receivable (166) (34) Inventories 208 329 Other assets (157) (333) Accounts payable and accrued expenses 51 (112) ------------ --------------- Cash provided by (used in) operations (660) 197 ------------ --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (155) (92) Investment in and loan to real estate partnership (868) ------------ --------------- Cash used in investment activities (1,023) (92) ------------ --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) related parties 325 (4) Net borrowings (repayments) of other short-term debt 303 (279) Net borrowings (repayments) of long-term debt 1,032 (384) ------------ --------------- Cash provided by (used in) financing activities 1,660 (667) ------------ --------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 124 (24) ------------ --------------- NET INCREASE (DECREASE) IN CASH 101 (586) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 785 978 ------------ --------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 886 $ 392 ============ ===============
See notes to consolidated condensed financial statements. F-29 117 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD", "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTES 2,4, AND 6 HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the Company) is a holding company for its three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A., and, effective March 26, 1997, XIT Corporation (XIT). CXR Telcom Corporation and CXR S.A.(collectively "CXR") design, manufacture and market electronic telecommunication test equipment and data communications equipment. XIT designs, manufactures, and markets information technology products, including displays and input components, subsystem assemblies, printed circuits, and hybrid microelectronic circuits. The Company conducts its operations out of various facilities in the U.S., France, England, and Japan and organizes itself in three product line sectors- Circuits, Components and Subsystem Assemblies, and Instrumentation and Test Equipment. The Company's Instrumentation and Test Equipment Sector business is conducted solely by CXR and therefore its results of operations are not included in the accompanying consolidated condensed financial statements for the three months ended December 31, 1996 and 1995. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated condensed financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the Company's financial position as of December 31, 1996 and September 30, 1996 and its results of operations and cash flows for the three months ended December 31, 1996 and 1995. It is suggested that the accompanying consolidated condensed financial statements be read in conjunction with the Company's Consolidated Financial Statements for the three years ended September 30, 1996, 1995 and 1994 included in its Registration Statement on Form S-1 (No. 333-29925) filed on June 24, 1997. F-30 118 As discussed more fully in Note 2, the Company merged with XIT on March 26, 1997. The merger was accounted for as a purchase of the Company by XIT in a "reverse acquisition" because the existing shareholders of the Company prior to the merger did not have voting control of the combined entity after the merger. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company, the Company, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. Consequently,the consolidated condensed financial statements include the accounts of XIT and its wholly and majority-owned subsidiaries, and beginning March 26, 1997, will include the Company and its other subsidiaries, CXR Telcom Corporation and CXR S.A. (the Former Company). XIT's 50% investment in a real estate partnership (see Note 5) is accounted for using the equity method. Intercompany balances and transactions are eliminated in consolidation and the currencies of the countries in which foreign subsidiaries are located are considered their functional currencies. Cumulative translation adjustments result from converting from these functional currencies to U.S. dollars. FISCAL YEAR END CHANGE In connection with the reverse acquisition accounting treatment described above, XIT changed its fiscal year end from September 30 to December 31 to adopt the fiscal year end of the Former Company. This report provides the financial information for XIT for the transition period between its fiscal year ended September 30, 1996 and the beginning of its new fiscal year, January 1, 1997. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE In accord with the reverse acquisition accounting treatment, the capital accounts of XIT will be restated at the merger date to give effect to the merger exchange ratio (1.451478 common shares of the Company for each common share of XIT) and to convert XIT's no par value common stock to $.0033 par value common stock of the Company. Weighted average shares used in the net income (loss) per share computations presented have been restated to reflect the exchange. Net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Common stock equivalents were antidilutive and therefore not part of the shares used in calculating net income (loss) per share for the three months ended December 31, 1996 and 1995, respectively. The accretion of the excess of the redemption value over the carrying value of redeemable preferred stock of $19,000 and $20,000 have been deducted from net income (loss) for the three months ended December 31, 1996 and 1995, respectively, in arriving at net income (loss) applicable to common stockholders used in the calculations of net income (loss) in those periods. On March 3, 1997 the Financial Accounting Standards Board issued FAS No. 128 "Earnings per Share" (FAS 128), which will become effective for the Company for its year ending December 31, 1997, requiring restatement of quarterly and prior year financial information, if applicable. This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APBO No. 15 "Earnings per Share". FAS No. 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the F-31 119 weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share of APB No. 15. As common stock equivalents have historically been antidilutive, implementation is expected to have no effect on previously reported EPS. However, based on the current trading value of the Company's common stock and assuming the Company is profitable, it is expected that future presentations of EPS will include differing values for Basic and Diluted EPS due to the effects of common stock equivalents. (2) MERGER WITH XIT On March 26, 1997, XIT of Ontario, California merged with a wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former shareholders of XIT were issued approximately 6,119,000 shares of common stock of the Company, or approximately 66% of the issued and outstanding common stock. In addition, holders of XIT stock options and warrants collectively have the right to acquire an additional 2,153,240 shares of common stock. Collectively, then the former XIT shareholders own, or have the right to acquire,approximately 65% of the Common Stock of the Company on a fully-diluted basis as of the date of the transaction. As noted above, the merger is accounted for as a purchase of the Former Company by XIT. Accordingly, the purchase price consists of the value of the common stock outstanding of the Former Company at the date of the merger of $5,011,000 plus estimated direct costs of the acquisition of $636,000 and the acquired assets and liabilities of the Former Company have been recorded at their estimated fair values at the date of the merger. The excess of $4,904,000 of the purchase price over the preliminary valuation of the net assets acquired was recorded as goodwill and is being amortized on a straight-line basis over 15 years. The preliminary purchase price allocation is subject to change when additional information concerning asset and liability valuations is obtained. The following represents the unaudited pro forma results of operations as if the merger had occurred at the beginning of the periods indicated and combines the Former Company's results of operations for the year ended December 31, 1996 and the three months ended December 31, 1996 with those of XIT's for its year ended September 30, 1996 and the three months ended December 31, 1996, respectively, with adjustments to reflect amortization of the estimated excess price over the fair value of the net assets acquired.
(in thousands, except per share amounts) 3 Months Year Ended Ended Dec 31, September 30, 1996 1996 ---- ---- Net sales $12,151 $47,552 ======= ======= Net loss $(4,627) $(3,841) ======= ======= Net loss per common share $ (.50) $ (.42) ======= =======
The pro forma results of operations above do not purport to be indicative of the results that would have occurred had the merger taken place at the beginning of the periods presented or of results which may occur in the future. F-32 120 (3) INVENTORIES Inventories consist of the following at December 31, 1996 and September 30, 1996:
(in thousands, except per share amounts) December 31, September 30, 1996 1996 ---- ---- Raw materials $2,718 $3,072 Work-in-process 2,642 2,950 Finished goods 1,289 805 Reserves (352) (322) ---- ---- $6,297 $6,505 ====== ======
(4) BANKING ARRANGEMENTS Both XIT and a subsidiary have bank lines of credit which expired originally on January 15, 1997, and which were to expire under extension arrangements on August 30, 1997. Additionally, both XIT and the subsidiary are in violation of certain covenants under the related loan agreements. Although the bank has not waived these defaults, it has agreed to forbear from taking any action with respect to same until the extended expiration date. On August 11, 1997 these lines were renewed with more favorable advance rates against related collateralized assets and with less restrictive financial covenants, with which XIT and the subsidiary are in compliance. Outstanding borrowings under these lines of credit were $2,027,000 and $1,999,000 at December 31, 1996 and September 30, 1996, respectively. (5) INVESTMENT IN PARTNERSHIP On December 19, 1996, XIT Corporation formed an equal partnership with P&S Development, a California general partnership. The partnership, "Capital Source Partners, A Real Estate Partnership," obtained ownership rights to the 93,000 square foot facility at 4290 East Brickell Street, Ontario, California, 63,000 square feet of which the Company presently leases as its corporate headquarters and as an administrative and factory facility for the Digitran Division of XIT. The lease term currently expires in September 2000, but may be extended to September 2010; and the monthly rent is approximately $36,000. XIT's investment in the partnership totalled $118,000 and it has loaned the partnership $750,000, which is due in varying monthly installments through 2001. XIT's 50% ownership in the net assets of the partnership was $768,000 at the date of formation. The $650,000 excess of this amount over XIT's cost of $118,000 (negative goodwill) is netted against the recorded percentage ownership in the net assets of the partnership, such that the net carrying value of the investment at the date of formation of the partnership is XIT's cost. Equity in the loss of the partnership from the date of formation to December 31, 1996 approximated $13,000 and is included in other income(expense) in the consolidated condensed statement of operations for the three months ended December 31, 1996. F-33 121 (6) LITIGATION In September, 1994 Raymond Jacobson, a former officer and director of the Company and a participant in the Company's deferred compensation plan, brought an action against the Company in the California Superior Court, Santa Clara County, alleging that the Company has breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August 1994. The 1993 Agreement superseded a previous deferred compensation agreement dated April 1, 1977 (the "1977 Agreement") which had provided for twice the level of payments. Mr. Jacobson was claiming damages of approximately $1,200,000, which he purported to be the present value of all payments to be made under the 1993 Agreement. In June 1995 the Company paid Mr. Jacobson all amounts past due under the contract plus interest and reinstated the bi-weekly payments, which have continued to date. On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against Mr. Jacobson in the District Court for Galveston County, Texas alleging damages arising from DDC's investment of more than $2,000,000 for the purchase of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr. Jacobson, through his attorney, demanded that the Company indemnify him, hold him harmless and pay for the cost of defense, including reasonable attorney's fees and costs in connection with the litigation instituted against him by DDC. This suit was subsequently dismissed by DDC. On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the Company that he believed that the litigation instituted against him by DDC provided a basis for him to rescind the 1993 Agreement and assert his rights to full payment under the 1977 Agreement. A motion for leave to amend the claim against the Company to include this assertion has been filed with the court. Notwithstanding the above, the Company management and Mr. Jacobson have conducted settlement discussions since June 1996, and the Company believes that an enforceable settlement was reached on January 22, 1997. Mr. Jacobson apparently disclaims this agreement based on the actions noted above. On February 28, 1997 the Company filed a motion for leave to file a cross-claim asserting that the January 22, 1997 agreement supersedes all previous agreements with Mr. Jacobson. A motion for leave to amend the claim against the Company to include this assertion has been filed with the court. A court supervised settlement conference with Mr. Jacobson was held on March 26, 1997. Although a tentative settlement was reached, the settlement was subject to fulfillment of a number of conditions subsequent which did not occur and therefore was not binding on either party. Subsequent thereto, several settlement offers have been proposed by plaintiff's counsel, none of which are acceptable to the Company. Currently, both the Company's motion for leave to cross-claim and Mr. Jacobson's motion for leave to amend his complaint have been granted and a trial date has been set for February 9, 1998. The Company does not believe that the value of a settlement of the above matter or alternatively a trial judgement will be materially in excess of the amount already recorded by the Company for the deferred compensation arrangement, which approximates $1,010,000 at December 31, 1996. The recorded amount approximates the value of the tentative settlement reached on March 26, 1997. In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of F-34 122 the Company, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by David Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company cannot issue unrestricted shares (absent registration), the Company answered Mr. Scheinfeld's motion, seeking to compel him to serve a complaint upon the defendants. On June 30, 1997, the complaint was served. The Company has subsequently answered, denying the material allegations of the complaint, and discovery is proceeding in the case. Although the ultimate outcome of the matters noted above cannot be predicted with certainty, pending actual resolution, in the opinion of management, the disposition of these matters will not have a material adverse affect on the consolidated results of operations, financial position, or cash flows. (7) PRIVATE PLACEMENT On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. The pricing of the units is based on a 20% discount from the ten day average closing bid price of the Company's common stock preceding the date of contracting with the institutional investors (the "Average Reported Price"), with a minimum price per unit of $2.50 and maximum price of $3.50. The investors warrants have an exercise price of 130% of the Average Reported Price. Additionally, Yorkton and one other intermediary earn an aggregate commission of 10% of the gross proceeds and warrants to acquire 10% of the shares purchased in the offering at an exercise price of the lesser of the Average Reported Price or $3.50 per share, and Yorkton further is reimbursed for accountable expenses of the offering up to 2% of the gross proceeds. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company were $4,258,000 after $600,000 for commissions and Yorkton's expenses noted above and $142,000 for other related expenses incurred. The offering, which was structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 was contracted or ii) the extended termination date of May 31, 1997. The offering expired on May 31, 1997 with no additional closings. F-35 123 PART 1-FINANCIAL INFORMATION MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, DEC. 31, 1997 1996 -------- -------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 1,304 $ 886 Accounts receivable 7,721 4,734 Inventories 8,011 6,297 Other current assets 1,031 714 ------- ------- Total current assets 18,067 12,631 Plant and equipment-net 5,134 5,006 Software development costs-net 726 Goodwill-net 6,655 1,836 Other assets 1,566 1,091 ------- ------- $32,148 $20,564 ======= ======= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to related parties $ 100 $ 352 Notes payable to institutional lenders 3,336 3,140 Current portion of long term debt 998 1,073 Accounts payable and accrued expenses 9,360 6,526 Deferred compensation 982 ------- ------- Total current liabilities 14,776 11,091 Long term debt 3,213 3,549 Deferred compensation liability 657 Minority interest 74 68 ------- ------- Total long-term liabilities 3,944 3,617 Redeemable preferred stock 686 794 Stockholders' equity: Common stock 38 9,018 Additional paid-in capital 18,730 Accumulated deficit (6,179) (4,109) Foreign currency translation adjustments 153 153 ------- ------- Total stockholders' equity 12,742 5,062 ------- ------- $32,148 $20,564 ======= =======
See notes to consolidated condensed financial statements. F-36 124 MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, 1997 1996 1997 1996 -------- -------- -------- -------- (in thousands except per share amounts) Net sales $ 12,029 $ 8,637 $ 19,736 $ 15,973 Cost of sales 8,875 6,170 14,972 11,541 -------- -------- -------- -------- GROSS PROFIT 3,154 2,467 4,764 4,432 Operating expenses: Selling, general and administrative 3,643 1,760 5,555 3,255 Engineering and product development 694 78 792 157 -------- -------- -------- -------- INCOME (LOSS) FROM OPERATIONS (1,183) 629 (1,583) 1,020 Other income (expense) Interest expense (262) (116) (460) (244) Other 8 59 7 81 -------- -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES (1,437) 572 (2,036) 857 Income taxes (benefit) (2) 29 2 32 -------- -------- -------- -------- NET INCOME (LOSS) $ (1,435) $ 543 $ (2,038) $ 825 ======== ======== ======== ======== NET INCOME (LOSS) PER COMMON SHARE $ (0.13) $ 0.09 $ (0.24) $ 0.13 ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES USED IN CALCULATING NET INCOME (LOSS) PER SHARE 11,005 5,873 8,638 5,844 ======== ======== ======== ========
See notes to consolidated condensed financial statements. F-37 125 MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 1996 ---- ---- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES; Net income (loss) $(2,038) $ 825 Reconciliation to cash provided by (used in) operations: Depreciation and amortization 356 288 Amortization of intangibles 287 91 Other noncash items 46 28 Changes in operating assets and liabilities: Accounts receivable (1,177) (422) Inventories 1,265 (329) Other assets (62) 111 Accounts payable and accrued expenses (1,443) (218) ------------ ------------ Cash provided by (used in) operations (2,766) 374 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (23) (279) Cash paid for purchase of Etch-Tek (428) Cash acquired in reverse acquisition 264 ------------- ------------- Cash provided by (used) in investment activities 241 (707) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings from (repayments to) related parties (752) (44) Net borrowings (repayments) of other short-term debt 53 (322) Net borrowings (repayments) of long-term debt (476) 1,086 Redemption of preferred stock (140) Private placement of common stock 4,258 ------------- -------------- Cash provided by financing activities 2,943 720 ------------- -------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH -- (21) ------------- -------------- NET INCREASE IN CASH 418 366 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 886 392 ------------- -------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,304 $758 ============= ==============
See notes to consolidated condensed financial statements. F-38 126 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD", "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTES 2,4, AND 5 HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the Company) is a holding company for its three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A., and, effective March 26, 1997, XIT Corporation (XIT). CXR Telcom Corporation and CXR S.A. design, manufacture and market electronic telecommunication test equipment and data communications equipment. XIT designs, manufactures, and markets information technology products, including displays and input components, subsystem assemblies, printed circuits, and hybrid microelectronic circuits. The Company conducts its operations out of various facilities in the U.S., France, England, and Japan and organizes itself in three product line sectors- Circuits, Components and Subsystem Assemblies, and Instrumentation and Test Equipment. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission and therefore do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated condensed financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly financial position as of June 30, 1997 and December 31, 1996 and results of operations and cash flows for the related interim periods ended June 30, 1997 and 1996. Results of operations for the six months ended June 30, 1997 are not necessarily indicative of results that may be expected for the full year. It is suggested that the accompanying consolidated condensed financial statements be read in conjunction with the Company's Consolidated Financial Statements for the three years ended September 30, 1996, 1995 and 1994 included in its Registration Statement on Form S-1 (No. 333-29925) filed on June 24, 1997. As discussed more fully in Note 2, the Company merged with XIT on March 26, 1997. The merger was accounted for as a purchase of the Company by XIT in a "reverse acquisition" because the existing shareholders of the Company prior to the merger did not have voting control of the combined entity after the merger. In a reverse acquisition, the accounting F-39 127 treatment differs from the legal form of the transaction, as the continuing legal parent company, the Company, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. Consequently,the consolidated condensed financial statements include the accounts of XIT and its subsidiaries, and beginning March 26, 1997, include the Company and its other subsidiaries, CXR Telcom Corporation and CXR S.A. (the Former Company). XIT has a 50% interest in a real estate partnership which was formed in December 1996 and is accounted for using the equity method. Equity in the income(loss) of the partnership of $nil and $(22,000) for the three and six months ended June 30, 1997, respectively, is included in other income (expense) in the accompanying consolidated condensed statements of operations. Intercompany balances and transactions are eliminated in consolidation and the currencies of the countries in which foreign subsidiaries are located are considered their functional currencies. Cumulative translation adjustments result from converting from these functional currencies to U.S. dollars. Certain 1996 amounts and certain first quarter 1997 amounts included in the results for the six months ended June 30, 1997, have been reclassified to conform to the current quarter presentation with no impact or the net income (loss) for those periods. FISCAL YEAR END CHANGE In connection with the reverse acquisition accounting treatment described above, XIT changed its fiscal year end from September 30 to December 31 to adopt the fiscal year end of the Former Company. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE In accord with the reverse acquisition accounting treatment, the capital accounts of XIT have been restated to give effect to the merger exchange ratio (1.451478 common shares of the Company for each common share of XIT) and to convert XIT's no par value common stock to $.0033 par value common stock of the Company. Weighted average shares used in the net income (loss) per share calculations presented have been restated to reflect the exchange. Net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Common stock equivalents were antidilutive and therefore not part of the shares used in calculating net income (loss) per share for the three and six months ended June 30, 1997 and 1996, respectively. The accretion of the excess of the redemption value over the carrying value of redeemable preferred stock has been deducted from net income (loss) in arriving at net income (loss) applicable to common stockholders used in the calculations of net income (loss) per share. Accretion of $16,000 and $21,000 have been deducted from net income (loss) for the three months ended June 30, 1997 and 1996, respectively, and $32,000 and $41,000 have been deducted from net income (loss) for the six months ended June 30, 1997 and 1996, respectively. On March 3, 1997 the Financial Accounting Standards Board issued FAS No. 128 "Earnings per Share" (FAS 128), which will become effective for the Company for its year ending December 31, 1997, requiring restatement of quarterly and prior year financial information, if applicable. This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APBO No. 15 "Earnings per Share". FAS No. 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the F-40 128 weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share of APB No. 15. As common stock equivalents have historically been antidilutive, implementation is expected to have no effect on previously reported EPS. However, based on the current trading value of the Company's common stock and assuming the Company is profitable, it is expected that future presentations of EPS will include differing values for Basic and Diluted EPS due to the effects of common stock equivalents. (2) MERGER WITH XIT On March 26, 1997, XIT of Ontario, California merged with a wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former shareholders of XIT were issued approximately 6,115,000 shares of common stock of the Company, or approximately 66% of the issued and outstanding common stock. In addition, holders of XIT stock options and warrants collectively have the right to acquire an additional 2,153,240 shares of common stock. Collectively, then the former XIT shareholders own, or have the right to acquire,approximately 65% of the Common Stock of the Company on a fully-diluted basis as of the date of the transaction. As noted above, the merger is accounted for as a purchase of the Former Company by XIT. Accordingly, the purchase price consists of the value of the common stock outstanding of the Former Company at the date of the merger of $5,011,000 plus estimated direct costs of the acquisition of $636,000 and the acquired assets and liabilities of the Former Company have been recorded at their estimated fair values at the date of the merger. The excess of $4,904,000 of the purchase price over the preliminary valuation of the net assets acquired was recorded as goodwill at the acquisition date and an additional $94,000 was recorded in the second quarter of 1997 upon the resolution of a preacquistion contingency. The goodwill is being amortized on a straight-line basis over 15 years. The preliminary purchase price allocation is subject to change as additional information concerning asset and liability valuations is obtained. The following represents the unaudited pro forma results of operations as if the merger had occurred at the beginning of the periods indicated and combines the Former Company's results of operations for the year ended December 31, 1996 and the two months and 25 days ended March 25, 1997 with those of XIT's for its year ended September 30, 1996 and the six months ended June 30, 1997, respectively, with adjustments to reflect amortization of the estimated excess price over the fair value of the net assets acquired. F-41 129
(in thousands, except per share amounts) 6 Months Year Ended Ended June 30, September 30, 1997 1996 Net sales $22,732 $47,552 ======= ======= Net loss $(4,130) $(3,847) ======= ======= Net loss per common share $ (.41) $ (.42) ======= =======
The pro forma results of operations above do not purport to be indicative of the results that would have occurred had the merger taken place at the beginning of the periods presented or of results which may occur in the future. (3) INVENTORIES Inventories consist of the following at June 30, 1997 and December 31, 1996:
(in thousands, except per share amounts) June 30, December 31, 1997 1996 Raw materials $4,396 $2,718 Work-in-process 3,199 2,642 Finished goods 2,245 1,289 Reserves (1,829) (352) ------ ------ $8,011 $6,297 ====== ======
(4) BANKING ARRANGEMENTS Both XIT and a subsidiary have bank lines of credit which expired originally on January 15, 1997, and which were to expire under extension arrangements on August 30, 1997. Additionally, both XIT and the subsidiary were in violation of certain financial covenants under the related loan agreements. Although the bank had not waived these defaults, it had agreed to forbear from taking any action with respect to same until the extended expiration date. On August 11, 1997 these lines were renewed with more favorable advance rates against related collateralized assets and with less restrictive financial covenants, with which XIT and the subsidiary are in compliance. Outstanding borrowings under these lines of credit were $2,208,000 and $2,027,000 at June 30, 1997 and December 31, 1996, respectively. (5) LITIGATION In September, 1994 Raymond Jacobson, a former officer and director of the Company and a participant in the Company's deferred compensation plan, brought an action against the Company in the California Superior Court, Santa Clara County, alleging that the Company has breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August 1994. The 1993 Agreement superseded a previous deferred compensation agreement dated April 1, 1977 (the "1977 Agreement") which had provided for twice the level of payments. Mr. Jacobson was claiming damages of approximately $1,200,000, which he purported to be the present value of all payments F-42 130 to be made under the 1993 Agreement. In June 1995 the Company paid Mr. Jacobson all amounts past due under the contract plus interest and reinstated the bi-weekly payments, which have continued to date. On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against Mr. Jacobson in the District Court for Galveston County, Texas alleging damages arising from DDC's investment of more than $2,000,000 for the purchase of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr. Jacobson, through his attorney, demanded that the Company indemnify him, hold him harmless and pay for the cost of defense, including reasonable attorney's fees and costs in connection with the litigation instituted against him by DDC. This suit was subsequently dismissed by DDC. On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the Company that he believed that the litigation instituted against him by DDC provided a basis for him to rescind the 1993 Agreement and assert his rights to full payment under the 1977 Agreement. A motion for leave to amend the claim against the Company to include this assertion has been filed with the court. Notwithstanding the above, the Company management and Mr. Jacobson have conducted settlement discussions since June 1996, and the Company believes that an enforceable settlement was reached on January 22, 1997. Mr. Jacobson apparently disclaims this agreement based on the actions noted above. On February 28, 1997 the Company filed a motion for leave to file a cross-claim asserting that the January 22, 1997 agreement supersedes all previous agreements with Mr. Jacobson. A motion for leave to amend the claim against the company to include this assertion has been filed with the court. A court supervised settlement conference with Mr. Jacobson was held on March 26, 1997. Although a tentative settlement was reached, the settlement was subject to fulfillment by the Company of a number of conditions subsequent which did not occur and therefore was not binding on either party. Subsequent thereto, several alternative settlement offers have been proposed by plaintiff's counsel, none of which are acceptable to the Company. Currently, both the Company's motion for leave to cross-claim and Mr. Jacobson's motion for leave to amend his complaint have been granted and a trial date has been set for February 9, 1998. The Company does not believe that the value of a settlement of the above matter or alternatively a trial judgement will be materially in excess of the amount already recorded by the Company for the deferred compensation arrangement, which approximates $1,000,000 at June 30, 1997. The recorded amount approximates the value of the tentative settlement reached on March 26, 1997. In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of the Company, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by David Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company cannot issue unrestricted shares (absent registration), the Company answered Mr. Scheinfeld's F-43 131 motion and sought to compel him to serve a complaint upon the defendants. On June 30, 1997, the complaint was served. The Company has subsequently answered, denying the material allegations of the complaint, and discovery is proceeding in the case. Although the ultimate outcome of the matters noted above cannot be predicted with certainty, pending actual resolution, in the opinion of management, the disposition of these matters will not have a material adverse affect on the consolidated results of operations, financial position, or cash flows. (6) PRIVATE PLACEMENT On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. The pricing of the units is based on a 20% discount from the ten day average closing bid price of the Company's common stock preceding the date of contracting with the institutional investors (the "Average Reported Price"), with a minimum price per unit of $2.50 and maximum price of $3.50. The investors warrants have an exercise price of 130% of the Average Reported Price. Additionally, Yorkton and one other intermediary earn an aggregate commission of 10% of the gross proceeds and warrants to acquire 10% of the shares purchased in the offering at an exercise price of the lesser of the Average Reported Price or $3.50 per share, and Yorkton further is reimbursed for accountable expenses of the offering up to 2% of the gross proceeds. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company approximated $4,258,000, after $600,000 for commissions and Yorkton's expenses noted above and $142,000 for other expenses incurred. The offering, which was structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 was contracted or ii) the extended termination date of May 31, 1997. The offering expired on May 31, 1997 with no additional closings. F-44 132 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS MicroTel International, Inc. San Jose, California We have audited the accompanying consolidated balance sheets of MicroTel International, Inc. (formerly CXR Corporation) as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1996 and 1995, and the six months ended December 31, 1994. We have also audited the schedule included on page F-71. These financial statements and the schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MicroTel International, Inc. at December 31, 1996 and 1995, and the results of its operations and its cash flows for the years ended December 31, 1996 and 1995, and the six months ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the schedule presents fairly, in all material respects, the information set forth therein. BDO Seidman, LLP San Francisco, California April 14, 1997 F-45 133 INDEPENDENT AUDITORS' REPORT MicroTel International, Inc. We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of MicroTel International, Inc. (formerly CXR Corporation) and its subsidiaries for the year ended June 30, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the operations and the cash flows of MicroTel International, Inc. (formerly CXR Corporation) and its subsidiaries for the year ended June 30, 1994 in conformity with generally accepted accounting. The accompanying fiscal 1994 financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the 1994 financial statements included in the June 30, 1994 Annual Report to the Securities and Exchange Commission on Form 10-K, the Company's declining revenues and recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters were also described in Note 1 to such 1994 financial statements. The fiscal 1994 financial statements do not include any adjustments that might result from the outcome of this uncertainty. Subsequent to June 30, 1994, the Company agreed to amendments to the Common Stock Purchase Agreement (the Agreement) with Daniel Dror & Co. ("DDC") or designee, approved by the stockholders in April 1994. In September 1994, as consideration under the first amendment to the Agreement, the Company was assigned a promissory note and received title to a securities brokerage account consisting of cash and common stock and the Company assumed the liability for certain financial derivative instruments which were secured by the cash and common stock investments in the securities brokerage account. Subsequent to the acceptance of this consideration on behalf of the Company by Daniel Dror in his capacity as Chairman of the Company's investment committee, the Board of Directors reviewed the consideration received and determined that it would be in the best interests of the Company to accept payment with securities which are less likely to experience significant fluctuations in value. On November 8, 1994 the Company executed a second amendment to the Agreement dated October 16, 1994 whereby the transactions under the previous amended Agreement were effectively rescinded, the Company agreed to sell a reduced number of shares to the designee of DDC and the Company agreed to accept, subject to completion of its due diligence on or before December 31, 1994, assignment of a promissory note (payable on December 31, 1995 and secured by common stock of another public company) as consideration under such second amendment to the Agreement. These transactions are described more fully in Note 2 to the financial statements. DELOITTE & TOUCHE LLP San Jose, California August 31, 1994 (November 18, 1994 as to paragraphs two through four in Note 2) F-46 134 MICROTEL INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS December 1996 and December 1995 (in thousands)
Dec. 31, Dec. 31, 1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 271 $ 432 Investments in marketable securities 152 Accounts receivable, less allowance for doubtful accounts: Dec. 1996, $186 Dec. 1995, $425 2,936 3,582 Inventories 3,004 4,148 Other current assets 487 283 -------- -------- Total current assets 6,698 8,597 -------- -------- Plant and equipment-net 526 709 Software development costs-net 1,027 1,209 Foreign tax receivable 830 790 Other assets 238 20 -------- -------- $ 9,319 $ 11,325 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to banks $ 1,142 $ 759 Current portion long term debt 44 170 Accounts payable 2,580 2,184 Accrued payroll and related expenses 748 922 Other accrued liabilities 749 748 Current portion-deferred compensation 737 161 Deferred income 350 -------- -------- Total current liabilities 6,000 5,294 -------- -------- Long term debt 36 54 Deferred compensation liability 507 803 Other long-term liabilities 218 -------- -------- Total liabilities 6,543 6,369 -------- -------- Commitments and contingencies Stockholders' equity: Common stock 10 45 Additional paid-in capital 23,560 22,293 Accumulated deficit (21,371) (16,774) Stockholder's note receivable (1,337) Deferred compensation (40) (88) Cumulative translation adjustments 617 817 -------- -------- Stockholders' equity 2,776 4,956 -------- -------- $ 9,319 $ 11,325 ======== ========
See notes to consolidated financial statements. F-47 135 MICROTEL INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts)
SIX MONTHS FOR THE FOR THE YEARS ENDED ENDED YEAR ENDED DEC 31, DEC 31, DEC 31, June 30, 1996 1995 1994 1994 -------- -------- -------- -------- Sales $ 16,303 $ 18,352 $ 9,931 $ 21,648 -------- -------- -------- -------- Costs and expenses: Cost of sales 10,819 11,322 6,174 12,647 Engineering and product development 1,817 1,674 659 2,960 Marketing and selling 3,715 3,928 1,654 3,975 Administration 3,115 2,211 1,049 2,571 Severance and related settlement costs 1,567 -------- -------- -------- -------- 21,033 19,135 9,536 22,153 -------- -------- -------- -------- Income (loss) from operations (4,730) (783) 395 (505) Other income (expense): Interest income 371 117 9 9 Interest expense (319) (164) (121) (258) Other (4) 12 15 115 -------- -------- -------- -------- Income (loss) before income tax benefit (4,682) (818) 298 (639) Income tax benefit (85) (151) -------- -------- -------- -------- Net income (loss) ($4,597) ($667) $ 298 ($639) ======== ======== ======== ======== Net income (loss) per share ($1.65) ($0.25) $ 0.15 ($0.39) ======== ======== ======== ======== Weighted average number of shares used in calculating net income (loss) per share 2,783 2,678 1,998 1,636 ======== ======== ======== ========
See notes to consolidated financial statements. F-48 136 MICROTEL INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
(A) Common Stock Additional Stockholder's Cumulative Total Paid-in Accumulated Note Deferred Translation Stockholders' Shares Amount Capital Deficit Receivable Compensation Adjustments Equity ------ ------ ------- ------- ---------- ------------ ----------- ------ BALANCE JUNE 30, 1993 7,730 $26 $19,824 $(15,766) $257 $4,341 Issuance of common stock for cash net of issuance cost of $94 thousand 1,965 6 710 716 Translation adjustments 196 196 Net loss (639) (639) ------ -- ------ ------- ------- ------- ---- ------ BALANCE JUNE 30, 1994 9,695 32 20,534 (16,405) 453 4,614 Issuance of common stock for cash 1 Issuance of common stock for notes receivable 3,343 11 1,326 (1,337) Translation adjustments 66 66 Net income 298 298 ------ -- ------ ------- ------- ------- ---- ------ BALANCE DECEMBER 31, 1994 13,039 43 21,860 (16,107) (1,337) 519 4,978 Issuance of common stock for cash net of issuance cost of $15 thousand 368 1 220 221 Issuance of common stock in settlement of debt 130 1 79 80 Issuance of incentive stock awards 215 134 (134) Amortization 46 46 Translation adjustments 298 298 Net loss (667) (667) ------ -- ------ ------- ------- ------- ---- ------ BALANCE DECEMBER 31, 1995 13,752 45 22,293 (16,774) (1,337) (88) 817 4,956 Issuance of common stock for cash 214 1 128 129 Issuance of common stock in payment of expenses 80 69 69 Issuance of compensation awards 90 1 57 (31) 27 Five for one reverse split net of costs of $43 thousand (11,309) (37) (6) (43) Payments on shareholders' note receivable 380 380 Recission of remaining stock subscription (478) (2) (955) 957 Issuance of common stock for cash 21 46 46 Issuance of common stock in payment of expenses 59 182 182 Employee and officer awards and option exercises, including $1.45 million in non-cash compensation 511 2 1,746 1,748 Amortization 79 79 Translation adjustments (200) (200) Net loss (4,597) (4,597) ----- --- ------- -------- -- ---- ---- ------ BALANCE DECEMBER 31, 1996 2,940 $10 $23,560 ($21,371) $0 ($40) $617 $2,776 ===== === ======= ======== == ==== ==== ======
(A) $.0033 par value; 25,000 shares authorized (B) $.01 par value; 10,000 preferred shares authorized none issued See notes to consolidated financial statements. F-49 137 MICROTEL INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE FOR THE SIX MONTHS YEAR FOR THE YEARS ENDED ENDED ENDED Dec. 31, Dec. 31, Dec. 31, June 30, 1996 1995 1994 1994 ------- ------- ------- ------- Cash flows from operating activities: Net income (loss) ($4,597) ($ 667) $ 298 ($ 639) Reconciliation to net cash provided by (used in) operations: Depreciation 221 274 153 387 Amortization of intangible assets 298 266 63 282 Deferred compensation 358 46 Stock-based compensation and expense 1,754 Write-down of assets 1,006 Changes in assets and liabilities net of sale of NAMS and LAN product lines: Investments in marketable securities (152) Accounts receivable 646 1,316 (1,084) (1,061) Inventories 768 (412) 463 766 Other current assets (52) 4 31 97 Other non-current assets (218) Accounts payable 396 (361) (701) 1,097 Other current liabilities (523) (262) (74) (252) Foreign taxes receivable (40) (144) 2 Other noncurrent liabilities (218) 237 31 (513) ------- ------- ------- ------- Net cash provided by (used in) operations (201) 145 (820) 166 ------- ------- ------- ------- Cash flows from investing activities: Certificate of deposit 650 (650) Additions to plant and equipment (71) (148) (43) (171) Capitalized software (795) (879) (490) Collection of other receivables 1,025 ------- ------- ------- ------- Net cash provided by (used in) investing activities (866) (377) (158) (171) ------- ------- ------- ------- Cash flows from financing activities: Notes payable-net 383 (184) 943 (737) Term debt Additions 91 Repayments (135) (95) (63) (174) Fee for note receivable extension 250 Proceeds from common stock transactions 827 221 716 Costs relating to stock split (43) ------- ------- ------- ------- Net cash provided by (used in) financing activities 1,032 192 880 (104) ------- ------- ------- ------- Effect of exchange rate changes on cash (126) 175 49 114 ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents (161) 135 (49) 5 Cash and cash equivalents at beginning of period 432 297 346 341 ------- ------- ------- ------- Cash and cash equivalents at end of period $ 271 $ 432 $ 297 $ 346 ======= ======= ======= ======= Non cash investing and financing activities: Issuance of equity securities for compensation and expenses $ 1,754 ======= Cancellation of stock subscription $ 957 ======= Issuance of common stock for debt settlement $ 80 ======= Sale of common stock for note receivable $ 1,337 ======= Sale of NAMS and LAN product lines for a note receivable $ 1,025 =======
See notes to consolidated financial statements. F-50 138 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the Company) is a holding company for its wholly-owned subsidiaries CXR Telcom Corporation, a U.S. corporation, and CXR S.A., its French subsidiary. The company designs, manufactures and markets electronic telecommunication test equipment and data communications equipment at its facilities in San Jose, California and in Abondant, France. BASIS OF PRESENTATION Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, CXR Telcom Corporation and CXR S.A. Intercompany balances and transactions are eliminated in consolidation. The French Franc is considered to be the functional currency of the French subsidiary. Foreign exchange transaction gains and (losses) were as follows: Year ended December 31, 1996 $(4,000) Year ended December 31, 1995 16,000 Six months ended Dec. 31, l994 423,000 Year ended June 30, 1994 75,000 Fiscal Year end Change Effective December 31, 1994, the Company changed its fiscal year end from June 30 to December 31 to better align its financial reporting cycle with the business cycle of its products. Accordingly, the audited financial statements included in the annual report comprise the years ended December 31, 1996 and 1995, the six months ended December 31, l994 and the year ended June 30, l994. The condensed statement of operations for the twelve months ended December 31, l994 presented below for comparative purposes has been derived from the unaudited financial records of the Company. This condensed consolidated statement of operations reflects all adjustments, consisting only of normal recurring items, which in the opinion of management are necessary to fairly state the Company's results of operations for the period presented. F-51 139 Consolidated statements of Operations data for the twelve months ended December 31, 1994 (unaudited):
(in thousands except for per share data) Sales $ 19,938 -------- Cost of Sales 11,932 Engineering and Product Development 2,157 Marketing and Selling 3,695 Administration 2,328 Other Expense - Net 29 -------- 20,141 -------- Net Loss $ (203) ======== Net Loss per Share $ (.11) ======== Weighted Average Number of Shares Outstanding 1,910 ========
New Accounting Pronouncements Financial Accounting Standards Board Statement No 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (FAS 121), became effective for the Company in l996. The new accounting pronouncement requires, among other things, that impairment losses on assets to be held, and gains or losses from assets that are expected to be disposed of, be included as a component of income from continuing operations. Adoption of FAS 121 in 1996 had no material effect on the consolidated financial statements as the Company's existing accounting policies were consistent with its provisions. Financial Accounting Standards Board Statement No. 123, "Accounting for Stock Based Compensation" (FAS 123), also became effective for the Company in l996. The new accounting pronouncement provides an alternative "fair value" method of accounting for stock options and other stock based compensation and also provides for expanded disclosures. The Company has elected not to apply the alternative accounting method for stock based compensation to employees, but was required to apply the new method to stock based transactions with non-employees and to expand its disclosures in l996 to comply with FAS 123, including providing proforma effects as if it had elected the alternative accounting method for stock based compensation. (See Note 11 to Consolidated Financial Statements for expanded disclosures). On March 3, 1997 the Financial Accounting Standards Board issued FAS No. 128 "Earnings per Share". (FAS 128), which will become effective for the Company for its year ending December 31, 1997. This pronouncement provides a different method of calculating earnings per share than is currently used in accordance with APB No. 15 "Earnings per Share". FAS No. 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities that could share in the earnings of an entity, similar to fully diluted earnings per share of APB No. 15. Potentially dilutive securities have F-52 140 an antidilutive effect in loss periods and are excluded from FAS 128 computations similar to current practice. Therefore, the required restatements of prior period information upon adoption will have no effect on earnings per share presented in the accompanying Consolidated Financial Statements. However, as discussed in Note 13, comparative historical financial information of the Company presented after the reverse acquisition by XIT Corporation on March 26, 1997 will be those of XIT Corporation, and the effects of FAS 128 on such financial statements have yet to be determined. Reverse Stock Split On August 15, 1996 the shareholders of the Company ratified a one-for-five reverse stock split effective for holders of record on August 29, 1996. Share and per share amounts in the Consolidated Financial Statements and Notes thereto have been restated to give effect to the reverse split. Reclassifications Certain 1995 amounts have been reclassified to conform to the 1996 presentation with no impact on the net loss for that year. CASH EQUIVALENTS All highly liquid instruments purchased with an initial maturity of three months or less are considered cash equivalents. INVESTMENTS The Company classifies its investments in common stock of publicly-traded companies as trading securities and records the investments at market. Realized or unrealized gains and losses are included in the statement of operations and were minimal for all periods presented. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out cost) or market. PLANT AND EQUIPMENT Plant and equipment are stated at cost. Depreciation and amortization are computed principally on the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes over the estimated useful lives of the assets as follows: Building 20 years Machinery, Equipment, Furniture and Fixtures 3-5 years Leasehold Improvements Lesser of lease term or estimated useful life F-53 141 SOFTWARE DEVELOPMENT COSTS Software development costs, which include purchased technology, are capitalized beginning when technological feasibility has been established or when purchased from third parties and continuing through the date of commercial release. Amortization commences upon commercial release of the product and is calculated using the greater of the straight line method over three years or the ratio of the products' current revenues divided by the anticipated total product revenues. During the year ended December 31, 1996, $795,000 of developed software was capitalized, $298,000 was amortized and charged to cost of goods sold, and the carrying value of certain capitalized software was reduced by $630,000 to reflect revisions in estimated future net realizable value (See Note 12). During the year ended December 31, l995, $699,000 of developed software was capitalized, $180,000 of software was purchased, and $188,000 of amortization was charged to cost of goods sold. During the six months ended December 31, 1994, $490,000 of developed software was capitalized and no amortization was recognized. At June 30, l994 all prior capitalized software costs were fully amortized and written off. Writedowns of carrying value are charged to cost of goods sold. GOODWILL Goodwill is amortized on a straight-line basis over its estimated useful life. In 1993, the Company adjusted the expected life of the goodwill related to its acquired LEA product line from ten years to five years to reflect the decline in demand for analog instruments. The remaining goodwill was fully amortized in l995. Related goodwill amortization for the year ended December 31, 1995, the six months ended December 31, 1994 and the year ended June 30, 1994 was $78,000, $63,000 and $124,000, respectively. REVENUE RECOGNITION The Company recognizes product revenues and related estimated warranty costs upon shipment. License, maintenance and lease revenues are recognized when earned. INCOME TAXES Deferred income taxes result from temporary differences between the financial statement and income tax basis of assets and liabilities (See Note 7). The Company adjusts the deferred tax asset valuation allowance based on judgments as to future realization of the deferred benefits supported by demonstrated trends in the Company's operating results. NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the weighted average number of common shares outstanding during the period. Common stock equivalents were antidilutive and therefore not part of the shares used in calculating net loss per share in l996 and l995 and fiscal l994. Common stock equivalent shares (shares covered by the stock option and warrant plans) were 295,000 for the six months ended December 3l, l994 and were considered as outstanding for net income per share computations. F-54 142 MAJOR CUSTOMERS No one customer accounted for 10% or more of sales during 1996 or l995. One customer accounted for l0% and 11% of sales during the six months ended December 3l, l994 and for the fiscal year l994, respectively. SUPPLEMENTAL CASH FLOW INFORMATION The Company paid interest of approximately $261,000 in 1996, $164,000 in 1995, $121,000 in the six months ended December 31, l994, and $258,000 in the fiscal year ended June 30, l994. The Company paid income taxes of $9,000 in 1996, $2,000 in l995, $7,000 in the six months ended December 31, l994, and $28,000, in the fiscal year ended June 30, l994. MANAGEMENT ESTIMATES AND ASSUMPTIONS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK The Company extends unsecured credit to its customers primarily in the telecommunications industry in the United States and Europe. Despite the industry concentration, the Company believes credit risk is mitigated by the large number of customers with which it does business and because these customers are typically large well-established companies. 2. RELATED PARTY TRANSACTIONS Daniel Dror was the Company's Chairman and Chief Executive Officer from 1994 until his resignation on November 15, 1996. Elkana Faiwuszeiwicz, the President and control person of Elk International Corporation Ltd. ("Elk"), is the brother of Mr. Dror. Based upon information contained in Elk's Schedule 13D filed with the Securities and Exchange Commission dated January 25, 1994, Mr. Dror may be deemed a "control" person of Elk and Mr. Dror, Daniel Dror & Company, Inc. ("DDC") and Elk may be deemed to constitute a "group" as those terms are defined under the Securities Act of 1933, as amended, and Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. Mr. Dror and DDC each disclaim any beneficial ownership in Elk and in stock of the Company owned by Elk. Pursuant to an agreement dated January 5, l994, the Company issued 300,000 shares of the Company's common stock to the designees of DDC for $600,000 (or $2.00 per share) including 210,000 shares to Elk. Additionally, pursuant to the agreement, the Company issued to Elk warrants to purchase 100,000 shares for $2.50 per share, exercisable at any time prior to December 25, l995. The Company also entered into a common stock purchase agreement with DDC on March l0, l994 whereby DDC, or its designee, was to acquire 1,260,000 shares of the F-55 143 Company's common stock for an aggregate of $2,520,000 (or $2.00 per share), payable in cash, or at the option of the Company, in cash, cash equivalents, or marketable securities or any combination thereof. The stockholders of the Company approved the common stock purchase agreement (the Agreement) on April 16, l994. The Agreement provided for a closing by June 30, l994 contingent upon all conditions to closing being fulfilled. As permitted under the terms of the Agreement, the Board of Directors on July 27, l994 amended the Agreement, following claims by DDC and its designee raised prior to June 30, l994 that certain closing conditions had not been satisfied. The amended Agreement required the Company to issue and sell 911,484 shares to Elk as designee of DDC, for an aggregate purchase price of $1l,882,967 (based on the previously agreed price of $2.00 per share), in cash, cash equivalents or marketable securities. In September l994, Elk tendered the assignment of an interest-free promissory note in the amount of $805,555 secured by shares of another public company and transferred a brokerage account to the Company consisting of cash and common stock of $1,077,412 amounting to an aggregate of $l,882,967 (the Company assumed the liability for certain financial instruments amounting to $506,250 which were secured by the cash and common stock investments in the brokerage account). Subsequent to this transfer, a loan of $226,000 was made from the brokerage account to another entity controlled by DDC which loan was payable with 15% interest on December 31, l995. Although no formal agreements were signed, DDC indicated its intent to reimburse the Company for any loss resulting from the settlement of the financial instruments and indebtedness from the related party. The acceptance of the consideration received and subsequent loan were authorized by Daniel Dror in his capacity as Chairman of the Company's investment committee prior to formal review by the Board of Directors. The Board of Directors subsequently reviewed the consideration tendered under the amended Agreement and determined that it would be in the best interests of the Company to accept payment from Elk with securities less likely to experience significant fluctuations in value. On November 8, l994 the Company executed a second amendment to the Agreement dated October l6, l994 with DDC whereby the transactions under the previous amendment were effectively rescinded and the Company agreed to issue and sell 668,725 shares to Elk as designees of DDC, for the aggregate purchase price of $1,337,449 (or $2.00 per share) on or before December 3l, l994. In payment of the purchase price under the second amendment to the Agreement, the Company accepted assignment of a promissory note payable to Elk from a limited partnership in the aggregate amount of $1,444,444 payable on December 3l, l995. The face amount of the promissory note includes the purchase price of $1,337,449 plus $106,995, representing interest on the purchase price at an interest rate of 8% per annum for the period commencing on December 3l, l994 through December 3l, l995. At a board meeting held in December 1995 the Company agreed to accept $250,000 to extend the note to December 15, 1996 and $100,000 as prepaid interest for the extension period. The $350,000 was recognized as income in l996 over the extension period of the note. As a result of this agreement the Board extended the option period of the remaining 90,000 Elk warrants for two years. Payment of the promissory note was secured by escrowed shares of another public company and the shares issued to Elk were being held in escrow and were to be delivered to Elk when the promissory note had been fully satisfied. F-56 144 In June 1996, Elk was given the right to make alternative cash payment to the Company for the stock subscription through December 15, 1996 releasing shares from escrow at the price of $2.00 per share, and to receive a corresponding assignment of proceeds from the promissory note when collected. Elk made payments against the stock subscription aggregating $380,000 through November 14, 1996, releasing 190,000 shares of common stock from the escrow. On November 15, 1996, the Company and Elk entered into an agreement pursuant to which Elk received (i) an option exercisable for a period of three years to purchase 500,000 shares of Common Stock at an exercise price of $2.375 per share, (ii) the extension of an outstanding warrant to purchase 90,000 shares of Common Stock for three years, and (iii) the return to Elk of the $1,444,444 promissory note. In exchange for the foregoing, the remaining shares held in escrow by the Company and the subscription right were canceled. The costs of this settlement totaling $807,000, including the valuation of the option grant of $700,000, was recorded in the fourth quarter of 1996. Also on November 15, 1996 Mr. Dror resigned as Chairman and Chief Executive Officer of the Company in anticipation of the pending merger with XIT. Mr. Jack Talan, a director of the Company, was appointed interim Chairman and Chief Executive Officer until consummation of the transaction. Upon his resignation, Mr. Dror (or his designee) received as a severance award for past service: (a) 350,000 shares of the Company's common stock; (b) an extension of the exercise period to November 14, 1999 on options he currently holds to purchase 25,000 shares of the Company's common stock; and (c) options to purchase 250,000 shares of the Company's common stock at a price of $2.375 per share. The latter options are excercisable for a period of 5 years, but only after Mr. Dror repays a certain indebtedness to the Company of approximately $211,000, which amount is due in 5 annual installments and which may be repaid by surrendering the options for value equivalent to the lesser of the future appreciation of the Company's common stock over the exercise price or $.50 per option. On December 3, 1996, it was mutually agreed between the Company and Mr. Dror to substitute an option to acquire 300,000 shares of common stock at an exercise price of $.01 per share for 300,000 shares of the previous award and on December 23, 1996, these options were exercised. The compensation expense associated with this grant of $560,000, as well as the value of the 50,000 shares awarded of $119,000 and other costs totaling $82,000 related to the immediate vesting of previous stock based deferred compensation to Mr. Dror and the settlement of certain amounts due the Company by Mr. Dror, were recognized in the fourth quarter of 1996. Additionally, during 1996 and 1995, the Company granted 18,000 and 43,000 shares, respectively, as incentive stock awards principally to certain directors and officers, which vest generally over a three-year period. The total value of these shares based on the market price of the Company's common stock on the date of grant totaled $192,000. Compensation expense recognized by the Company for the awards totaled $106,000 and $46,000 for 1996 and 1995, including amortization of related deferred compensation. In October and November of 1996, the Company granted non-qualified stock options to acquire approximately 156,000 shares of the Company's Common Stock to certain officers at an exercise F-57 145 price equal to 80% of the market value on the date of the grant. Compensation expense associated with these grants approximated $48,000. On February 19, 1997, in recognition of past and future services to the Company, Mr. Talan was granted 150,000 restricted shares of the Company's common stock with a market value as of that date of $337,500 ($2.25 per share). On February 25, 1997 through March 5, 1997, Mr. Talan also loaned the Company an aggregate of $500,000. Such loans bear interest at the rate of 6% per annum and are payable on April 25, 1997. 3. DISPOSITIONS At the end of the fourth quarter of the year ended June 30, l994 the Company sold the net assets of its NAMS and LAN product lines to Numerex for $1,025,000 which is included in other receivables at June 30, l994. The price represented the book value of the net assets sold, and there was no gain or loss on the sale. These products accounted for sales of approximately $4,657,000 in fiscal l994. 4. OPERATIONS BY GEOGRAPHIC AREA The Company operates principally in the telecommunications industry. It manufactures products in the United States and France and markets in North America, Europe and other areas of the world. A summary of operations by geographic area follows (in thousands):
Six Months Year Ended Year Ended Ended June 30, 12/31/96 12/31/95 12/31/94 1994 -------- -------- -------- ---- Sales to Unaffiliated Customers from: United States $ 6,825 $ 8,255 $ 4,071 $ 12,621 France 9,478 10,097 5,860 9,027 -------- -------- -------- -------- $ 16,303 $ 18,352 9,931 $ 21,648 ======== ======== ======== ======== Transfers from United States to France $ 16 $ 118 $ $ 158 ======== ======== ======== ======== Net Income (Loss): United States (3,599) $ (766) (286) $ (698) France (998) 99 584 59 -------- -------- -------- -------- $ (4,597) $ (667) $ 298 $ (639) ======== ======== ======== ========
F-58 146
Six Year Months Ended Year Ended Ended June 30, 12/31/96 12/31/95 12/31/94 1994 ------------------ -------- -------- Identifiable Assets at Year End: United States $ 3,794 $ 4,786 $ 5,174 $ 5,268 France 5,525 6,539 6,632 6,054 ------- ------- ------- ------- $ 9,319 $11,325 $11,806 $11,322 ======= ======= ======= =======
Transfer prices are established to allow a reasonable profit to the selling entity. Identifiable assets are those assets of the Company that are identified with the operations in each geographic area. Export sales to unaffiliated customers from the United States were approximately $333,000 for 1996, $381,000 for l995, $149,000 for the six months ended December 31, l994, and $881,000 in fiscal year l994. 5. INVENTORIES Inventories consist of the following (in thousands) at December 31:
1996 l995 ------- ------- Finished Goods $ 2,369 $ 2,620 Work-in-Process 683 1,135 Parts 1,653 1,817 Reserves (1,701) (1,424) ------- ------- $ 3,004 $ 4,148 ======= =======
6. PLANT AND EQUIPMENT Plant and equipment consist of the following (in thousands) at December 31:
1996 l995 ------- ------- Land and Buildings $ 374 $ 403 Machinery, Equipment, Furniture and Fixtures 2,413 2,431 ------- ------- 2,787 2,834 Accumulated Depreciation and Amortization (2,261) (2,125) ------- ------- $ 526 $ 709 ======= =======
F-59 147 Plant and equipment includes assets leased under capital leases of approximately $92,000 at December 31, 1996 and 1995, respectively. Accumulated depreciation on these items at December 31, 1996 and 1995 was $42,000 and $36,000. 7. INCOME TAXES Effective July l, l993, the Company adopted Statement of Financial Accounting Standards No. 109 ("FAS l09"), "Accounting for Income Taxes." Under FAS l09, a deferred tax asset or liability is determined based on the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. The adoption of FAS l09 had no material effect on the Company's financial position or results of operations for the year ended June 30, l994. Pre-tax income (loss) from operations for the following periods was taxed under the following jurisdictions (in thousands):
Six Months Year Ended Year Ended Ended June 30, 12/31/96 2/31/95 12/31/94 1994 -------- ------- -------- ------- Domestic $(3,599) $ (766) $ (286) $(1,105) Foreign (1,083) (52) 584 466 ------- ------- ------- ------- $(4,682) $ (818) $ 298 $ (639) ======= ======= ======= =======
The income tax expense (benefit) differs from the amount of income tax expense (benefit) determined by applying the statutory Federal rate to pre-tax income (loss) as follows (in thousands):
Six Months Ended Year Ended Year Ended Dec 31, Dec 31, June 30, 1996 1995 l994 1994 ------- ------- ------- ------- Tax expense (benefit) at the Statutory Federal Rate $(1,563) $ (278) $ 101 $ (217) Net Operating Losses (75) (68) Change in Valuation Allowance 1,478 127 (26) 285 ------- ------- ------- ------- $ (85) $ (151) $ -- $ -- ======= ======= ======= =======
The tax benefits for the year ended December 31, 1996 and l995 are a result of research and development credits allowed in France. F-60 148 During the six months ended December 31, l994, the Company utilized foreign net operating loss carryforwards of approximately $225,000 to reduce foreign income tax expense by approximately $75,000. At December 3l, l996 the Company had net operating loss carryforwards for Federal and state tax purposes totaling approximately $19,900,000 and $4,800,000, respectively. These carryforwards are available to reduce Federal and state taxable income through 2011 and 2001, respectively. The foreign net operating loss carryforward for statutory tax reporting purposes at December 31, 1996 was approximately $2,200,000 and expires through 2001. In addition, the Company has a Federal net operating loss carryforward of approximately $4,300,000 arising from an acquired company. As discussed in Note 13, subsequent to December 31, 1996, the Company entered into a merger transaction. This transaction will limit the domestic net operating loss carryover to approximately $265,000 per year. At December 3l, l996 the Company has investment tax credits and research and development credits totaling $682,000 and $385,000, which expire through 2005. These tax credits are subject to certain limitations. Deferred tax assets are comprised of the following (in thousands) at December 31:
1996 1995 ------- ------- Deferred Tax Asset: Net Operating Loss Carryforwards $ 8,684 $ 7,116 Capitalized Software (175) (187) Plant and Equipment (6) 25 Accruals and Reserves Recognized in Different Periods 1,338 1,063 Valuation Allowance (9,841) (8,017) ------- ------- Total $ -- $ -- ======= =======
A valuation allowance has been provided to reduce recorded total possible future tax benefits to zero as the Company's recent history of operating losses does not support a judgment that the deferred tax assets are more likely than not to be realized in the future. Consequently, no tax benefits were recognized for the Company's domestic and foreign operating losses during the periods presented. Further, these tax benefits will be recognized the earlier of when realized in future periods or when future profitability of the Company appears sufficiently probable that it appears more likely than not that the benefits will be realized. The changes in the valuation allowance for all periods presented are due primarily to additional net operating losses incurred and expiration of existing net operating loss carryforwards. F-61 149 8. BORROWING ARRANGEMENTS The Company's borrowing arrangements consist of the following (in thousands) at December 31:
1996 1995 ------ ------ Short-term Borrowings Borrowing under U.S. Factoring Line of Credit $ 589 $ 759 Borrowing under Working Capital Lines of Credit for CXR S.A 553 ------ ------ Notes Payable to Banks $1,142 $ 759 ====== ====== Long-term Debt Term Loan, Interest at 10.5% Due January 1997 Secured by Land and Building 30 168 Capital lease obligations (see Note 9) 50 56 ------ ------ 80 224 Current Portion of Long-term Debt 44 170 ------ ------ Long-term Debt $ 36 $ 54 ====== ======
During 1996, the Company's U.S. subsidiary renegotiated its bank credit facility, which had matured in June, 1996. Under its prior revolving line of credit, borrowings were based on eligible receivables and inventory with a maximum borrowing limit of $1,000,000. The line of credit bore interest at prime plus 4% (12 1/2% at December 31, 1995), was collateralized by accounts receivable and inventories and was guaranteed by the Company. The revolving line of credit was replaced by a factoring line of credit with the same bank. Borrowings under the factoring line of credit are based on an advance rate of 85% of eligible receivables with no maximum cap. The line bears interest at prime plus 2% (10.25% at December 31, 1996) and an administrative fee of 1% per month charged on the average factored invoiced balance for invoice processing. At December 31, 1996, the U.S. subsidiary had additional available borrowings of $158,000 under this line. F-62 150 The Company's French subsidiary has bank lines of credit approximating $1,145,000 at December 31, 1996, with available borrowings based on eligible accounts receivable. Borrowings under the related agreements bear interest at 5.0 - 8.6%, and at December 31, 1996, approximately $370,000 of additional borrowings were available under the lines. 9. LEASES The Company leases certain of its facilities under non-cancelable operating leases expiring through May 1998. Rent expense for the years ended December 31, 1996 and 1995, the six months ended December 31, l994 and the year ended June 30, 1994 was approximately $363,000, $380,000, $168,000 and $869,000, respectively. In May l994, the Company negotiated an early termination of its lease on its 90,000 square foot U.S. facility, and leased 40,000 square feet for 39 months. The Company had previously been accruing rent on this facility on a straight-line basis, resulting in a deferred liability for future rent payments. The reversal of the remaining liability, net of lease termination costs, resulted in a $108,000 gain, which is included in other income for the year ended June 30, l994. Future minimum lease payments required under operating lease agreements and future minimum lease payments under capital lease obligations together with the present value of minimum payments are as follows (in thousands):
Years Ending December 31, Operating Capital Leases Lease ------ ----- 1997 $297 $14 1998 71 14 1999 - 14 2000 - 14 2001 - 7 ---- --- Total minimum payments $368 63 ==== Less amount representing interest 13 --- Present value of minimum lease payments $50 ===
10. COMMITMENTS AND CONTINGENT LIABILITIES Under the terms of its acquisition of Anderson Jacobson, Inc. in fiscal 1989, the Company assumed the liability for certain deferred compensation arrangements (the Plan). During l993 the beneficiaries of the Plan and the Company renegotiated the future payments required under the Plan, and the annual payments were reduced to $173,000. Payment to the individual recipients generally were reduced 50% and the terms of the agreements range from five years to 14 years, with one agreement covering the remaining life of the recipient. At December 31, 1996, recorded obligations for deferred compensation related to these arrangements totaled $1,244,000. The amounts recorded are generally based on the estimated present value of the future required payments, discounted at 8.5%, and assuming annual CPI increases of 3.3%, and further include estimated costs to settle the dispute with one Plan participant as described below. Based on F-63 151 ongoing settlement discussions, the Company recorded additional costs of $344,000 in the fourth quarter of 1996 with respect to this matter. In September, 1994 Raymond Jacobson, a former officer and director of the Company and one of the Plan participants, brought an action against the Company in the California Superior Court, Santa Clara County, alleging that the Company has breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August 1994. The 1993 Agreement superseded a previous deferred compensation agreement dated April 1, 1977 (the "1977 Agreement") which had provided for twice the level of payments. Mr. Jacobson was claiming damages of approximately $1,200,000, which he purported to be the present value of all payments to be made under the 1993 Agreement. In June 1995 the Company paid Mr. Jacobson all amounts past due under the contract plus interest and reinstated the bi-weekly payments. On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against Mr. Jacobson in the District Court for Galveston County, Texas alleging damages arising from DDC's investment of more than $2,000,000 for the purchase of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr. Jacobson, through his attorney, demanded that the Company indemnify him, hold him harmless and pay for the cost of defense, including reasonable attorney's fees and costs in connection with the litigation instituted against him by DDC. The Company believes that it has a reasonable basis to deny Mr. Jacobson's claim for indemnification in part or in whole. On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the Company that he believed that the litigation instituted against him by DDC provided a basis for him to rescind the 1993 Agreement and assert his rights to full payment under the 1977 Agreement. The Company's litigation counsel believes that while Mr. Jacobson's allegations may be sufficient to withstand a summary motion for dismissal of the claim, no conclusion can be drawn as to his likelihood of success on the merits of the claim. Notwithstanding the above, the Company management and Mr. Jacobson have conducted settlement discussions since June 1996, and the Company believes that an enforceable settlement was reached on January 22, 1997. Mr. Jacobson apparently disclaims this agreement based on the actions noted above. On February 28, 1997 the Company filed a motion for continuance to file a counterclaim that the January 22, 1997 agreement supersedes all previous agreements with Mr. Jacobson. A court supervised settlement conference with Mr. Jacobson was held on March 26, 1997. Although a tentative settlement was reached, the settlement was subject to fulfillment of a number of conditions subsequent. If one or more of these conditions subsequent are not satisfied, the settlement will not be binding on the parties. A trial in the matter has been scheduled for August 25, 1997. The Company does not believe that the value of a settlement in the matter will be materially in excess of the amount already recorded by the Company for the deferred compensation arrangement, which approximates $1,000,000 at December 31, 1996. F-64 152 In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of the Company, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by David Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company cannot issue unrestricted shares (absent registration), the Company has answered Mr. Scheinfeld's motion and is seeking to compel him to serve a complaint upon the defendants. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of business. Although the ultimate outcome of these as well as the matters noted above cannot be predicted with certainty, pending actual resolution, in the opinion of management, the disposition of these matters will not have a material adverse affect on the consolidated financial statements. 11. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS The Company has outstanding options on its Common Stock issued under the following arrangements: o Employee Stock and Stock Option Plan, effective July 1, 1994, providing for non-qualified stock options as well as restricted and non-restricted stock awards to both employees and outside consultants. Up to 520,000 shares may be granted or optioned under this plan. Terms of related grants under the plan are at the discretion of the Board of Directors. o Stock Option Plan adopted in 1993, providing for the granting of up to 300,000 incentive stock options to purchase stock at not less than the current market value on the date of grant. Options granted under this plan vest ratably over three years and expire 10 years after date of grant. o A superseded Stock Option Plan adopted in 1986, under which no further options may be granted. In addition, during 1996 the Company granted certain non-qualified options and restricted stock not pursuant to a formal plan (See Note 2). The Company accounts for stock-based compensation under the "intrinsic value" method. Under this method, no compensation expense is recorded for these plans and arrangements for current employees whose grants provide for exercise prices at or above the market price on the day of grant. Compensation or other expense is recorded based on intrinsic value (excess of market price over exercise price on date of grant) for employees, and fair value of the option awards for others. F-65 153 The following table shows activity in the outstanding options.
Six Months Year Ended Year Ended Ended Year Ended December 31, Weighted December 31, December June 30, 1996 Average 1995 31, 1994 1994 -------- Exercise --------- --------- ---------- Shares Price Shares Shares Shares --------- ------ --------- --------- ---------- Outstanding at beginning of year 401,510 $3.27 128,910 74,843 112,626 Granted 1,319,900 1.79 296,600 60,000 104,500 Exercised (507,896) 0.87 (3,300) -- (92,766) Canceled (67,142) 2.59 (20,700) (5,933) (49,517) --------- ------- ------- ------- Outstanding at end of year 1,146,372 $2.68 401,510 128,910 74,843 ========= ======= ======= ======
Options exercisable as of December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ------- ------- -------- Exercisable 1,088,072 100,243 113,476 ========= ======= ======== Weighted Average Exercise Price $ 2.65 $ 3.41 $ 3.40 ========= ======= ========
Weighted average exercise prices for 1996 are calculated at prices effective as of December 31, 1996, including the effect of repricing of certain options in 1996. The fair value of options granted during 1996 was $1,797,000, at a weighted average value of $1.36 per share, including $767,000 attributable to 500,000 options granted at amounts less than market. The incremental fair value of 170,000 options repriced or extended in 1996 over their fair values immediately before modification was $102,000. Total amounts recorded for book purposes for less-than-market awards and non-employee awards were $1,350,000 in 1996. Exercise prices for options outstanding as of December 31, 1996 generally ranged from $2.38 to $3.44 per share and the weighted average remaining contractual life for these options was 4.7 years. The fair value of options granted during 1995 was $667,000, at a weighted average price of $2.25 per share. If the Company had instead elected the fair value method of accounting for stock-based compensation, compensation cost would be accrued at the estimated fair value of all stock option grants over the service period, regardless of later changes in stock prices and price volatility. The fair value at date of grant for options granted in 1996 and 1995 has been estimated based on a modified Black-Scholes pricing model with the following assumptions: no dividend yield F-66 154 for any year; expected volatility for 1996 and 1995 grants of approximately 56% and 61%, based on historical results; risk-free interest rates of 6.6% and 6.65% for 1996 and 1995 grants; and average expected lives of approximately three years for both 1996 and 1995. The following table shows net loss and loss per share for 1995 and 1996 as if the Company had elected the fair value method of accounting for stock options.
(in thousands except per-share amounts) 1996 1995 ---- ---- Net Loss, as Reported $ (4,597) $ (667) Additional Incremental Compensation Expense (557) (336) ----- ----- Net Loss, as Adjusted $ (5,154) $ (1,003) ======= ======= Net Loss per Share, as Reported $ (1.65) $ (0.25) Additional Incremental Compensation Expense (0.20) (0.13) ------ ------ Net Loss per Share, as Adjusted $ (1.85) $ (0.38) ====== ======
Additional incremental compensation expense includes the excess of fair values of options granted during the year over any compensation amounts recorded for options whose exercise prices were less than the market value at date of grant, and for any expense recorded for non-employee grants. Additional incremental compensation expense also includes the excess of the fair value at modification date of options repriced or extended over the value of the old options immediately before modification. All such incremental compensation is amortized over the related vesting period, or expensed immediately if fully vested. The above calculations include only the effects of 1995 and 1996 grants. 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 earnings or losses in future years. In addition, at December 31, 1996, the Company has outstanding 122,000 warrants to purchase stock at $2.50 per share, expiring in varying amounts through 2003. During 1996, 18,000 warrants were exercised at $2.50 per share. The Company has an Employee Stock Purchase Plan allowing eligible employees to purchase shares of the Company's common stock at 85% of market value. At December 31, l995, 6,180 shares had been issued pursuant to the plan with 38,820 shares reserved for future issuance. The Company has a 401(k) tax deferred saving plan whereby eligible employees may elect to contribute a portion of their salaries. Company contributions are made at the discretion of the Board of Directors. The Company's contributions to the plan were $35,000, $41,000, $20,000, and $49,000 for 1996, 1995, the six months ended December 3l, l994 and the fiscal year ended June 30, l994, respectively. 12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS For the three months ended December 31, 1996, the Company reported a net loss of $(3,656,000) or $(1.32) per share. These results were impacted by the following adjustments: F-67 155 Severance and related settlement costs $1,567,000 Write-down of assets 1,006,000 Estimated costs of litigation settlements 475,000 ---------- $3,048,000 ==========
Severance and related settlement costs represent the aggregate value of $678,000 of the stock and stock options awarded to the Company's former Chairman, Daniel Dror, upon his resignation in November 1996, costs of $807,000 related to the settlement of the subscription receivable from Elk, and other costs totaling $82,000 related to the immediate vesting of previous stock based deferred compensation to Mr. Dror and the settlement of certain amounts due the Company by Mr. Dror (see also Note 2). The write-down of assets consists of reductions of $376,000 and $630,000 in the carrying value of certain inventory and capitalized software development costs, respectively, to their net realizable value. These write-downs charged to cost of sales resulted from the Company's reassessment of the anticipated near-term impact of current industry and economic factors on the Company's operations. Net realizable value was based on estimated undiscounted future cash flows from the related assets. CXR Telcom's sales continue to be negatively impacted by delays in buying by its principal customers, as a result of the consolidation and/or restructuring of these companies in the wake of the passage of the Telecommunications Bill of 1996; and CXR SA's sales continue to be impacted by a decline in sales to France Telecom during its pre-privatization reorganization and a generally weak French economy. Additionally, sales for both operating subsidiaries have been negatively impacted by the rapid obsolescence of the analog-based components of their product lines, particularly older transmission products; and further, both sales and margins have been impacted by extreme price competition for transmission products in general. Estimated costs of litigation settlements are comprised of the expected incremental costs of $344,000 to settle the dispute regarding Mr. Jacobson's deferred compensation agreement (see Note 10) and $131,000 for a contingent payment related to a price guarantee in a stock based settlement of another dispute reached in the fourth quarter of 1996. These estimated costs are included in administrative expenses in the accompanying Consolidated Financial Statements. The aggregate effect of the above adjustments was to increase the net loss per share for the fourth quarter of 1996 by $(1.10) per share. 13. OTHER SUBSEQUENT EVENTS MERGER WITH XIT CORPORATION On March 26, 1997, XIT Corporation ("XIT") of Ontario, California merged with a wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former shareholders of XIT were issued approximately 6,199,215 shares of common stock of the Company, or approximately 65.8% of the issued and outstanding common stock. In addition, holders of XIT stock options and warrants collectively have the right to acquire an additional 2,153,240 shares of MicroTel Common Stock. Collectively, then the former XIT shareholders own, or have the right to acquire, F-68 156 approximately 65% of the Common Stock of the Company on a fully-diluted basis as of the date of the transaction XIT, with vertically integrated operations in the U.S., England and Japan, designs, manufactures and markets information display and input products and printed circuit boards for the international telecommunications, medical, industrial and military/aerospace markets. The merger will be accounted for as a purchase of the Company by XIT in a "reverse acquisition" because the existing shareholders of the Company prior to the merger will not have voting control of the combined entity. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company, the Company, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. The following represents the unaudited pro forma results of operations as if the merger had occurred at the beginning of the Company's year ended December 31, 1996 and combines the Company's results of operations for that year with those of XIT's for its year ended September 30, 1996, with adjustments to reflect amortization of the estimated excess cost over the fair value of the net assets acquired.
(in thousands, except per share amounts) Net sales $ 47,552 Net loss $ (3,841) ======== Net loss per common share $ (.42) ========
The proforma results of operations above does not purport to be indicative of the results that would have occurred had the merger taken place at the beginning of the period presented or of results which may occur in the future. PRIVATE PLACEMENT OF SECURITIES On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. The pricing of the units is based on a 20% discount from the ten day average closing bid price of the Company's common stock preceding the date of contracting with the institutional investors (the "Average Reported Price"), with a minimum price per unit of $2.50 and maximum price of $3.50. The investors warrants have an exercise price of 130% of the Average Reported Price. Additionally, Yorkton and one other intermediary earn an aggregate commission of 10% of the gross proceeds and warrants to acquire 10% of the shares purchased in the offering at an exercise price of the lesser of the Average Reported Price or F-69 157 $3.50 per share, and Yorkton further is reimbursed for accountable expenses of the offering up to 2% of the gross proceeds. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company approximated $4,258,000 after $600,000 for commissions and Yorkton's expenses noted above and $142,000 for other expenses incurred. The offering, which is structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 is contracted or ii) April 18, 1997, unless extended by the mutual agreement of the Company and Yorkton. The Company anticipates that the net proceeds of the offering will be utilized for working capital purposes, including product development and marketing, and for the acquisition of companies and intellectual property rights which will provide extensions of the Company's product lines. F-70 158 MICROTEL INTERNATIONAL, INC. VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Charged to Deductions Beginning Costs and Writeoffs of Balance End of Period Expenses Accounts of Period ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended December 31, 1996 $ 425 ($175) ($64) 186 Year ended December 31, 1995 405 42 (22) 425 Six months ended December 31, 1994 548 (100) (43) 405 Year ended June 30, 1994 771 137 (360) 548 ALLOWANCE FOR INVENTORY OBSOLESCENCE Year ended December 31, 1996 $1,424 $599 ($322) $1,701 Year ended December 31, 1995 1,598 288 (462) 1,424 Six months ended December 31, 1994 2,243 108 (753) 1,598 Year ended June 30, 1994 3,484 560 (1,801) 2,243
F-71 159 MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
MARCH 26, DEC. 31, 1997 1996 -------- -------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 264 $ 271 Accounts receivable 1,810 2,936 Inventories 2,979 3,004 Other current assets 255 487 -------- -------- Total current assets 5,308 6,698 Plant and equipment-net 461 526 Software development costs-net 913 1,027 Foreign tax receivable 238 830 Other assets 180 238 -------- -------- $ 7,100 $ 9,319 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable to related parties $ 500 Notes payable to banks 143 $ 1,142 Current portion of long term debt 29 44 Accounts payable 2,452 2,580 Accrued expenses 1,539 1,497 Deferred compensation 738 737 -------- -------- Total current liabilities 5,401 6,000 Long term debt 36 36 Deferred compensation liability 490 507 -------- -------- Total long-term liabilities 526 543 Stockholders' equity: Common stock 10 10 Additional paid-in capital and other 24,548 24,137 Accumulated deficit (23,385) (21,371) -------- -------- Total stockholders' equity 1,173 2,776 -------- -------- $ 7,100 $ 9,319 ======== ========
See notes to consolidated condensed financial statements. F-72 160 MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE TWO MONTHS AND TWENTY-SIX DAYS ENDED MARCH 26, 1997 (In thousands except per share amounts) Net sales $ 2,996 Cost of sales 2,375 ------- GROSS PROFIT 621 Operating expenses: Selling, general and administrative 2,071 Engineering and product development 521 ------- LOSS FROM OPERATIONS (1,971) Other income (expense) Interest expense (47) Other 10 ------- LOSS BEFORE INCOME TAXES (2,008) Income taxes 6 ------- NET LOSS $(2,014) ======= LOSS PER COMMON SHARE $ (0.66) ======= WEIGHTED AVERAGE NUMBER OF SHARES USED IN CALCULATING LOSS PER SHARE 3,038 =======
See notes to consolidated condensed financial statements. F-73 161 MICROTEL INTERNATIONAL, INC. CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE TWO MONTHS AND TWENTY-SIX DAYS ENDED MARCH 26, 1997 (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,014) Reconciliation to cash provided by operations Depreciation and amortization 71 Amortization of intangible assets 119 Write-down of assets and severance 287 Stock-based compensation 462 Other 6 Changes in operating assets and liabilities: Accounts receivable 1,126 Inventories (72) Accounts payable and accrued expenses (164) Other assets and liabilities 866 ------- Cash provided by operations 687 ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of plant and equipment (6) Capitalized software (117) ------- Cash used in investment activities (123) ------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings from related parties 500 Net borrowings (repayments) of other short-term debt (999) Repayments) of long-term debt (15) Exercise of stock options 114 ------- Cash used in financing activities (400) ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (171) ------- NET DECREASE IN CASH (7) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 271 ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 264 =======
See notes to consolidated condensed financial statements. F-74 162 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS WHEN USED IN THESE NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE," "PROJECT," "INTEND", "SHOULD", "BELIEVE" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, OPERATING COSTS AND FINANCIAL POSITION. SPECIFICALLY, FORWARD-LOOKING STATEMENTS ARE INCLUDED IN NOTE 5 HEREOF. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY THAN THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. (1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the Company) is a holding company for its three wholly-owned subsidiaries- CXR Telcom Corporation, CXR S.A., and, effective March 26, 1997, XIT Corporation ("XIT"). CXR Telcom Corporation and CXR S.A. design, manufacture and market electronic telecommunication test equipment and data communications equipment. XIT designs, manufactures, and markets information technology products, including displays and input components, subsystem assemblies, printed circuits, and hybrid microelectronic circuits. BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared to present financial information for the Company for the interim period prior to its merger with XIT on March 26, 1997 (see Note 2 below). These financial statements do not include all information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated condensed financial statements do, however, reflect all adjustments, consisting of only normal recurring adjustments, which are, in the opinion of management, necessary to state fairly financial position as of March 26, 1997 and December 31, 1996 and results of operations and cash flows for the two months and twenty-six days ended March 26, 1997. It is suggested that these interim consolidated condensed financial statements be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, l996. Intercompany balances and transactions are eliminated in consolidation and the French Franc is considered the functional currency of CXR S.A. Cumulative translation adjustments result from converting the functional currency of CXR S.A. to U.S. dollars and are included in Additional Paid-in Capital and Other in the accompanying consolidated condensed balance sheets. EARNINGS PER SHARE Net loss per share is computed using the weighted average number of common shares outstanding during the period. Common stock equivalents were antidilutive and therefore not part of the shares used in calculating net loss per share. F-75 163 (2)MERGER WITH XIT On March 26, 1997, XIT of Ontario, California merged with a wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former shareholders of XIT were issued approximately 6,115,000 shares of common stock of the Company, or approximately 66% of the issued and outstanding common stock. In addition, holders of XIT stock options and warrants collectively have the right to acquire an additional 2,153,240 shares of common stock. Collectively, then the former XIT shareholders own, or have the right to acquire, approximately 65% of the Common Stock of the Company on a fully-diluted basis as of the date of the transaction. The merger was accounted for as a purchase of the Company by XIT in a "reverse acquisition" because the existing shareholders of the Company prior to the merger did not have voting control of the combined entity after the merger. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company, the Company, is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. (3)INVENTORIES Inventories consist of the following at March 26, 1997 and December 31, 1996:
(in thousands) March 26, December 31, 1997 1996 ---- ---- Raw materials $1,462 $2,369 Work-in-process 808 683 Finished goods 2,554 1,653 Reserves (1,844) (1,701) ------ ------ $2,979 $3,004 ====== ======
(4)CERTAIN TRANSACTIONS During the two months and twenty-six days ended March 26, 1997, the Company incurred certain significant charges as follows: Stock-based compensation $462,000 Write-down of assets 209,000 Severance costs 78,000 -------- $749,000 ========
The stock-based compensation is comprised of restricted stock grants to certain officers and directors whose corporate capacities would terminate or change at the date of the merger with XIT. The write-down of assets consists of reductions of $97,000 and $112,000 in the carrying value of certain inventory and capitalized software development costs, respectively, to their net realizable value. These write-downs were charged to cost of sales and net realizable value was based on estimated undiscounted future cash flows from the related assets. The severance costs relate to personnel cutbacks at both CXR Telcom and CXR S.A. Both the write-downs and the cutbacks resulted from the Company's reassessment of the anticipated near-term impact of current industry and economic factors on the Company's operations. CXR Telcom's sales continue to be negatively impacted by delays in buying by F-76 164 its principal customers, as a result of the consolidation and/or restructuring of these companies in the wake of the passage of the Telecommunications Bill of 1996; and CXR S.A.'s sales continue to be impacted by a decline in sales to France Telecom during its pre-privatization reorganization and a generally weak French economy. Additionally, sales for both operating subsidiaries have been negatively impacted by the rapid obsolescence of the analog-based components of their product lines, particularly older transmission products; and further, both sales and margins have been impacted by extreme price competition for transmission products in general. (5)LITIGATION In September, 1994 Raymond Jacobson, a former officer and director of the Company and a participant in the Company's deferred compensation plan, brought an action against the Company in the California Superior Court, Santa Clara County, alleging that the Company has breached its contract to pay Mr. Jacobson $3,495 bi-weekly for life under his deferred compensation agreement dated May 11, 1993 (the "1993 Agreement"), by discontinuing payment in August 1994. The 1993 Agreement superseded a previous deferred compensation agreement dated April 1, 1977 (the "1977 Agreement") which had provided for twice the level of payments. Mr. Jacobson was claiming damages of approximately $1,200,000, which he purported to be the present value of all payments to be made under the 1993 Agreement. In June 1995 the Company paid Mr. Jacobson all amounts past due under the contract plus interest and reinstated the bi-weekly payments, which have continued to date. On May 20, 1996, Daniel Dror & Co, Inc. ("DDC"), instituted a suit against Mr. Jacobson in the District Court for Galveston County, Texas alleging damages arising from DDC's investment of more than $2,000,000 for the purchase of 1,072,000 shares of the Company's common stock. On February 11, 1997, Mr. Jacobson, through his attorney, demanded that the Company indemnify him, hold him harmless and pay for the cost of defense, including reasonable attorney's fees and costs in connection with the litigation instituted against him by DDC. This suit was subsequently dismissed by DDC. On February 14, 1997, Mr. Jacobson, through his attorney, gave notice to the Company that he believed that the litigation instituted against him by DDC provided a basis for him to rescind the 1993 Agreement and assert his rights to full payment under the 1977 Agreement. A motion for leave to amend the claim against the Company to include this assertion has been filed with the court. Notwithstanding the above, the Company management and Mr. Jacobson have conducted settlement discussions since June 1996, and the Company believes that an enforceable settlement was reached on January 22, 1997. Mr. Jacobson apparently disclaims this agreement based on the actions noted above. On February 28, 1997 the Company filed a motion for leave to file a cross-claim asserting that the January 22, 1997 agreement supersedes all previous agreements with Mr. Jacobson. A court supervised settlement conference with Mr. Jacobson was held on March 26, 1997. Although a tentative settlement was reached, the settlement was subject to fulfillment by the Company of a number of conditions subsequent which did not occur and therefore was not binding on either party. Subsequent thereto, several alternative settlement offers have been proposed by plaintiff's counsel, none of which are acceptable to the Company. F-77 165 Currently, both the Company's motion for leave to cross-claim and Mr. Jacobson's motion for leave to amend his complaint have been granted and a trial date has been set for February 9, 1998. The Company does not believe that the value of a settlement of the above matter or alternatively a trial judgement will be materially in excess of the amount already recorded by the Company for the deferred compensation arrangement, which approximates $1,007,000 at March 26, 1997. The recorded amount approximates the value of the tentative settlement reached on March 26, 1997. In October 1996, David Scheinfeld brought an action in the Supreme Court of the State of New York, County of New York, to recover monetary damages in the amount of $300,000 allegedly sustained by the failure of the Company, its stock transfer agent and its counsel to timely deliver and register 30,000 shares of Common Stock for which payment had been made. The Company was informed by David Scheinfeld that in order to settle his claims, the Company would have to issue him unrestricted shares of common stock. Since the Company cannot issue unrestricted shares (absent registration), the Company answered Mr. Scheinfeld's motion and sought to compel him to serve a complaint upon the defendants. On June 30, 1997, the complaint was served. The Company has subsequently answered, denying the material allegations of the complaint, and discovery is proceeding in the case. Although the ultimate outcome of the matters noted above cannot be predicted with certainty, pending actual resolution, in the opinion of management, the disposition of these matters will not have a material adverse affect on the consolidated results of operations, financial position, or cash flows. (6)PRIVATE PLACEMENT On February 20, 1997, the Company accepted a commitment from Yorkton Securities Inc. ("Yorkton"), pursuant to which Yorkton would use its best efforts to raise a minimum of $5,000,000 and a maximum of $10,000,000 through a private placement of investment units consisting of one share of restricted common stock and one quarter of a warrant to purchase one share of restricted common stock. The pricing of the units is based on a 20% discount from the ten day average closing bid price of the Company's common stock preceding the date of contracting with the institutional investors (the "Average Reported Price"), with a minimum price per unit of $2.50 and maximum price of $3.50. The investors warrants have an exercise price of 130% of the Average Reported Price. Additionally, Yorkton and one other intermediary earn an aggregate commission of 10% of the gross proceeds and warrants to acquire 10% of the shares purchased in the offering at an exercise price of the lesser of the Average Reported Price or $3.50 per share, and Yorkton further is reimbursed for accountable expenses of the offering up to 2% of the gross proceeds. On April 14, 1997, a first closing occurred on 2,000,000 investment units, for gross proceeds of $5,000,000. Net proceeds to the Company approximated $4,258,000, after $600,000 for commissions and Yorkton's expenses noted above and $142,000 for other expenses incurred. The offering, which was structured to accommodate multiple closings, would terminate on the earlier of i) the date the maximum offering of $10,000,000 was contracted or ii) the extended termination date of May 31, 1997. The offering expired on May 31, 1997 with no additional closings. F-78 166 UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS The accompanying pro forma combined condensed financial statements assume a business combination between MicroTel International, Inc. (MicroTel) and XIT Corporation (XIT), which is accounted for as a purchase of MicroTel by XIT in a "reverse acquisition". Treatment as a reverse acquisition is based on the the fact that the shareholders of MicroTel have less than a majority of voting control of the combined entity. In a reverse acquisition, the accounting treatment differs from the legal form of the transaction, as the continuing legal parent company (MicroTel) is not assumed to be the acquiror and the financial statements of the combined entity are those of the accounting acquiror (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. The Unaudited Pro Forma Combined Condensed Statement of Operations for the Year Ended September 30, 1996 combines XIT's results of operations for its fiscal year ended September 30, 1996 with MicroTel's results of operations for its fiscal year ended December 31, 1996. The Unaudited Pro Forma Combined Condensed Statement of Operations for the six months ended June 30, 1997 combines XIT's results of operations for the six months ended June 30, 1997, which includes three months and 5 days of MicroTel's results after the merger on March 26, 1997, and MicroTel's results of operations for the 2 month and 26 day period ended March 26, 1997. The Unaudited Pro Forma Combined Condensed Statements of Operations assume that the acquisition had occurred at the beginning of each of the periods presented. The Unaudited Combined Condensed Financial Statements are based on the historical financial statements of Microtel and XIT and notes thereto included elsewhere herein and should be read in conjunction therewith. MicroTel's historical financial statements are included as the Consolidated Financial Statements of Microtel International, Inc. (Pre-merger) for the years ended December 31, 1996 and 1995, the Six Months Ended December 31, 1994 and the year ended June 30, 1994 and the Consolidated Condensed Financial Statements of MicroTel International, Inc. (Pre-merger) for the two months and twenty-six days ended March 26, 1997. XIT's historical financial statements are included in the Consolidated Financial Statements of MicroTel International, Inc. for the three years ended September 30, 1996, 1995 and 1994 and the Consolidated Condensed Statements of MicroTel International, Inc. for the three and six months ended June 30, 1997 and 1996. The Unaudited Pro Forma Combined Condensed Financial Statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or financial position that would have been achieved if the acquisition had been in effect on the dates indicated, nor are they necessarily indicative of future operating results or financial position of the combined entity. The statements do not give effect to any cost savings or other synergistic affects which may result from the combination of MicroTel and XIT. F-79 167 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA -------------------------- XIT MICROTEL ADJUSTMENTS COMBINED -------- -------- ----------- -------- DR (CR) Net sales $ 31,249 $ 16,303 $ 47,552 Cost of sales 23,057 10,819 33,876 -------- -------- -------- Gross profit 8,192 5,484 13,676 -------- Operating expenses: Selling, general and administrative 6,379 8,397 $ 333 15,109 Engineering, research and development 309 1,817 2,126 -------- -------- -------- -------- Operating income (loss) 1,504 (4,730) $ (333) (3,559) -------- Other income (expense) Interest expense (506) (319) (825) Other 107 367 474 -------- -------- -------- -------- Income (loss) before taxes 1,105 (4,682) (333) (3,910) -------- Income taxes (benefit) 22 (85) (63) -------- -------- -------- -------- Income (loss) $ 1,083 $ (4,597) $ (333) $ (3,847) ======== ======== ======== ======== Net income (loss) per common share $ 0.17 $ (0.42) ======== ======== Weighted average number of common shares outstanding 5,841 9,037 ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS F-80 168 UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ------------------------ XIT MICROTEL ADJUSTMENTS COMBINED -------- -------- ----------- ------- DR (CR) Net sales $ 19,736 $ 2,996 $ 22,732 Cost of sales 14,972 2,375 17,347 -------- -------- ------- Gross profit 4,764 621 5,385 ------- Operating expenses: Selling, general and administrative 5,555 2,071 $ 78 7,704 Engineering, research and development 792 521 1,313 -------- -------- -------- ------- Operating loss (1,583) (1,971) (78) (3,632) ------- Other income (expense) Interest expense (460) (47) (507) Other 7 10 17 -------- -------- -------- ------- Loss before taxes (2,036) (2,008) (78) (4,122) Income taxes 2 6 8 -------- -------- -------- ------- Net loss $ (2,038) $ (2,014) $ (78) $(4,130) ======== ======== ======== ======= Net loss per common share $ (.24) $ (.41) ======== ======= Weighted average number of common shares outstanding 8,638 10,139 ======== =======
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS F-81 169 NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS 1. The pro forma financial statements are based on the reverse acquisition of MicroTel by XIT in a purchase transaction and the pro forma financial statements are therefore those of the accounting acquiror or XIT. In accord with this accounting treatment, the purchase price is the fair value of the shares of common stock of MicroTel outstanding immediately prior to the effective date of the transaction plus transaction costs. The purchase price of MicroTel includes 3,186,027 shares of common stock valued at $5,011,000 and estimated transaction costs of $636,000. A portion of the broker's fees included in the transaction costs includes 10,000 shares of restricted common stock valued at $31,000 and warrants to acquire 150,000 shares of common stock valued at $223,000. The number of shares used is that outstanding on March 26, 1997, the date of acquisition, and the value per share used of $1.5729 is based on the average closing sale price of MicroTel common stock for the fifteen day period preceding the announcement on January 7, 1997 of the execution of the definitive merger agreement related to the acquisition. The only adjustment in the preliminary purchase price allocation to the historical values of the assets acquired and liabilities assumed was the accrual of $430,000 for certain change-in-control payments to an executive officer of MicroTel. Otherwise, the historical values were believed to approximate estimated fair value. The excess of the purchase price over the preliminary valuation of the net assets acquired of $4,904,000 was recorded as goodwill at the acquisition date, and an additional $94,000 was recorded in the second quarter of 1997 upon the resolution of a preacquisition contingency. The preliminary purchase price allocation is subject to change when additional information concerning asset and liability valuations is obtained. 2. The pro forma adjustments are to record amortization of the goodwill originating from the acquisition as if the transaction had occurred at the beginning of the periods presented. The goodwill is assumed amortized on a straight line basis over fifteen years. 3. Net income (loss) per common share computations are based on the following: a) Pro forma net income (loss) per common share is based on the weighted average outstanding shares of XIT for the respective period, plus the number of shares assumed to be issued to MicroTel shareholders. b) Common stock equivalents based on the assumed exercise of options and warrants are not included in the computations of net income(loss) per share as the effects would be antidilutive. c) The accretion of the excess of the redemption value over the carrying value of redeemable preferred stock is deducted from net income (loss) in arriving at income (loss) applicable to common shareholders in the computations of income (loss) per share. F-82 170 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses payable by the Company in connection with the registration of the Shares is as follows: SEC Registration ........................ $ 7,693 ------------- NASD Fees ............................... $ 0 ------------- Accounting Fees and Expenses ............ $ 50,000 ------------- Legal Fees and Expenses, Including Blue Sky Fees and Expenses ............ $ 100,000 ------------- Printing Costs .......................... $ 35,000 ------------- Miscellaneous Expenses .................. $ 5,000 ------------- TOTAL ............................. $ 197,693 -------------
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS As the Company is a Delaware corporation, reference is made to the Delaware General Corporation Law (the "DGCL"). Section 145 of the DGCL provides, in part, that a Company may indemnify any person who was or is a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that such person is or was a director, officer, employee or agent of the corporation against expenses (including attorneys' fees), judgments, liens and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such conduct was unlawful. The DGCL further provides that a corporation may indemnify such officer or director in an action by or in the right of the corporation under the same conditions, except that in indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where such officer or director is successful on the merits in the defense of any action referred to above, the corporation must indemnify such officer or director against expenses actually and reasonably incurred. Article IX of the Company's By-laws parallels Section 145 of the DGCL and provides for indemnification of officers and directors in similar circumstances. -87- 171 Section 102(b)(7) of the DGCL enables a corporation in its certificate of incorporation to eliminate or limit the personal liability of a director for monetary damages for violations of the director's fiduciary duty, except (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL (providing for liability of directors for unlawful payment of dividends or unlawful stock purchases or redemptions) or (iv) for any transaction from which a director derived an improper personal benefit. Article Fifth of the Company's By-laws parallels this language and provides that to the fullest extent permitted by the DGCL, no director shall be liable to the Company or its stockholders for monetary damages for breach of fiduciary as a director. (See "Disclosure of Commission position or Indemnification for Securities Act Liabilities"). ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES a) April 1997 Yorkton Placement On April 14, 1997, the Company sold $5.0 million of investment units consisting of one share of Common Stock and one-quarter of a warrant to purchase one share of Common Stock. The number of investment units sold was 2,000,000 and the Company realized net proceeds of $4,258,000 from the sale. Accordingly, 2,000,000 shares of Common Stock and 500,000 warrants to purchase Common Stock were issued in connection with this sale. In connection with the Yorkton Offering, warrants to purchase an additional 200,000 shares of the Company's Common Stock were issued to certain placement agents. The shares, and the shares underlying these warrants, are being registered hereby. No underwriter was used in the sale of the investment units. The securities were sold to non-U.S. investors who were primarily European institutional investors. The investment units were sold pursuant to Rule 903 of Regulation S and qualified for such exemption based upon the following: (i) the investment unit purchasers were represented to the Company in the Subscription Agreements that they were non-U.S. Persons; (ii) the Company is a Reporting Issuer (as defined in Rule 902(l) of Regulation S); (iii) the Company has not made any Directed Selling Efforts (as defined in Rule 902(b) of Regulation S); (iv) the Company has implemented Offering restrictions (as defined in Rule 902(h) of Regulation S); (v) the Company has not made any offer of sale to any U.S. person or the account or benefit of any U.S. person; (vi) the offer and sale of the investment units were made in Offshore Transactions (as defined in Rule 902(i) of Regulation S). b) The XIT Merger On March 26, 1997, in a merger by and between a wholly-owned subsidiary of the Company and XIT Corporation, the Company issued 6,119,130 shares of Common Stock (previously defined herein as the Merger Shares) and agreed to assume all of the outstanding XIT Warrants and XIT Options and convert them into options and warrants to purchase the Company's Common Stock. The Company will be required to issue an additional 2,153,240 shares of Common Stock if such warrants and options are exercised. Of the total 8,151,608 shares and shares underlying warrants and options, 7,723,424 shares are being registered hereby consisting of: (i) the 6,119,130 Merger Shares; (ii) 1,197,879 shares underlying XIT Warrants; and (iii) 406,415 shares underlying XIT options. The issuance of the Merger Shares and assumption of -88- 172 the XIT options and warrants were in consideration for all of the outstanding common stock of XIT Corporation. The Company relied on the exemption from registration provided by Section 4(2) of the Securities Act. No underwriter was used in connection with the Merger. c) Other Sales of Unregistered Securities Since June 1994, the Company has issued certain other unregistered securities in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act, relating to sales by an issuer not involving any public offering. These transactions are summarized below. No Underwriter was used for any of these sales. In addition, the issuance of securities in connection with the Company's reverse stock split in August 1996, by which shareholders received one share of common stock for every five shares held, was exempt under the Securities Act because such issuance was not a "sale" as such term is defined in Section 2(3) of the Securities Act. All numbers of shares of Common Stock of the Company, and all exercise prices of Warrants and options to purchase shares of Common Stock of the Company, have been adjusted to reflect this reverse stock split. i) Non-Qualified Stock Options Since June 1994, the Company has granted 2,139,368 Non-qualified stock options to various officers, directors and consultants in consideration for past and/or future services rendered to the Company. The Company has also repriced or extended 100,000 of such options. In addition, the Company has assumed 834,599 Common Stock Options in connection with the Merger, and shares underlying 406,415 of such options are being registered hereby. ii) Common Stock Issuances Since June 1994, the Company has issued 1,156,164 shares of restricted Common Stock, 668,725 shares of which were issued in connection with an investment in the Company by Elk in December 1994. The remaining 487,439 shares were issued as follows: i) 151,000 shares for legal fees and settlements, ii) 40,494 shares for consulting and other professional services and iii) 295,945 for incentive and/or severance awards to certain officers, directors and employees. Of the latter shares 75,000, 176,945, 26,000 and 5,000 of such shares were issued to Mssrs. Dror, Talan, Lewisham and Mourad, respectively, and 13,000 to others. iii) Warrants. Since June 1994, the Company has granted 150,000 warrants to purchase shares of the Company's common stock as a finders' fee in connection with the Merger, granted 20,000 warrants in payment for professional services, and in addition extended certain warrants to purchase 90,000 shares of Common Stock twice. In addition, the Company has assumed an additional 1,197,879 warrants in connection with the Merger all of which are being registered hereby. -89- 173 ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS Exhibit Description Number ----------- ------- 2. Merger Agreement dated December 31, 1996 between XIT Corporation, XIT Acquisition, Inc. and MicroTel International, Inc.(1) 3.1 Certificate of Incorporation of MicroTel International, Inc. as amended to date.(2) 3.2 Bylaws of MicroTel International, Inc.(3) 3.3 Certificate of Amendment of Certificate of Incorporation of MicroTel International, Inc.(7) 10.1 Lease for 2040 Fortune Dr., San Jose, CA 95131.(4) 10.2 1986 Incentive Stock Option Plan.(3) 10.3 Form of Officers Deferred Compensation Agreement by and between Raymond E. Jacobson and CXR Corporation.(5) 10.4 Agreement from San Jose National Bank for CXR Telcom Corporation dated May 19, 1995.(2) 10.5 Qualified Employee Stock Purchase Plan.(3) 10.6 1993 Incentive Stock Option Plan.(6) 10.7 Stock Purchase Agreement with DDC.(4) 10.8 First Amendment to Stock Purchase Agreement with DDC.(4) 10.9 Second Amendment to Stock Purchase Agreement with DDC.(4) 10.10 Warrant to Purchase Common Stock of MicroTel International, Inc. Issued to DDC.(4) 10.11 Form of Warrant to Purchase Common Stock of MicroTel International, Inc. issued to Yorkton Securities, Inc.(7) 10.12 Form of Warrant to Purchase Common Stock of MicroTel International, Inc. issued to entrenet Group, L.L.C.(7) -90- 174 Exhibit Number Description ------ ----------- 10.13 Form of Warrant to Purchase Common Stock of MicroTel International, Inc. issued to various subscribers.(7) 10.14 Agreement between MicroTel International, Inc. and Elk International Corporation, Ltd. dated November 15, 1996 (without Exhibits).(8) 10.15 Settlement Agreement between MicroTel International, Inc. and Daniel Dror dated December 3, 1996 (without Exhibits).(8) 10.16 Agency Agreement between MicroTel International, Inc. and Yorkton Securities, Inc.(7) 10.17 Form of Subscription Agreement between MicroTel International, Inc. and various subscribers.(7) 10.18 Employment Arrangement between Henry Mourad and Registrant (without Exhibits).(7) 10.19 Employment Arrangement between Barry Reifler and Registrant (without Exhibits).(7) 10.20 Employment Agreement between Registrant and Jacques Moisset dated July 1, 1995.(8) 10.21 Employment Agreement dated January 1, 1996 between XIT and Carmine T. Oliva.(8) 10.22 XIT Corporation Note and Credit Agreement re: Imperial Bank Revolver Loan #0070000702700003.(8) 10.23 XIT Corporation Note and Credit Agreement re: Imperial Bank Term Loan #0070000702700004.(8) 10.24 XCEL Arnold Circuits, Inc. Note and Credit Agreement re: Imperial Bank Revolver Loan #0070000702600003.(8) 10.25 XCEL Arnold Circuits, Inc. Note and Credit Agreement re: Imperial Bank Term Loan #0070000702600004.(8) 10.26 XCEL Arnold Circuits, Inc. Note and Credit Agreement re: Imperial Bank Term Loan #0070000702600005.(8) -91- 175 Exhibit Number Description ------ ----------- 10.27 Lease Agreement between XIT Corporation and P&S Development.(8) 10.28 Lease Agreement between XIT Corporation and Don Mosco.(8) 10.29 General Partnership Agreement between XIT Corporation and P&S Development.(8) 10.30 Lease Agreement between XCEL Arnold Circuits, Inc. and Frances I. Peters.(8) 10.31 Lease Agreement between XCEL Arnold Circuits, Inc. and Don Wilson and Zenna N. Wilson.(8) 10.32 Lease Agreement between XCEL Arnold Circuits, Inc. and Ellis Wesson.(8) 10.33 Lease Agreement between XCEL Arnold Circuits, Inc. and Roland E. Hay and Doris L. Hay.(8) 10.34 Lease Agreement between XCEL Arnold Circuits, Inc. and RKR Associates.(8) 10.35 Option Agreement between MicroTel International, Inc. and Elk International Corporation dated November 15, 1996.(8) 10.36 Amendment to Option Agreement between MicroTel International, Inc. and Daniel Dror dated November 15, 1996.(8) 10.37 Option Agreement between MicroTel International, Inc. and Elk International Corporation dated December 3, 1996.(8) 10.38 Warrant to Purchase Common Stock of MicroTel International, Inc. issued to Elk International Corporation.(8) 10.39 Agreement of Settlement and Mutual Release between MicroTel International, Inc. and Francis John Gorry dated June 28, 1996.(8) 10.40 Amended Agreement of Settlement and Mutual Release between MicroTel International, Inc. and Francis John Gorry dated November 30, 1996.(8) -92- 176 10.41 Promissory Note between MicroTel International, Inc. and Jack Talan dated February, 1997.(8) 10.42 XCEL Arnold Circuits, Inc. Note re: Imperial Bank Loan Dated July 22, 1997. # 10.43 Continuing Guarantee of MicroTel International, Inc. in favor of Imperial Bank Dated July 22, 1997. # 10.44 Continuing Guarantee of Hy Comp, Inc. in favor of Imperial Bank Dated July 22, 1997. # 10.45 Continuing Guarantee of XIT Corporation in favor of Imperial Bank Dated July 22, 1997. # 10.46 Security and Loan Agreement between XCEL Arnold Circuits, Inc., XIT Corporation and Imperial Bank Dated July 22, 1997. # 10.47 Lease Agreement between SCI Limited Partnership-I and CXR Telcom Corporation, Dated July 28, 1997. # 21.1 List of Subsidiaries of MicroTel International, Inc.(7) 23.1 Consent of BDO SEIDMAN, LLP. # 23.2 Consent of KPMG Peat Marwick LLP. # 23.3 Consent of Deloitte & Touche, LLP. # 23.4 Consent of Hardcastle Burton. # 27. Financial Data Schedule. # 99.1 Undertakings to be Incorporated by Reference to Forms S-8 33-27454 and 33-77926.(4) 99.2 Undertakings to be Incorporated by Reference to Form S-8 333-12567. --------------- # Filed herewith. (1) Incorporated by reference to MicroTel International, Inc. report on Form 8-K filed as Exhibit 1 to Item 2 of the Report on January 21, 1997 (File No. 1-10346). (2) Incorporated by reference to MicroTel International, Inc. annual report on Form 10-K for the year ended December 31, 1995 (File No. 1-10346). (3) Incorporated by reference to CXR Corporation Registration Statement on Form S-4 No. 33-30818. (4) Incorporated by reference to CXR Corporation annual report on Form 10-K for the year ended June 30, 1994 (File No. 1-10346). (5) Incorporated by reference to CXR Telecom Corporation annual report on Form 10-K for the year ended June 30, 1993 (File No. 1-10346). (6) Incorporated by reference to CXR Corporation Registration Statement on Form S-8 No. 33-77926. (7) Incorporated by reference to MicroTel International, Inc. annual report on Form 10-K for the year ended December 31, 1996 (File No. 1-10346). (8) Incorporated by reference to MicroTel International, Inc. annual report on Form 10-K/A for the year ended December 31, 1996 (File No. 1-10346). -93- 177 ITEM 17 UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described above in Item 14, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. -94- 178 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Company certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Ontario, California, on this 23rd day of September, 1997. MicroTel International Inc. By: /s/ Carmine T. Oliva ------------------------------------- Carmine T. Oliva President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by or on behalf of the following persons in the capacities and on the dates indicated. Each person, in so signing, also makes, constitutes and appoints Carmine T. Oliva, Chairman and Chief Executive Officer, his true and lawful attorney-in-fact, in his name, place and stead to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this Registration Statement, with all exhibits and any and all documents required to be filed with respect thereto, and to do and perform each and every act and thing necessary to effectuate the same.
Signature Capacity Date --------- -------- ---- /s/ Carmine T. Oliva President September 23, 1997 - ----------------------------- and Chief Executive Carmine T. Oliva Officer and Director (Principal Executive Officer) /s/ David A. Barrett Director September 23, 1997 - ----------------------------- David A. Barrett /s/ Laurence P. Finnegan, Jr. Director September 23, 1997 - ----------------------------- Laurence P. Finnegan, Jr. /s/ Robert B. Runyon Director September 23, 1997 - ----------------------------- Robert B. Runyon /s/ Jack R. Talan Director September 23, 1997 - ----------------------------- Jack R. Talan /s/ James P. Butler Chief Financial Officer September 23, 1997 - ----------------------------- (Principal Accounting and James P. Butler Financial Officer)
EX-10.42 2 XCEL ARNOLD CIRCUITS, INC. RE:IMPERIAL BANK LOAN 1 EXHIBIT 10.42 [IMPERIAL BANK LOGO] NOTE $737,500.00 Los Angeles, California July 22, 1997 On April 30, 2001, and as hereinafter provided, for value received, the undersigned promises to pay to IMPERIAL BANK ("Bank"), a California banking corporation, or order, at its Los Angeles Regional office, the principal sum of $737,500.00 or such sums up to the maximum if so stated, as the Bank may now or hereafter advance to or for the benefit of the undersigned in accordance with the terms hereof, together with interest from date of disbursement or N/A, whichever is later, on the unpaid principal balance [ ] at the rate of % per year [X] at the rate of 1.250% per year in excess of the rate of interest which Bank has announced as its prime lending rate (the "Prime Rate"), which shall vary concurrently with any change in such Prime Rate, or $250.00, whichever is greater. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance is outstanding, divided by 360, which shall, for interest computation purposes, be considered one year. Interest shall be payable [X] monthly [ ] quarterly [ ] included with principal [X] in addition to principal [ ] beginning August 30, 1997, and if not so paid shall become a part of the principal. All payments, shall be applied first to interest, and the remainder, if any, on principal. [X] (if checked). Principal shall be payable in installments of $15,000.00, or more, each installment on the 30th day of each month, beginning August 30, 1997. Advances not to exceed any unpaid balance owing at any one time equal to the maximum amount specified above, may be made at the option of the Bank. Any partial prepayment shall be applied to the installments, if any, in inverse order of maturity. Should default be made in the payment of principal or interest when due, or in the performance or observance, when due, of any item, covenant or condition of any deed of trust, security agreement or other agreement (including amendments or extensions thereof) securing or pertaining to this note, at the option of the holder hereof and without notice or demand, the entire balance of principal and accrued interest then remaining unpaid shall (a) become immediately due and payable, and (b) thereafter bear interest, until paid in full, at the increased rate of 5% per year in excess of the rate provided for above, as it may vary from time to time. Defaults shall include, but not be limited to, the failure of the maker(s) to pay principal or interest when due; the filing as to each person obligated hereon, whether as maker, co-maker, endorser or guarantor (individually or collectively referred to as the "Obligor") of a voluntary or involuntary petition under the provisions of the Federal Bankruptcy Act; the issuance of any attachment or execution against any asset of any Obligor; the death of any Obligor; or any deterioration of the financial condition of any Obligor which results in the holder hereof considering itself, in good faith, insecure. [X] If any installment payment or principal balance payment due hereunder is delinquent ten or more days, Obligor agrees to pay a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the holder of this note to accept payment of any installment past due or less than the total unpaid principal balance after maturity. If this note is not paid when due, such Obligor promises to pay all costs and expenses of collection and reasonable attorney's fees incurred by the holder hereof on account of such collection, plus interest at the rate applicable to principal, whether or not suit is filed hereon. Each Obligor shall be jointly and severally liable hereon and consents to renewals, replacements and extensions of time for payment hereof, before, at, or after maturity; consents to the acceptance, release or substitution of security for this note; and waives demand and protect and the right to assert any statute of limitations. Any married person who signs this note agrees that recourse may be had against separate property for any obligations hereunder. The indebtedness evidenced hereby shall be payable in lawful money of the United States. In any action brought under or arising out of this note, each Obligor, including successor(s) or assign(s) hereby consents to the application of California law, to the jurisdiction of any competent court within the State of California, and to service of process by any means authorized by California law. No single or partial exercise of any power hereunder, or under any deed of trust, security agreement or other agreement in connection herewith shall preclude other or further exercises thereof or the exercise of any other such power. The holder hereof shall at all times have the right to proceed against any portion of the security for this note in such order and in such manner as such holder may consider appropriate, without waiving any rights with respect to any of the security. Any delay or omission on the part of the holder hereof in exercising any right hereunder, or under any deed of trust, security agreement or other agreement, shall not operate as a waiver of such right, or of any other right, under this note or any deed of trust, security agreement or other agreement in connection herewith. Default by Borrower under any obligation to Bank shall be a default hereunder. XCEL ARNOLD CIRCUITS, INC. __________________________________ ______________________________________ __________________________________ BY ___________________________________ EX-10.43 3 CONTINUING GUARANTEE OF MICROTEL INTERNATIONAL INC 1 EXHIBIT 10.43 [IMPERIAL BANK LOGO] CONTINUING GUARANTEE ORIGINATING OFFICE: Name of Office: Los Angeles Regional Street Address: 201 N. Figueroa Street City, State, Zip Code: Los Angeles, California 90012 The undersigned (hereinafter referred to as "Guarantor") hereby requests and authorizes IMPERIAL BANK (hereinafter referred to as the "Bank") to extend credit to XCEL ARNOLD CIRCUITS, INC., XIT CORPORATION Corporations (Designate type of entity) (hereinafter referred to as "Debtor"), and in consideration of the granting of such credit by the Bank to Debtor, Guarantor agrees as follows: 1. The words "indebtedness" and "credit" are used herein in their most comprehensive sense and include any and all advances, debts, obligations and liabilities, including interest thereon, of Debtor heretofore, now or hereafter made, incurred or created, with or without notice to Guarantor, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether assumed by Debtor's successors, heirs or assigns by operation of law or otherwise, and whether Debtor is liable individually or jointly with others, and whether recovery upon any such indebtedness or credit is or hereafter becomes barred by any statute of limitations or is or hereafter becomes otherwise unenforceable. 2. Credit may be granted from time to time at the request of Debtor and without further authorization from or notice to Guarantor, even though Debtor's financial condition may have deteriorated since the date hereof. If Debtor is a corporation or a partnership, the Bank need not inquire into the power of Debtor or the authority of its officers, directors, partners or agents acting or purporting to act in its behalf. Each credit heretofore or hereafter granted to Debtor shall be considered to have been granted at the special instance and request of Guarantor and in consideration of and in reliance upon this guarantee. 3. Guarantor hereby unconditionally guarantees and promises to pay the Bank or its order any and all indebtedness of Debtor to the Bank and to perform any and all obligations of Debtor under the terms of any agreement or instrument evidencing, securing or executed in connection with any such indebtedness ("Credit Documents"). The liability of Guarantor shall not at any time exceed the sum of the amount set forth below, plus the interest thereon in accordance with the Credit Documents and the costs, attorneys' fees and other expenses provided for in Paragraph 15 hereof. If no amount is set forth below, the liability of the Guarantor hereunder shall be unlimited. The Bank may permit Debtor's indebtedness to exceed any maximum liability without impairing the obligations of Guarantor hereunder. No payments made by or on behalf of Guarantor to the Bank shall reduce any such maximum liability unless written notice to that effect is received by the Bank at or prior to the time such payment is made. If Guarantor has executed more than one guarantee of the indebtedness of Debtor to the Bank, the guarantees shall be cumulative. 4. Either before or after revocation hereof and in such manner, upon such terms and at such times as it considers best and with or without notice to Guarantor, the Bank may alter, compromise, accelerate, extend or change the time or manner for the payment of any indebtedness hereby guaranteed, increase or reduce the rate of interest thereon, release or add any one or more guarantees or endorsers, accept additional or substituted security therefor, or release or subordinate any security therefor. No exercise or nonexercise by the Bank of any right hereby given it, no dealing by the Bank with Debtor or any other person, and no change, impairment or suspension of any right or remedy of the Bank shall in any way affect any of the obligations of Guarantor hereunder or any security furnished by Guarantor or give Guarantor any recourse against the Bank. 5. In addition to all liens upon and rights of offset given to the Bank by law against any property of Debtor or of Guarantor, Guarantor hereby grants a security interest in all property of Guarantor now or hereafter in the possession of or on deposit with the Bank, whether held in a general or special account or for safekeeping or otherwise. Each such security interest may be exercised without demand upon or notice to Guarantor, shall continue in full force unless specifically waived or released by the Bank in writing and shall not be considered waived by any conduct of the Bank or by any failure of the Bank to exercise any right of offset or to enforce any such security interest or by any neglect or delay in so doing. Page 1 of 4 2 6. Guarantor waives and agrees not to assert or take advantage of (a) any right to require the Bank to proceed against the Debtor or any other person, firm or corporation or to proceed against or exhaust any security held by it at any time or to pursue any other remedy in its power; (b) the defense of the statute of limitations in any action hereunder or for the collection of any indebtedness or the performance of any obligation guaranteed hereby; (c) any defense that may arise by reason of the incapacity, lack of authority, death or disability of, or revocation hereof by, any other or others or the failure of the Bank to file or enforce a claim against the estate (either in administration, bankruptcy, or other proceeding) of any other or others; (d) demand, protest and notice of any kind including, without limiting the generality of the foregoing, notice of the existence, creation or incurring of new or additional indebtedness or of any action or non-action on the part of the Debtor, the Bank, any endorser, creditor of Debtor or Guarantor under this or any other instrument, or any other person whomsoever, in connection with any obligation or evidence of indebtedness hereby guaranteed; (e) any defense based upon an election of remedies by the Bank, including without limitation, an election to proceed by nonjudicial rather than judicial foreclosure, which election destroys or otherwise impairs subrogation rights of Guarantor or the right of Guarantor to proceed against Debtor for reimbursement, or both, including, without limitation, the impairment of subrogation rights arising by virtue of California Civil Code 580(b) and 580(d); (f) any defense or right based upon the fair value deficiency protections and provisions of California Civil Code 580(a) and California Civil Procedure Code 726; and (g) any defense or right based upon the acceptance by the Bank or any affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing the indebtedness, even if such acceptance destroys, alters or otherwise impairs subrogation rights of Guarantor or the right of Guarantor to proceed against Debtor for reimbursement, or both. 7. Guarantor, by execution hereof, represents to the Bank that the relationship between Guarantor and Debtor is such that Guarantor has access to all relevant facts and information concerning the indebtedness and Debtor and that the Bank can rely upon Guarantor having such access. Guarantor waives and agrees not to assert any duty on the part of the Bank to disclose to Guarantor any facts that the Bank may now or hereafter know about Debtor, regardless of whether the Bank has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume, or has reason to believe that such facts are unknown to Guarantor, or has a reasonable opportunity to communicate such facts to Guarantor. Guarantor is fully responsible for being and keeping informed of the financial condition of Debtor and all circumstances bearing on the risk of non-payment of the indebtedness guaranteed hereby. 8. Until all indebtedness of Debtor to the Bank has been paid in full, even though such indebtedness is in excess of the liability of Guarantor, Guarantor shall have no right of subrogation and waives any right to enforce any remedy which the Bank now has or may hereafter have against Debtor and any benefit of and any right to participate in any security now or hereafter held by the Bank. 9. Except as otherwise provided in this paragraph, all existing or future indebtedness of Debtor to Guarantor and, if Debtor is a partnership, any right to withdraw any capital of Guarantor invested in Debtor, is hereby subordinated to all indebtedness hereby guaranteed and, without the prior written consent of the Bank, shall not be paid or withdrawn in whole or in part nor will Guarantor accept any payment of or on account of any such indebtedness or as a withdrawal of capital while this guarantee is in effect. At the Bank's request, Debtor shall pay to the Bank all or any part of subordinated indebtedness and any capital which Guarantor is entitled to withdraw. Each payment by Debtor to Guarantor in violation of this paragraph shall be received in trust for the Bank and shall be paid to the Bank immediately on account of the indebtedness of Debtor to the Bank. No such payment shall reduce or affect in any manner Guarantor's liability under any of the provisions of this guarantee. Guarantor reserves the right to receive from Debtor payment of any salary for personal services at the same monthly rate as that at which Guarantor has been paid during the preceding twelve months, it being expressly understood that such amount shall not be subordinated to the indebtedness guaranteed hereby. 10. Guarantor will file all claims against Debtor in any bankruptcy or other proceeding in which the filing of claims is required by law upon any indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank all of the Guarantor's rights thereunder. If Guarantor does not file any such claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so in Guarantor's name or, in the Bank's discretion, to assign the claim and to cause proof of claim to be filed in the name of the Bank's nominee. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claims shall pay to the Bank the full amount thereof and, to the full extent necessary for the purpose, Guarantor hereby assigns to the Bank all of the Guarantor's rights to any and all such payments or distributions to which Guarantor would otherwise be entitled. If the amount so paid is greater than the guaranteed indebtedness then outstanding, the Bank will pay the amount of the excess to the person entitled thereto. 11. With or without notice to Guarantor, the Bank, in its sole discretion and at any time and from time to time either before or after delivery of any notice of revocation hereunder and in such manner and upon such terms as it considers fit, may (a) apply any or all payments or recoveries from Debtor, from Guarantor or from any other guarantor under this or any other instrument or realized from any security, in such manner and order or priority as the Bank elects, to any indebtedness of Debtor to the Bank, whether or not such indebtedness is guaranteed hereby or is otherwise secured or is due at the time of such application; and (b) refund to Debtor any payment received by the Bank upon any indebtedness hereby guaranteed and payment of the amount refunded shall be fully guaranteed hereby. Any recovery realized from any other guarantor under this or any other instrument shall be first credited upon that portion of the indebtedness of Debtor to the Bank which exceeds Guarantor's maximum liability, if any, hereunder. 12. The amount of Guarantor's liability and all rights, powers and remedies of the Bank hereunder and under the Credit Documents and any other agreements now or at any time hereafter in force between the Bank and Guarantor shall be cumulative and not alternative, and such rights, powers and remedies shall be in addition to all rights, powers and remedies given to the Bank by law. 13. Guarantor's obligations hereunder are independent of the obligations of Debtor and, in the event of any default hereunder, a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Debtor or whether Debtor is joined in any such action or actions. The Bank may maintain successive actions for other defaults. The Bank's rights hereunder shall not be exhausted by its exercise of any of its rights or remedies or by any such action or by any number of successive actions until and unless all indebtedness and obligations hereby guaranteed have been paid and fully performed. Page 2 of 4 3 14. This is a continuing guarantee and Guarantor agrees that it shall remain in full force until and unless Guarantor delivers to the Bank written notice that it has been revoked as to credit granted subsequent to the effective time of revocation as herein provided. Delivery of such notice shall be effective by personal service upon an officer of the Bank at the originating office of the Bank designated on the first page hereof or by mailing such notice by certified or registered mail, return receipt requested, postage prepaid and addressed to the Bank at the originating office designated on the first page hereof. Regardless of how notice of revocation is given, it shall not be effective until twelve o'clock noon Pacific Standard or Daylight Savings Time, as the case may be, on the next succeeding Bank business day following the day such notice is delivered, but delivery of such notice shall not affect any of Guarantor's obligations hereunder with respect to credit granted prior to the effective date of such revocation, nor shall it affect any of the obligations of any other guarantor for the credit granted to Debtor hereunder. If the originating office of the Bank designated above is not in existence at the time notice of revocation is desired to be given, then such notice may be given in the manner above provided by delivering the same to IMPERIAL BANK OFFICE at 9920 South La Cienega Boulevard, Inglewood, California, 90301. 15. Guarantor agrees to pay to the Bank without demand reasonable attorneys' fees and all costs and other expenses which the Bank expends or incurs in collecting or compromising any indebtedness of the Debtor, in protecting the Bank's security under the Credit Documents or in enforcing this guarantee against Guarantor or any other guarantor of any indebtedness hereby guaranteed whether or not suit is filed, including, without limitation, attorney's fees, costs and other such expenses incurred in any bankruptcy proceeding. Guarantor warrants and represents that it is fully authorized by law to execute this guarantee. 16. This guarantee shall benefit the Bank, its successors and assigns, including the assignees of any indebtedness hereby guaranteed, and binds Guarantor's successors and assigns. This guarantee is assignable by the Bank with respect to all or any portion of the indebtedness and obligations guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the assignees under this guarantee without in any manner affecting Guarantor's liability hereunder with respect to any indebtedness or obligations retained by the Bank. No delegation or assignment of this guarantee by any Guarantor shall be of any force or effect or release Guarantor from any obligation hereunder. 17. No provision of this guarantee or right of the Bank hereunder can be waived, nor can any Guarantor be released from his/her obligations hereunder, except by a writing duly executed by an authorized officer of the Bank. Should any one or more provisions of this guarantee be determined to be illegal or unenforceable, all other provisions nevertheless shall be governed by and construed in accordance with the laws of California, and Guarantor agrees to submit to the jurisdiction of the Courts of California. 18. If more than one guarantor signs this guarantee, the obligation of all such guarantors shall be joint and several. When the context and construction so require, all words used in the singular shall be deemed to have been used in the plural and the masculine shall include the feminine and neuter. Any married person who signs this guarantee agrees that recourse may be had against separate property for all obligations under this guarantee. 19. Except as provided in any other written agreement now or at any time hereafter in force between the Bank and Guarantor, this guarantee shall constitute the entire agreement of Guarantor with the Bank with respect to the subject matter hereof and no representation, understanding, promise or condition concerning the subject matter hereof shall be binding upon the Bank unless expressed herein. Any notice to Guarantor shall be considered to have been duly given when delivered personally or forty-eight hours after being mailed, postage prepaid, to the address(es) set forth below or to such other address(es) as Guarantor may from time to time designate by giving notice in the same manner of notice to the Bank set forth in Paragraph 14 hereof. 20. Each of the undersigned Guarantors hereby acknowledges the receipt of a true copy of this guarantee. 21. [ ] This guarantee is secured by a deed of trust dated , 19 , to Imperial Bancorp, as Trustee. GUARANTEE AMOUNT $5,116,684.00 Executed by or on behalf of Guarantor(s) on July 22, 1997.
Signature of Guarantor(s) Address MICROTEL INTERNATIONAL, INC. 4290 Brickell Street, Ontario, CA 91761 BY - -------------------------------- --------------------------------------- - -------------------------------- --------------------------------------- - -------------------------------- ---------------------------------------
Page 3 of 4 EX-10.44 4 CONTINUING GUARANTEE OF HY COMP, INC. 1 EXHIBIT 10.44 [IMPERIAL BANK LOGO] CONTINUING GUARANTEE ORIGINATING OFFICE: Name of Office: Los Angeles Regional Street Address: 201 N. Figueroa Street City, State, Zip Code: Los Angeles, California 90012 The undersigned (hereinafter referred to as "Guarantor") hereby requests and authorizes IMPERIAL BANK (hereinafter referred to as the "Bank") to extend credit to XCEL ARNOLD CIRCUITS, INC., XIT CORPORATION Corporations (Designate type of entity) (hereinafter referred to as "Debtor"), and in consideration of the granting of such credit by the Bank to Debtor, Guarantor agrees as follows: 1. The words "indebtedness" and "credit" are used herein in their most comprehensive sense and include any and all advances, debts, obligations and liabilities, including interest thereon, of Debtor heretofore, now or hereafter made, incurred or created, with or without notice to Guarantor, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether assumed by Debtor's successors, heirs or assigns by operation of law or otherwise, and whether Debtor is liable individually or jointly with others, and whether recovery upon any such indebtedness or credit is or hereafter becomes barred by any statute of limitations or is or hereafter becomes otherwise unenforceable. 2. Credit may be granted from time to time at the request of Debtor and without further authorization from or notice to Guarantor, even though Debtor's financial condition may have deteriorated since the date hereof. If Debtor is a corporation or a partnership, the Bank need not inquire into the power of Debtor or the authority of its officers, directors, partners or agents acting or purporting to act in its behalf. Each credit heretofore or hereafter granted to Debtor shall be considered to have been granted at the special instance and request of Guarantor and in consideration of and in reliance upon this guarantee. 3. Guarantor hereby unconditionally guarantees and promises to pay the Bank or its order any and all indebtedness of Debtor to the Bank and to perform any and all obligations of Debtor under the terms of any agreement or instrument evidencing, securing or executed in connection with any such indebtedness ("Credit Documents"). The liability of Guarantor shall not at any time exceed the sum of the amount set forth below, plus the interest thereon in accordance with the Credit Documents and the costs, attorneys' fees and other expenses provided for in Paragraph 15 hereof. If no amount is set forth below, the liability of the Guarantor hereunder shall be unlimited. The Bank may permit Debtor's indebtedness to exceed any maximum liability without impairing the obligations of Guarantor hereunder. No payments made by or on behalf of Guarantor to the Bank shall reduce any such maximum liability unless written notice to that effect is received by the Bank at or prior to the time such payment is made. If Guarantor has executed more than one guarantee of the indebtedness of Debtor to the Bank, the guarantees shall be cumulative. 4. Either before or after revocation hereof and in such manner, upon such terms and at such times as it considers best and with or without notice to Guarantor, the Bank may alter, compromise, accelerate, extend or change the time or manner for the payment of any indebtedness hereby guaranteed, increase or reduce the rate of interest thereon, release or add any one or more guarantees or endorsers, accept additional or substituted security therefor, or release or subordinate any security therefor. No exercise or nonexercise by the Bank of any right hereby given it, no dealing by the Bank with Debtor or any other person, and no change, impairment or suspension of any right or remedy of the Bank shall in any way affect any of the obligations of Guarantor hereunder or any security furnished by Guarantor or give Guarantor any recourse against the Bank. 5. In addition to all liens upon and rights of offset given to the Bank by law against any property of Debtor or of Guarantor, Guarantor hereby grants a security interest in all property of Guarantor now or hereafter in the possession of or on deposit with the Bank, whether held in a general or special account or for safekeeping or otherwise. Each such security interest may be exercised without demand upon or notice to Guarantor, shall continue in full force unless specifically waived or released by the Bank in writing and shall not be considered waived by any conduct of the Bank or by any failure of the Bank to exercise any right of offset or to enforce any such security interest or by any neglect or delay in so doing. Page 1 of 4 2 6. Guarantor waives and agrees not to assert or take advantage of (a) any right to require the Bank to proceed against the Debtor or any other person, firm or corporation or to proceed against or exhaust any security held by it at any time or to pursue any other remedy in its power; (b) the defense of the statute of limitations in any action hereunder or for the collection of any indebtedness or the performance of any obligation guaranteed hereby; (c) any defense that may arise by reason of the incapacity, lack of authority, death or disability of, or revocation hereof by any other or others or the failure of the Bank to file or enforce a claim against the estate (either in administration, bankruptcy, or other proceeding) of any other or others; (d) demand, protest and notice of any kind including, without limiting the generality of the foregoing, notice of the existence, creation or incurring of new or additional indebtedness or of any action or non-action on the part of the Debtor, the Bank, any endorser, creditor of Debtor or Guarantor under this or any other instrument, or any other person whomsoever, in connection with any obligation or evidence of indebtedness hereby guaranteed; (e) any defense based upon an election of remedies by the Bank, including without limitation, an election to proceed by nonjudicial rather than judicial foreclosure, which election destroys or otherwise impairs subrogation rights of Guarantor or the right of Guarantor to proceed against Debtor for reimbursement, or both, including, without limitation, the impairment of subrogation rights arising by virtue of California Civil Code 580(b) and 580(d); (f) any defense or right based upon the fair value deficiency protections and provisions of California Civil Code 580(a) and California Civil Procedure Code 726 and (g) any defense or right based upon the acceptance by the Bank or any affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing the indebtedness, even if such acceptance destroys, alters or otherwise impairs subrogation rights of Guarantor or the right of Guarantor to proceed against Debtor for reimbursement, or both. 7. Guarantor, by execution hereof, represents to the Bank that the relationship between Guarantor and Debtor is such that Guarantor has access to all relevant facts and information concerning the indebtedness and Debtor and that the Bank can rely upon Guarantor having such access. Guarantor waives and agrees not to assert any duty on the part of the Bank to disclose to Guarantor any facts that the Bank may now or hereafter know about Debtor, regardless of whether the Bank has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume, or has reason to believe that such facts are unknown to Guarantor, or has a reasonable opportunity to communicate such facts to Guarantor. Guarantor is fully responsible for being and keeping informed of the financial condition of Debtor and all circumstances bearing on the risk of non-payment of the indebtedness guaranteed hereby. 8. Until all indebtedness of Debtor to the Bank has been paid in full, even though such indebtedness is in excess of the liability of Guarantor, Guarantor shall have no right of subrogation and waives any right to enforce any remedy which the Bank now has or may hereafter have against Debtor and any benefit of and any right to participate in any security now or hereafter held by the Bank. 9. Except as otherwise provided in this paragraph, all existing or future indebtedness of Debtor to Guarantor and, if Debtor is a partnership, any right to withdraw any capital of Guarantor invested in Debtor, is hereby subordinated to all indebtedness hereby guaranteed and, without the prior written consent of the Bank, shall not be paid or withdrawn in whole or in part nor will Guarantor accept any payment of or on account of any such indebtedness or as a withdrawal of capital while this guarantee is in effect. At the Bank's request, Debtor shall pay to the Bank all or any part of subordinated indebtedness and any capital which Guarantor is entitled to withdraw. Each payment by Debtor to Guarantor in violation of this paragraph shall be received in trust for the Bank and shall be paid to the Bank immediately on account of the indebtedness of Debtor to the Bank. No such payment shall reduce or affect in any manner Guarantor's liability under any of the provisions of this guarantee. Guarantor reserves the right to receive from Debtor payment of any salary for personal services at the same monthly rate as that at which Guarantor has been paid during the preceding twelve months, it being expressly understood that such amount shall not be subordinated to the indebtedness guaranteed hereby. 10. Guarantor will file all claims against Debtor in any bankruptcy or other proceeding in which the filing of claims is required by law upon any indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank all of the Guarantor's rights thereunder. If Guarantor does not file any such claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so in Guarantor's name or, in the Bank's discretion, to assign the claim and to cause proof of claim to be filed in the name of the Bank's nominee. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claims shall pay to the Bank the full amount thereof and, to the full extent necessary for the purpose, Guarantor hereby assigns to the Bank all of the Guarantor's rights to any and all such payments or distributions to which Guarantor would otherwise be entitled. If the amount so paid is greater than the guaranteed indebtedness then outstanding, the Bank will pay the amount of the excess to the person entitled thereto. 11. With or without notice to Guarantor, the Bank, in its sole discretion and at any time and from time to time either before or after delivery of any notice of revocation hereunder and in such manner and upon such terms as it considers fit, may (a) apply any or all payments or recoveries from Debtor, from Guarantor or from any other guarantor under this or any other instrument or realized from any security, in such manner and order or priority as the Bank elects, to any indebtedness of Debtor to the Bank, whether or not such indebtedness is guaranteed hereby or is otherwise secured or is due at the time of such application; and (b) refund to Debtor any payment received by the Bank upon any indebtedness hereby guaranteed and payment of the amount refunded shall be fully guaranteed hereby. Any recovery realized from any other guarantor under this or any other instrument shall be first credited upon that portion of the indebtedness of Debtor to the Bank which exceeds Guarantor's maximum liability, if any, hereunder. 12. The amount of Guarantor's liability and all rights, powers and remedies of the Bank hereunder and under the Credit Documents and any other agreements now or at any time hereafter in force between the Bank and Guarantor shall be cumulative and not alternative, and such rights, powers and remedies shall be in addition to all rights, powers and remedies given to the Bank by law. 13. Guarantor's obligations hereunder are independent of the obligations of Debtor and, in the event of any default hereunder, a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Debtor or whether Debtor is joined in any such action or actions. The Bank may maintain successive actions for other defaults. The Bank's rights hereunder shall not be exhausted by its exercise of any of its rights or remedies or by any such action or by any number of successive actions until and unless all indebtedness and obligations hereby guaranteed have been paid and fully performed. Page 2 of 4 3 14. This is a continuing guarantee and Guarantor agrees that it shall remain in full force until and unless Guarantor delivers to the Bank written notice that it has been revoked as to credit granted subsequent to the effective time of revocation as herein provided. Delivery of such notice shall be effective by personal service upon an officer of the Bank at the originating office of the Bank designated on the first page hereof or by mailing such notice by certified or registered mail, return receipt requested, postage prepaid and addressed to the Bank at the originating office designated on the first page hereof. Regardless of how notice of revocation is given, it shall not be effective until twelve o'clock noon Pacific Standard or Daylight Savings Time, as the case may be, on the next succeeding Bank business day following the day such notice is delivered, but delivery of such notice shall not affect any of Guarantor's obligations hereunder with respect to credit granted prior to the effective date of such revocation, nor shall it affect any of the obligations of any other guarantor for the credit granted to Debtor hereunder. If the originating office of the Bank designated above is not in existence at the time notice of revocation is desired to be given, then such notice may be given in the manner above provided by delivering the same to IMPERIAL BANK OFFICE at 9920 South La Cienega Boulevard, Inglewood, California, 90301. 15. Guarantor agrees to pay to the Bank without demand reasonable attorneys' fees and all costs and other expenses which the Bank expends or incurs in collecting or compromising any indebtedness of the Debtor, in protecting the Bank's security under the Credit Documents or in enforcing this guarantee against Guarantor or any other guarantor of any indebtedness hereby guaranteed whether or not suit is filed, including, without limitation, attorney's fees, costs and other such expenses incurred in any bankruptcy proceeding. Guarantor warrants and represents that it is fully authorized by law to execute this guarantee. 16. This guarantee shall benefit the Bank, its successors and assigns, including the assignees of any indebtedness hereby guaranteed, and binds Guarantor's successors and assigns. This guarantee is assignable by the Bank with respect to all or any portion of the indebtedness and obligations guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the assignees under this guarantee without in any manner affecting Guarantor's liability hereunder with respect to any indebtedness or obligations retained by the Bank. No delegation or assignment of this guarantee by any Guarantor shall be of any force or effect or release Guarantor from any obligation hereunder. 17. No provision of this guarantee or right of the Bank hereunder can be waived, nor can any Guarantor be released from his/her obligations hereunder, except by a writing duly executed by an authorized officer of the Bank. Should any one or more provisions of this guarantee be determined to be illegal or unenforceable, all other provisions nevertheless shall be governed by and construed in accordance with the laws of California, and Guarantor agrees to submit to the jurisdiction of the Courts of California. 18. If more than one guarantor signs this guarantee, the obligation of all such guarantors shall be joint and several. When the context and construction so require, all words used in the singular shall be deemed to have been used in the plural and the masculine shall include the feminine and neuter. Any married person who signs this guarantee agrees that recourse may be had against separate property for all obligations under this guarantee. 19. Except as provided in any other written agreement now or at any time hereafter in force between the Bank and Guarantor, this guarantee shall constitute the entire agreement of Guarantor with the Bank with respect to the subject matter hereof and no representation, understanding, promise or condition concerning the subject matter hereof shall be binding upon the Bank unless expressed herein. Any notice to Guarantor shall be considered to have been duly given when delivered personally or forty-eight hours after being mailed, postage prepaid, to the address(es) set forth below or to such other address(es) as Guarantor may from time to time designate by giving notice in the same manner of notice to the Bank set forth in Paragraph 14 hereof. 20. Each of the undersigned Guarantors hereby acknowledges the receipt of a true copy of this guarantee. 21. [ ] This guarantee is secured by a deed of trust dated , 19 , to Imperial Bancorp, as Trustee. GUARANTEE AMOUNT $5,116,684.00 Executed by or on behalf of Guarantor(s) on July 22, 1997.
Signature of Guarantor(s) Address HYCOMP, INC. 165 Cedar Hill St., Marlborough, MA 01752 BY - -------------------------------- --------------------------------------- - -------------------------------- --------------------------------------- - -------------------------------- ---------------------------------------
Page 3 of 4 EX-10.45 5 CONTINUING GUARANTEE OF XIT CORPORATION 1 EXHIBIT 10.45 [IMPERIAL BANK LOGO] CONTINUING GUARANTEE ORIGINATING OFFICE: Name of Office: Los Angeles Regional Street Address: 201 N. Figueroa Street City, State, Zip Code: Los Angeles, California 90012 The undersigned (hereinafter referred to as "Guarantor") hereby requests and authorizes IMPERIAL BANK (hereinafter referred to as the "Bank") to extend credit to XCEL ARNOLD CIRCUITS, INC., XIT CORPORATION Corporations (Designate type of entity) (hereinafter referred to as "Debtor"), and in consideration of the granting of such credit by the Bank to Debtor, Guarantor agrees as follows: 1. The words "indebtedness" and "credit" are used herein in their most comprehensive sense and include any and all advances, debts, obligations and liabilities, including interest thereon, of Debtor heretofore, now or hereafter made, incurred or created, with or without notice to Guarantor, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, whether assumed by Debtor's successors, heirs or assigns by operation of law or otherwise, and whether Debtor is liable individually or jointly with others, and whether recovery upon any such indebtedness or credit is or hereafter becomes barred by any statute of limitations or is or hereafter becomes otherwise unenforceable. 2. Credit may be granted from time to time at the request of Debtor and without further authorization from or notice to Guarantor, even though Debtor's financial condition may have deteriorated since the date hereof. If Debtor is a corporation or a partnership, the Bank need not inquire into the power of Debtor or the authority of its officers, directors, partners or agents acting or purporting to act in its behalf. Each credit heretofore or hereafter granted to Debtor shall be considered to have been granted at the special instance and request of Guarantor and in consideration of and in reliance upon this guarantee. 3. Guarantor hereby unconditionally guarantees and promises to pay the Bank or its order any and all indebtedness of Debtor to the Bank and to perform any and all obligations of Debtor under the terms of any agreement or instrument evidencing, securing or executed in connection with any such indebtedness ("Credit Documents"). The liability of Guarantor shall not at any time exceed the sum of the amount set forth below, plus the interest thereon in accordance with the Credit Documents and the costs, attorneys' fees and other expenses provided for in Paragraph 15 hereof. If no amount is set forth below, the liability of the Guarantor hereunder shall be unlimited. The Bank may permit Debtor's indebtedness to exceed any maximum liability without impairing the obligations of Guarantor hereunder. No payments made by or on behalf of Guarantor to the Bank shall reduce any such maximum liability unless written notice to that effect is received by the Bank at or prior to the time such payment is made. If Guarantor has executed more than one guarantee of the indebtedness of Debtor to the Bank, the guarantees shall be cumulative. 4. Either before or after revocation hereof and in such manner, upon such terms and at such times as it considers best and with or without notice to Guarantor, the Bank may alter, compromise, accelerate, extend or change the time or manner for the payment of any indebtedness hereby guaranteed, increase or reduce the rate of interest thereon, release or add any one or more guarantees or endorsers, accept additional or substituted security therefor, or release or subordinate any security therefor. No exercise or nonexercise by the Bank of any right hereby given it, no dealing by the Bank with Debtor or any other person, and no change, impairment or suspension of any right or remedy of the Bank shall in any way affect any of the obligations of Guarantor hereunder or any security furnished by Guarantor or give Guarantor any recourse against the Bank. 5. In addition to all liens upon and rights of offset given to the Bank by law against any property of Debtor or of Guarantor, Guarantor hereby grants a security interest in all property of Guarantor now or hereafter in the possession of or on deposit with the Bank, whether held in a general or special account or for safekeeping or otherwise. Each such security interest may be exercised without demand upon or notice to Guarantor, shall continue in full force unless specifically waived or released by the Bank in writing and shall not be considered waived by any conduct of the Bank or by any failure of the Bank to exercise any right of offset or to enforce any such security interest or by any neglect or delay in so doing. Page 1 of 4 2 6. Guarantor waives and agrees not to assert or take advantage of (a) any right to require the Bank to proceed against the Debtor or any other person, firm or corporation or to proceed against or exhaust any security held by it at any time or to pursue any other remedy in its power; (b) the defense of the statute of limitations in any action hereunder or for the collection of any indebtedness or the performance of any obligation guaranteed hereby; (c) any defense that may arise by reason of the incapacity, lack of authority, death or disability of, or revocation hereof by, any other or others or the failure of the Bank to file or enforce a claim against the estate (either in administration, bankruptcy, or other proceeding) of any other or others; (d) demand, protest and notice of any kind including, without limiting the generality of the foregoing, notice of the existence, creation or incurring of new or additional indebtedness or of any action or non-action on the part of the Debtor, the Bank, any endorser, creditor of Debtor or Guarantor under this or any other instrument, or any other person whomsoever, in connection with any obligation or evidence of indebtedness hereby guaranteed; (e) any defense based upon an election of remedies by the Bank, including without limitation, an election to proceed by nonjudicial rather than judicial foreclosure, which election destroys or otherwise impairs subrogation rights of Guarantor or the right of Guarantor to proceed against Debtor for reimbursement, or both, including, without limitation, the impairment of subrogation rights arising by virtue of California Civil Code 580(b) and 580(d); (f) any defense or right based upon the fair value deficiency protections and provisions of California Civil Code 580(a) and California Civil Procedure Code 726, and (g) any defense or right based upon the acceptance by the Bank or any affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing the indebtedness, even if such acceptance destroys, alters or otherwise impairs subrogation rights of Guarantor or the right of Guarantor to proceed against Debtor for reimbursement, or both. 7. Guarantor, by execution hereof, represents to the Bank that the relationship between Guarantor and Debtor is such that Guarantor has access to all relevant facts and information concerning the indebtedness and Debtor and that the Bank can rely upon Guarantor having such access. Guarantor waives and agrees not to assert any duty on the part of the Bank to disclose to Guarantor any facts that the Bank may now or hereafter know about Debtor, regardless of whether the Bank has reason to believe that any such facts materially increase the risk beyond that which Guarantor intends to assume, or has reason to believe that such facts are unknown to Guarantor, or has a reasonable opportunity to communicate such facts to Guarantor. Guarantor is fully responsible for being and keeping informed of the financial condition of Debtor and all circumstances bearing on the risk of non-payment of the indebtedness guaranteed hereby. 8. Until all indebtedness of Debtor to the Bank has been paid in full, even though such indebtedness is in excess of the liability of Guarantor, Guarantor shall have no right of subrogation and waives any right to enforce any remedy which the Bank now has or may hereafter have against Debtor and any benefit of and any right to participate in any security now or hereafter held by the Bank. 9. Except as otherwise provided in this paragraph, all existing or future indebtedness of Debtor to Guarantor and, if Debtor is a partnership, any right to withdraw any capital of Guarantor invested in Debtor, is hereby subordinated to all indebtedness hereby guaranteed and, without the prior written consent of the Bank, shall not be paid or withdrawn in whole or in part nor will Guarantor accept any payment of or on account of any such indebtedness or as a withdrawal of capital while this guarantee is in effect. At the Bank's request, Debtor shall pay to the Bank all or any part of subordinated indebtedness and any capital which Guarantor is entitled to withdraw. Each payment by Debtor to Guarantor in violation of this paragraph shall be received in trust for the Bank and shall be paid to the Bank immediately on account of the indebtedness of Debtor to the Bank. No such payment shall reduce or affect in any manner Guarantor's liability under any of the provisions of this guarantee. Guarantor reserves the right to receive from Debtor payment of any salary for personal services at the same monthly rate as that at which Guarantor has been paid during the preceding twelve months, it being expressly understood that such amount shall not be subordinated to the indebtedness guaranteed hereby. 10. Guarantor will file all claims against Debtor in any bankruptcy or other proceeding in which the filing of claims is required by law upon any indebtedness of Debtor to Guarantor and shall concurrently assign to the Bank all of the Guarantor's rights thereunder. If Guarantor does not file any such claim, the Bank, as Guarantor's attorney-in-fact, is hereby authorized to do so in Guarantor's name or, in the Bank's discretion, to assign the claim and to cause proof of claim to be filed in the name of the Bank's nominee. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claims shall pay to the Bank the full amount thereof and, to the full extent necessary for the purpose, Guarantor hereby assigns to the Bank all of the Guarantor's rights to any and all such payments or distributions to which Guarantor would otherwise be entitled. If the amount so paid is greater than the guaranteed indebtedness then outstanding, the Bank will pay the amount of the excess to the person entitled thereto. 11. With or without notice to Guarantor, the Bank, in its sole discretion and at any time and from time to time either before or after delivery of any notice of revocation hereunder and in such manner and upon such terms as it considers fit, may (a) apply any or all payments or recoveries from Debtor, from Guarantor or from any other guarantor under this or any other instrument or realized from any security, in such manner and order or priority as the Bank elects, to any indebtedness of Debtor to the Bank, whether or not such indebtedness is guaranteed hereby or is otherwise secured or is due at the time of such application; and (b) refund to Debtor any payment received by the Bank upon any indebtedness hereby guaranteed and payment of the amount refunded shall be fully guaranteed hereby. Any recovery realized from any other guarantor under this or any other instrument shall be first credited upon that portion of the indebtedness of Debtor to the Bank which exceeds Guarantor's maximum liability, if any, hereunder. 12. The amount of Guarantor's liability and all rights, powers and remedies of the Bank hereunder and under the Credit Documents and any other agreements now or at any time hereafter in force between the Bank and Guarantor shall be cumulative and not alternative, and such rights, powers and remedies shall be in addition to all rights, powers and remedies given to the Bank by law. 13. Guarantor's obligations hereunder are independent of the obligations of Debtor and, in the event of any default hereunder, a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Debtor or whether Debtor is joined in any such action or actions. The Bank may maintain successive actions for other defaults. The Bank's rights hereunder shall not be exhausted by its exercise of any of its rights or remedies or by any such action or by any number of successive actions until and unless all indebtedness and obligations hereby guaranteed have been paid and fully performed. Page 2 of 4 3 14. This is a continuing guarantee and Guarantor agrees that it shall remain in full force until and unless Guarantor delivers to the Bank written notice that it has been revoked as to credit granted subsequent to the effective time of revocation as herein provided. Delivery of such notice shall be effective by personal service upon an officer of the Bank at the originating office of the Bank designated on the first page hereof or by mailing such notice by certified or registered mail, return receipt requested, postage prepaid and addressed to the Bank at the originating office designated on the first page hereof. Regardless of how notice of revocation is given, it shall not be effective until twelve o'clock noon Pacific Standard or Daylight Savings Time, as the case may be, on the next succeeding Bank business day following the day such notice is delivered, but delivery of such notice shall not affect any of Guarantor's obligations hereunder with respect to credit granted prior to the effective date of such revocation, nor shall it affect any of the obligations of any other guarantor for the credit granted to Debtor hereunder. If the originating office of the Bank designated above is not in existence at the time notice of revocation is desired to be given, then such notice may be given in the manner above provided by delivering the same to IMPERIAL BANK OFFICE at 9920 South La Cienega Boulevard, Inglewood, California, 90301. 15. Guarantor agrees to pay to the Bank without demand reasonable attorneys' fees and all costs and other expenses which the Bank expends or incurs in collecting or compromising any indebtedness of the Debtor, in protecting the Bank's security under the Credit Documents or in enforcing this guarantee against Guarantor or any other guarantor of any indebtedness hereby guaranteed whether or not suit is filed, including, without limitation, attorney's fees, costs and other such expenses incurred in any bankruptcy proceeding. Guarantor warrants and represents that it is fully authorized by law to execute this guarantee. 16. This guarantee shall benefit the Bank, its successors and assigns, including the assignees of any indebtedness hereby guaranteed, and binds Guarantor's successors and assigns. This guarantee is assignable by the Bank with respect to all or any portion of the indebtedness and obligations guaranteed hereunder, and, when so assigned, Guarantor shall be liable to the assignees under this guarantee without in any manner affecting Guarantor's liability hereunder with respect to any indebtedness or obligations retained by the Bank. No delegation or assignment of this guarantee by any Guarantor shall be of any force or effect or release Guarantor from any obligation hereunder. 17. No provision of this guarantee or right of the Bank hereunder can be waived, nor can any Guarantor be released from his/her obligations hereunder, except by a writing duly executed by an authorized officer of the Bank. Should any one or more provisions of this guarantee be determined to be illegal or unenforceable, all other provisions nevertheless shall be governed by and construed in accordance with the laws of California, and Guarantor agrees to submit to the jurisdiction of the Courts of California. 18. If more than one guarantor signs this guarantee, the obligation of all such guarantors shall be joint and several. When the context and construction so require, all words used in the singular shall be deemed to have been used in the plural and the masculine shall include the feminine and neuter. Any married person who signs this guarantee agrees that recourse may be had against separate property for all obligations under this guarantee. 19. Except as provided in any other written agreement now or at any time hereafter in force between the Bank and Guarantor, this guarantee shall constitute the entire agreement of Guarantor with the Bank with respect to the subject matter hereof and no representation, understanding, promise or condition concerning the subject matter hereof shall be binding upon the Bank unless expressed herein. Any notice to Guarantor shall be considered to have been duly given when delivered personally or forty-eight hours after being mailed, postage prepaid, to the address(es) set forth below or to such other address(es) as Guarantor may from time to time designate by giving notice in the same manner of notice to the Bank set forth in Paragraph 14 hereof. 20. Each of the undersigned Guarantors hereby acknowledges the receipt of a true copy of this guarantee. 21. [ ] This guarantee is secured by a deed of trust dated , 19 , to Imperial Bancorp, as Trustee. GUARANTEE AMOUNT $4,887,493.00 Executed by or on behalf of Guarantor(s) on July 22, 1997.
Signature of Guarantor(s) Address XIT CORPORATION 4290 Brickell Street, Ontario, CA 91761 BY - -------------------------------- --------------------------------------- - -------------------------------- --------------------------------------- - -------------------------------- ---------------------------------------
Page 3 of 4 EX-10.46 6 SECURITY AND LOAN AGREEMENT 1 EXHIBIT 10.46 IMPERIAL BANK Member FDIC SECURITY AND LOAN AGREEMENT (ACCOUNTS RECEIVABLE AND/OR INVENTORY) This Agreement is entered into between XCEL Arnold Circuits, Inc., XIT Corporation (herein called "Borrower") and IMPERIAL BANK (herein called "Bank"). 1. Bank hereby commits, subject to all the terms and conditions of this Agreement and prior to the termination of its commitment as hereinafter provided, to make loans to Borrower from time to time in such amounts as may be determined by Bank up to, but not exceeding in the aggregate unpaid principal balance. the following Borrowing Base: 80.000 % of Eligible Accounts 25.000 % of the Value of Inventory $500,000.00 and in no event more than $3,500,000.00 2. The amount of each loan made by Bank to Borrower hereunder shall be debited to the loan ledger account of Borrower maintained by Bank (herein called "Loan Account") and Bank shall credit the Loan Account with all loan repayments made by Borrower. Borrower promises to pay Bank on or before the tenth day of each month, interest on the average daily unpaid balance of the Loan Account during the immediately preceding month at the rate of One percent (1.000%) per annum in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall for interest computation purposes be considered one year. Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest at any time. Such notice may be given verbally or in writing and should be effective upon receipt by Borrower. The amount of interest payable each month by Borrower shall not be less than a minimum monthly charge of $ 250.00. Bank is hereby authorized to charge Borrower's deposit account(s) with Bank for all sums due Bank under this Agreement. 3. Requests for loans hereunder shall be in writing duly executed by Borrower in a form satisfactory to Bank and shall contain a certification setting forth the matters referred to in Section 1, which shall disclose that Borrower is entitled to the amount of loan being requested. 4. As used in this Agreement, the following terms shall have the following meanings: A. "Accounts" means any right to payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered no matter how evidenced, including accounts receivable, contract rights, chattel paper, instruments, purchase orders, notes, drafts, acceptances, general intangibles and other forms of obligations and receivables. B. "Inventory" means all of the Borrower's goods, merchandise and other personal property which are held for sale or lease, including those held for display or demonstration or out on lease or consignment or to be furnished under a contract of service or are raw materials, work in process or materials used or consumed, or to be used or consumed in Borrower's business, and shall include all property rights, patents, plans, drawings, diagrams, schematics, assembly and display materials relating thereto. C. "Collateral" means any and all personal property of Borrower which is assigned or hereafter is assigned to Bank as security or in which Bank now has or hereafter acquires a security interest. D. "Eligible Accounts" means all of Borrower's Accounts excluding, however, (1) all Accounts under which payment is not received within days from any invoice date, (2) all Accounts against which the account debtor or any other person obligated to make payment thereon asserts any defense, offset, counterclaim or other right to avoid or reduce the liability represented by the Account and (3) any Accounts if the account debtor or any other person liable in connection therewith is insolvent, subject to bankruptcy or receivership proceedings or has made an assignment for the benefit of creditors or whose credit standing is unacceptable to Bank and Bank has so notified Borrower. Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. E. "Value of Inventory" means the value of Borrower's Inventory determined in accordance with generally accepted accounting principles consistently applied excluding, however, the amount of progress payments, pre-delivery payments, deposits and any other sums received by Borrower in anticipation of the sale and delivery of Inventory, all Inventory on consignment or lease to others, and all property on consignment or lease from others to Borrower. 5. Borrower hereby assigns to Bank all Borrower's present and future Accounts, including all proceeds due thereunder, all guaranties and security therefor and all merchandise giving rise thereto, and hereby grants to Bank a continuing security interest in all Borrower's Inventory and in all proceeds and products thereof, whether now owned or hereafter existing or acquired, including all moneys in the Collateral Account referred to in Section 6 hereof, as security for any and all obligations of Borrower to Bank, whether now owing or hereafter incurred and whether direct, indirect, absolute or contingent. So long as Borrower is indebted to Bank or Bank is committed to extend credit to Borrower, Borrower will execute and deliver to Bank such assignments, including Bank's standard forms of Specific or General Assignment covering individual Accounts, notices, financing statements, and other documents and papers as Bank may require in order to affirm, effectuate or further assure the assignment to Bank of the Collateral or to give any third party, including the account debtors obligated on the Accounts, notice of Bank's interest in Collateral. 6. Until Bank exercises its rights to collect the Accounts and Inventory proceeds pursuant to paragraph 10, Borrower will collect with diligence all Borrower's Accounts and Inventory proceeds, provided that no legal action shall be maintained thereon or in connection therewith without Bank's prior written consent. Any collection of Accounts or Inventory proceeds by Borrower, whether in the form of cash, checks, notes, or other instruments for the payment of money (properly endorsed or assigned where required to enable Bank to collect same), shall be in trust for Bank, and Borrower shall keep all such collections separate and apart from all other funds and property so as to be capable of identification as the property of Bank and deliver said collections, together with the proceeds of all cash sales, daily to Bank in the identical form received. The proceeds of such collections when received by Bank may be applied by Bank directly to the payment of Borrower's Loan Account or any other obligation secured hereby. Any credit given by Bank upon receipt of said proceeds shall be conditional credit subject to collection. Return items at Bank's option may be charged to Borrower's general account. All collections of the Accounts and Inventory proceeds shall be set forth on an itemized schedule, showing the name of the account debtor, the amount of each payment and such other information as Bank may request. 7. Until Bank exercises its rights to collect the Accounts or Inventory proceeds pursuant to paragraph 10, Borrower may continue its present policies with respect to returned merchandise and adjustments. However, Borrower shall immediately notify Bank of all cases involving returns, repossessions, and loss or damage of or to merchandise represented by the Accounts or constituting Inventory and of any credits, adjustments or disputes arising in connection with the goods or services represented by the Accounts or constituting Inventory and, in any of such events, Borrower will immediately pay to Bank from its own funds (and not from the proceeds of Accounts or Inventory) for application to Borrower's Loan Account or any other obligation secured hereby the amount of any credit for such returned or repossessed merchandise and adjustments made to any of the Accounts. Until payment is made as provided herein or until release by Bank from its security interest, all merchandise returned to or Page 1 of 2 2 repossessed by Borrower shall be set aside and identified as the property of Bank and Bank shall be entitled to enter upon any premises where such merchandise is located and take immediate possession thereof and remove same. 8. Borrower represents and warrants to Bank: (i) If Borrower is a corporation, that Borrower is duly organized and existing in the State of its incorporation and the execution, delivery and performance hereof are within Borrower's corporate powers, have been duly authorized and are not in conflict with law or the terms of any charter, by-law or other incorporation papers, or of any indenture, agreement or undertaking to which Borrower is a party or by which Borrower is found or affected; (ii) Borrower is, or at the time the collateral becomes subject to Bank's security interest will be, the true and lawful owner of and has, or at the time the Collateral becomes subject to Bank's security interest will have, good and clear title to the Collateral, subject only to Bank's rights therein; (iii) Each Account is, or at the time the Account comes into existence will be, a true and correct statement of a bona fide indebtedness incurred by the debtor named therein in the amount of the Account for either merchandise sold or delivered (or being held subject to Borrower's delivery instructions) to, or services rendered, performed and accepted by, the account debtor; (iv) That there are or will be no defenses, counterclaims, or setoffs which may be asserted against the Accounts; and (v) any and all financial information, including information relating to the Collateral, submitted by Borrower to Bank, whether previously or in the future, is or will be true and correct. 9. Borrower will: (1) Furnish Bank from time to time such financial statements and information as Bank may reasonably request and inform Bank immediately upon the occurrence of a material adverse change therein; (ii) Furnish Bank periodically, in such form and detail and at such times as Bank may require, statements showing aging and reconciliation of the Accounts and collections thereon, and reports as to the Inventory and sales thereof; (iii) Permit representatives of Bank to inspect the Inventory and Borrower's books and records relating to the Collateral and make extracts therefrom at any reasonable time and to arrange for verification of the Accounts, under reasonable procedures, acceptable to Bank, directly with the account debtors or otherwise at Borrower's expense; (iv) Promptly notify Bank of any attachment or other legal process levied against any of the Collateral and any information received by Borrower relative to the Collateral, including the Accounts, the account debtors or other persons obligated in connection therewith, which may in any way affect the value of the Collateral or the rights and remedies of Bank in respect thereto; (v) Reimburse Bank upon demand for any and all legal costs, including reasonable attorney's fees, and other expense incurred in collecting any sums payable by Borrower under Borrower's Loan Account or any other obligation secured hereby, enforcing any term or provision of this Security Agreement or otherwise or in the checking, handling and collection of the Collateral and the preparation and enforcement of any agreement relating thereto; (vi) Notify Bank of each location at which the Inventory is or will be kept, other than for temporary processing, storage or similar purposes, and of any removal thereof to a new location and of each office of Borrower at which records of Borrower relating to the Accounts are kept; (vii) Provide, maintain and deliver to Bank policies insuring the collateral against loss or damage by such risks and in such amounts, forms and companies as Bank may require and with loss payable solely to Bank, and, in the event Bank takes possession of the Collateral, the insurance policy or policies and any unearned or returned premium thereon shall at the option of Bank become the sole property of Bank, such policies and the proceeds of any other insurance covering or in any way relating to the Collateral, whether now in existence or hereafter obtained, being hereby assigned to Bank; (viii) Do all acts necessary to maintain, preserve and protect all Inventory, keep all Inventory in good condition and repair and not to cause any waste or unusual or unreasonable depreciation thereof, and (ix) In the event the unpaid balance of Borrower's Loan Account shall exceed the maximum amount of outstanding loans to which Borrower is entitled under Section 1 hereof, Borrower shall immediately pay to Bank, from its own funds and not from the proceeds of Collateral, for credit to Borrower's Loan Account the amount of such excess. 10. Bank may at any time, without prior notice to Borrower, collect the Accounts and Inventory proceeds and may give notice of assignment to any and all account debtors, and Borrower does hereby make, constitute and appoint Bank its irrevocable, true and lawful attorney with power to receive, open and dispose of all mail addressed to Borrower, to endorse the name of Borrower upon any checks or other evidences of payment that may come into the possession of Bank upon the Accounts or as proceeds of Inventory; to endorse the name of the undersigned upon any document or instrument relating to the Collateral; in its name or otherwise, to demand, sue for, collect and give acquittances for any and all moneys due or to become due upon the Accounts; to compromise, prosecute or defend any action, claim or proceeding with respect thereto; and to do any and all things necessary and proper to carry out the purpose herein contemplated. 11. Until Borrower's Loan Account and all other obligations secured hereby shall have been repaid in full, Borrower shall not sell, dispose of or grant a security interest in any of the Collateral other than to Bank, or execute any financing statements covering the Collateral in favor of any secured party or person other than Bank. 12. Should: (i) Default be made in the payment of any obligation, or breach be made in any warranty, statement, promise, term or condition, contained herein or hereby secured; (ii) Any statement or representation made for the purpose of obtaining credit hereunder prove false; (iii) Bank deem the Collateral inadequate or unsafe or in danger of misuse; (iv) Borrower become insolvent or make an assignment for the benefit of creditors; or (v) Any proceeding be commended by or against Borrower under any bankruptcy, reorganization, arrangement, readjustment of debt or moratorium law or statute; then in any such event, Bank may, at its option and without demand first made and without notice to Borrower, do any one or more of the following: (a) Terminate its obligation to make loans to Borrower as provided in Section 1 hereof; (b) Declare all sums secured hereby immediately due and payable; (c) Immediately take possession of the Collateral wherever it may be found, using all necessary force so to do, or require Borrower to assemble the Collateral and make it available to Bank at a place designated by Bank which is reasonably convenient to Borrower and Bank, and Borrower waives all claims for damages due to or arising from or connected with any such taking; (d) Proceed in the foreclosure of Bank's security interest and sale of the Collateral in any manner permitted by law, or provided for herein; (e) Sell, lease or otherwise dispose of the Collateral at public or private sale, with or without having the Collateral at the place of sale, and upon terms and in such manner as Bank may determine, and Bank may purchase same at any such sale; (f) Retain the Collateral in full satisfaction of the obligations secured thereby; (g) Exercise any remedies of a secured party under the Uniform Commercial Code. Prior to any such disposition, Bank may, at its option, cause any of the Collateral to be repaired or reconditioned in such manner and to such extent as Bank may deem advisable, and any sums expended therefor by Bank shall be repaid by Borrower and secured hereby. Bank shall have the right to enforce one or more remedies hereunder successively or concurrently, and any such action shall not estop or prevent Bank from pursuing any further remedy which it may have hereunder or by law. If a sufficient sum is not realized from any such disposition of Collateral to pay all obligations secured by this Security Agreement, Borrower hereby promises and agrees to pay Bank any deficiency. 13. If any writ of attachment, garnishment, execution or other legal process be issued against any property of Borrower, or if any assessment for taxes against Borrower, other than real property, is made by the Federal or State government or any department thereof, the obligation of Bank to make loans to Borrower as provided in Section 1 hereof shall immediately terminate and the unpaid balance of the Loan Account, all other obligations secured hereby and all other sums due hereunder shall immediately become due and payable without demand, presentment or notice. 14. Borrower authorizes Bank to destroy all invoices, delivery receipts, reports and other types of documents and records submitted to Bank in connection with the transactions contemplated herein at any time subsequent to four months from the time such items are delivered to Bank. 15. Nothing herein shall in any way limit the effect of the conditions set forth in any other security or other agreement executed by Borrower, but each and every condition hereof shall be in addition thereto. *16. Additional Provisions: See Exhibit "A" Addendum to Security and Loan Agreement attached Executed this 22nd day of July, 1997 XCEL Arnold Circuits, Inc. -------------------------- (Name of Borrower) BY: ------------------------------- (Authorized Signature and Title) XIT Corporation -------------------------- (Name of Borrower) BY: ------------------------------- (Authorized Signature and Title) IMPERIAL BANK BY: /s/ Nunilo Soler BY: ------------------------------- -------------------------------- Nunilo Soler, Vice President (Authorized Signature and Title) * If none, Insert "None" Page 2 of 2 3 EXHIBIT "A" ADDENDUM TO SECURITY AND LOAN AGREEMENT ("Security and Loan Agreement") BETWEEN XIT CORPORATION AND XCEL ARNOLD CIRCUITS, INC. AND IMPERIAL BANK DATED: July 22, 1997 This Addendum is made and entered into July 15, 1997, between XIT CORPORATION & XCEL ARNOLD CIRCUITS, INC. (individually and collectively "Borrower") and Imperial Bank ("Bank"). This Addendum amends and supplements the Security and Loan Agreement. In the event of any inconsistency between the terms herein and the terms of the Security and Loan Agreement, the terms herein shall in all cases govern and control. All capitalized terms herein, unless otherwise defined herein, shall have the meaning set forth in the Security and Loan Agreement. 1. A. Any commitment of Bank, pursuant to the terms of the Security and Loan Agreement, to make advances against Eligible Accounts shall expire on June 25, 1998, subject to Bank's right to renew said commitment at its sole discretion. Any renewal of the commitment shall not be binding upon the Bank unless it is in writing and signed by an officer of the Bank. B. In addition to Bank's commitment to make advances against Eligible Accounts, the Bank has made certain loans to XCEL Arnold Circuits, Inc. The terms and conditions of the Security and Loan Agreement and this Addendum, as either is amended, replaced, or otherwise revised will apply to all of those loans until repaid in full and any other loans made by the Bank to either Borrower in the future and shall survive even if commitment to make advances against Eligible Accounts and Inventory has expired, has been terminated or is not in effect for any reason. 2. Definitions: a. Eligible Accounts. Eligible Accounts as defined in the Security and Loan Agreement is amended to include, in addition to Borrower's Accounts, Accounts of Hycomp, Inc. (subsidiary of XIT Corporation) and Accounts of Etch- Tek, Inc. (division of Xcel Arnold Circuits, Inc.) meeting the criteria set forth therein and herein. b. Value of Inventory. Value of Eligible Inventory as defined in the Security and Loan Agreement is amended to represent only raw material inventory located at main premises at 4290 East Brickell Street, Ontario, Ca. belonging to XIT Corporation, and is to include raw material inventory of Hycomp, Inc. located in Marlborough, Ma. meeting the criteria set forth therein and herein. 4 EXHIBIT A Page 2 3. Borrower represents and warrants that: a. Litigation. Except as previously disclosed in writing to Bank, there is no litigation or other proceeding pending or threatened against or affecting Borrower, and Borrower is not in default with respect to any order, writ, injunction, decree or demand of any court or other governmental or regulatory authority. b. Financial Condition. The balance sheet of Borrower as of June 30, 1997, and the related profit and loss statement on that date, a copy of which has heretofore been delivered to Bank by Borrower, and all other statements and data submitted in writing by Borrower to Bank in connection with this request for credit are true and correct, and said balance sheet and profit and loss statement truly present the financial condition of Borrower as of the date thereof and the results of the operations of Borrower for the period covered thereby, and have been prepared in accordance with generally accepted accounting principles on a basis consistently maintained. Since such date, there have been no materially adverse changes in the financial condition or business of Buyer. Borrower has no knowledge of any liabilities, contingent or otherwise, at such date not reflected in said balance sheet, and Borrower has not entered into any special commitments or substantial contracts which are not reflected in said balance sheet, other than in the ordinary and normal course of its business, which may have a materially adverse effect upon its financial condition, operations or business as now conducted. c. Trademarks, Patents. Borrower, as of the date hereof, possesses all necessary trademarks, trade names, copyrights, patents, patent rights, and licenses to conduct its business as now operated, without any known conflict with valid trademarks, trade names, copyrights patents and license rights of others. d. Tax Status. Borrower has no liability for any delinquent state, local or federal taxes, and, if Borrower has contracted with any government agency, Borrower has no liability for renegotiation of profits. 4. Borrower agrees that so long as it is indebted to Bank, it will not, without Bank's written consent: a. Type of Business. Management. Make any substantial change in the character of its business; or make any change in its executive management provided that Bank will not unreasonably withhold its consent to any change in executive management. b. Outside Indebtedness. Create, incur, assume or permit to exist any indebtedness for borrowed moneys other than loans from Bank except obligations now existing as shown in financial statement dated June 30, 1997, excluding those being refinanced by Bank and except for indebtedness to shareholders; or sell or transfer, either with or without recourse, any accounts or notes receivable or any moneys due to become due. 5 EXHIBIT A Page 3 c. Liens and Encumbrances. Create, incur, assume any mortgage, pledge, encumbrance, lien or charge of any kind (including the charge upon property at any time purchased or acquired under conditional sale or other title retention agreement) upon any asset now owned or hereafter acquired by it, other than (i) liens for taxes not delinquent and liens in Bank's favor and (ii) obligations secured by equipment or automotive vehicles purchased in the ordinary course of Borrower's business. d. Loans, Investments, Secondary Liabilities, Make any loans or advances to any person or other entity other than in the normal and ordinary course of its business as now conducted or make any investment(s), in the securities of any person or other entity other than the United States Government; or guarantee or otherwise become liable upon the obligation of any person or other entity, except by endorsement of negotiable instruments for deposit or collection in the ordinary and normal course of its business. e. Acquisition or Sale of Business; Merger or Consolidation. Purchase or otherwise acquire the assets or business of any person or other entity; or liquidate, dissolve, merge or consolidate, or commence any proceedings therefor; or sell any assets except in the ordinary and normal course of its business as now conducted; or sell, lease, assign, or transfer any substantial part of its business or fixed assets, or any property or other assets necessary for the continuance of its business as now conducted, including without limitation the selling of any property or other asset accompanied by leasing back of same. f. Dividends, Stock Payments. Declare or pay any dividend (other than dividends payable in common stock of Borrower, or that amount necessary for company related income tax payments) or make any other distribution of any of its capital stock now outstanding or hereafter issued or purchase, redeem or retire any such stock. Nothing in this agreement shall be deemed to prohibit Borrower from establishing any employee stock benefit plans. g. Capital Expenditures. Make or incur obligations for capital expenditures in excess of $100,000 from the date hereof through December 31, 1997 and $300,000 in any one fiscal year period thereafter. h. Lease Liability. Make or incur liability for payments of rent under leases of real property in excess of $50,000 and personal property operating leases in excess of $100,000 in any one fiscal year. 5. Should there be a default under the Security and Loan Agreement, the General Security Agreement or under any note executed by either Borrower, all obligations, loans and liabilities of Borrower to Bank, due or to become due, whether now existing or hereafter arising, shall at the option of the Bank, become immediately due and payable without notice or demand, and Bank shall thereupon have the right to exercise all of its default rights and remedies, provided, however, that with respect to an non-monetary defaults, Borrower 6 EXHIBIT A Page 4 shall have thirty (30) days from notice from Bank of any such default to cure same and with respect to any monetary default, Borrower shall have ten (10) days from the date of such default to cure same. 6. In addition to the provisions in the Security and Loan Agreement, Eligible Accounts shall only include such accounts as Bank in its sole discretion shall determine are eligible from time to time. "Eligible Accounts" shall also NOT include any of the following: a. Accounts with respect to which the account debtor is an officer, director, shareholder, employee, subsidiary or affiliate of Borrower. b. Accounts with respect to which 25% or more of the account debtor's total accounts or obligations outstanding to Borrower are more than 90 days from invoice date are not eligible. c. For accounts representing more than 20% of total accounts receivable, the balance in excess of the 20% is not eligible. Bank may deem, at its sole discretion, the entire amount, or any portion thereof, eligible and with respect to Diebold, Inc., balances up to and including 30% shall be eligible. d. Accounts with respect to international transactions unless insured by an insurance company acceptable to the Bank or covered by letters of credit issued or confirmed by a bank acceptable to the Bank. e. Credit balances greater than 90 days from invoice date. f. All accounts sold to and purchased from a company of common name/ownership, whereby a potential offset exists. g. Accounts over 90 days from invoice date. h. Consignment or guaranteed sales. i. Bill and hold accounts. j. Equipment rental offsets. k. Collection accounts (aged up to 90 days from invoice date). 7. Borrower may borrow against eligible inventories consisting of raw materials, deemed acceptable by Bank, up to $500,000 sub-limit within the line (not to exceed 25% of eligible inventory, whichever is less), contingent upon borrowing base availability, and supported by monthly inventory certification submitted by Borrower to the Bank. Inventory eligible for advances under the Security Agreement shall NOT include the following: 7 EXHIBIT A Page 5 a. Goods on consignment. b. Inventory reserve amounts applicable to eligible inventory. c. Inventory not insured, naming Bank as loss payee. d. Obsolete inventory. e. Inventory located in areas making it difficult to verify its existence, or which will cause undue expense in liquidation due to transportation costs, or other logistical reasons. 8. All financial covenants and financial information referenced herein shall be interpreted and prepared in accordance with generally accepted accounting principles applied on a basis consistent with previous years. Compliance with financial covenants shall be calculated based on the consolidated financial statements of XIT Corporation and its subsidiaries which shall include the elimination of all inter company transactions. 9. Borrower affirmatively covenants that so long as any loans, obligations or liabilities remain outstanding or unpaid to Bank, it will: a. Maintain a minimum tangible net worth (meaning the excess of all assets, excluding any value for goodwill, trademarks, patents, copyrights, organization expense and other similar intangible items, over its liabilities) of not less than $4,000,000, plus, on a cumulative basis, 100% of all extraordinary gains, proceeds from capital stock sold, equity issued in connection with mergers and acquisitions and 80% of positive net income for the reporting period. b. Maintain working capital (Borrower's current assets minus current liabilities) of not less than $1,500,000. c. Maintain a current ratio of at least 1.1 to 1.0. Current ratio is the ratio of current assets to current liabilities. d. Maintain a maximum ratio of total debt to tangible net worth of not greater than 3.00 to 1.0. e. Maintain a ratio of Cash Flow (meaning the Borrower's net profit after taxes and dividends, exclusive of non-recurring income, to which depreciation, amortization, and other non-cash expenses are added for the three (3) month period immediately preceding the date of calculation) to Debt Service (meaning that portion of Borrower's long term liabilities and capital leases coming due within 12 months after the date of calculation) of not less than 1.20 to 1.00 beginning with the quarter ending December 31, 1997 and quarterly thereafter until June 30, 1998 at which time Borrower shall maintain a ratio of Cash Flow (meaning the Borrower's net profit after taxes and dividends 8 EXHIBIT A Page 6 exclusive of non-recurring income, to which depreciation, amortization, and other non-cash expenses are added for the 12 month period immediately preceding the date of calculation) to Debt Service (meaning that portion of Borrower's long term liabilities and capital leases coming due within 12 months after the date of calculation) of not less than 1.20 to 1.00. f. Make no loans, advances or distributions to parent company Microtel International, Inc. or affiliates. g. Maintain all significant bank accounts and banking relationship with Bank. Not show a net loss for any two consecutive quarters beginning with, and including the quarter ended September 30, 1997 nor at any fiscal year end beginning with Borrower's 1998 fiscal year end. i. Within 10 working days from each month-end, deliver to Bank an accounts receivable aging reconciled to the general ledger of Borrower, a detailed accounts payable aging reconciled to the Borrower's general ledger and setting forth the amount of any book overdraft or the amount of checks issued but not sent, and an inventory certification outlining both inventory composition and activity for the month. All the foregoing will be in form satisfactory to the Bank. Also provide the Bank on a quarterly basis or more frequently if demanded by Bank, a complete address list of all active customers. j. Quarterly Financial Statement. Within forty-five (45) days after the close of each quarter of each fiscal year of Borrower, commencing with the quarter next ending, a Compliance Certificate along with a consolidated and consolidating balance sheet, profit and loss statement and reconciliation of Borrower's capital accounts as of the close of such period and covering operations for the portion of Borrower's fiscal year ending on the last day of such period all in reasonable detail, prepared in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower; k. Annual Financial Statement. As soon as available, and in any event within one hundred twenty (120) days after the close of each fiscal year of Borrower, a Compliance Certificate along with a consolidated and consolidating report of audit of Borrower's parent company, MicroTel International, Inc. as of the close of and for such fiscal year, all in reasonable detail, prepared on an audited basis by an independent certified public accountant selected by Borrower and reasonably acceptable to Bank, in accordance with generally accepted accounting principles on a basis consistently maintained by Borrower and certified by an appropriate officer of Borrower; l. Within one hundred twenty (120) days after the end of the fiscal year ended of Borrower, a certificate of the chief financial officer of Borrower, stating that Borrower has performed and observed each and every covenant contained in this Agreement to be performed by it and that no event has occurred and no condition then exists which constitutes an event of default hereunder or 9 EXHIBIT A Page 7 would constitute such an event of default upon the lapse of time or upon the giving of notice and the lapse of time specified herein; or, if any such event has occurred or any such condition exists, specifying the nature thereof; m. Promptly after the receipt thereof by Borrower, copies of any detailed audit reports submitted to Borrower by independent accountants in connection with each annual or interim audit of the accounts of Borrower made by such accountants; n. Rights and Facilities. Maintain and preserve all rights, franchises and other authority adequate for the conduct of its business; maintain its properties, equipment and facilities in good order and repair; conduct its business or partnership, maintain and preserve its existence. o. Insurance. Maintain public liability, property damage and workers' compensation insurance and insurance on all its insurable property against fire and other hazards with responsible insurance carriers to the extent usually maintained by similar businesses. Borrower shall provide evidence of property insurance in amounts and types acceptable to the Bank. Bank to be named as loss payee. p. Taxes and Other Liabilities. Pay and discharge, before the same become delinquent and before penalties accrue thereon, all taxes, assessments and governmental changes upon or against it or any of its properties, and any of its liabilities at any time existing, except to the extent and so long as: (a) The same are being contested in good faith and by appropriate proceedings in such manner as not to cause any materially adverse effect upon its financial condition or the loss of any right of redemption from any sale thereunder; and (b) It shall have set aside on its books reserves segregated to the extent required by generally accepted accounting practice) deemed adequate with respect thereto. q. Records and Reports. Maintain a standard and modern system of accounting in accordance with generally accepted accounting principles on a basis consistently maintained; permit Bank's representatives to have access to, and to examine its properties, books and records at all reasonable times. 10. The rate of interest applicable to the Loan Account shall be 1.00% per year in excess of the rate of interest which Bank has announced as its prime lending rate ("Prime Rate") which shall vary concurrently with any change in such Prime Rate. Interest shall be computed at the above rate on the basis of the actual number of days during which the principal balance of the loan account is outstanding divided by 360, which shall, for interest computation purposes, be considered one year. Should Borrower be in default, as default is defined herein, Bank at its option may demand payment of any or all of the amount due under the Loan Account including accrued but unpaid interest, at any time. Such 10 EXHIBIT A Page 8 notice may be given verbally or in writing and should be effective upon receipt by Borrower. The default rate of interest shall be five percent per year in excess of the rate otherwise applicable. 11. Commercial (sight or usance) Letters of Credit (collectively "Letters of Credit") may be issued by Bank for Borrower so long as the aggregate of the Loan Account and Letters of Credit do not exceed the Borrowing Base. No letters of credit are to expire later than 60 days past the maturity of the line of credit. Tenor of usance letters of credit are not to exceed 90 days. Pricing for issuance of Commercial Letters of Credit will be Bank's standard rates and charges as announced from time to time. 12. Cross Default. Any default under any other obligation of Borrower, XIT Corporation or Xcel Arnold Circuits, Inc., to Bank shall be a default hereunder and Bank shall have all the rights set forth in the Security and Loan Agreement for defaults thereunder. 13. Reference Provisions. The attached Reference Provisions are hereby incorporated herein. 14. Late Charges. If any installment payment, interest payment, principal payment or principal balance due hereunder is delinquent twenty or more days, Borrower agrees to pay Bank a late charge in the amount of 5% of the payment so due and unpaid, in addition to the payment; but nothing in this paragraph is to be construed as any obligation on the part of the Bank to accept payment of any payment past due or less than the total unpaid principal balance after maturity. The late charges provided for herein shall not apply while the default rate contained in paragraph 10 is in effect. All payments shall be applied first to any late charges owing, then to interest and the remainder, if any, to principal. 15. Miscellaneous Provisions. Failure or Indulgence Not Waiver. No failure or delay on the part of your Bank or any holder or Notes Issued hereunder, in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof or of any other right, power or privilege. All rights and remedies existing under this agreement or any not issued in connection with a loan that your Bank may make hereunder, are cumulative to, not exclusive of, any rights or remedies otherwise available. 11 EXHIBIT A Page 9 16. JOINT AND SEVERAL LIABILITIES OF BORROWERS. a. Each of the Borrowers is accepting joint and several liability hereunder in consideration of the financial accommodations to be provided by the Bank, for, the mutual benefit, directly and indirectly, of each of the Borrowers and in consideration of the undertakings of each of the Borrowers to accept joint and several liability for the obligations of each of them. b. Each of the Borrowers, jointly and severally, hereby irrevocable and unconditionally accept, not merely as a surety but also as a co-debtor, joint and several liability with each of the other Borrowers, with respect to the payment and performance of all of the obligations of each Borrower to Bank hereunder, it being the intention of the parties hereto that all the obligations of the any Borrower to Bank be joint and several obligations of both of the Borrowers without preferences or distinction among them. c. If and to the extent that either of the Borrowers shall fail to make any payment with respect of any of the obligations hereunder when due, or to perform any of such obligations in accordance with the terms thereof, then in each such event each of the other Borrower will make such payment with respect to, or perform such obligation. d. The obligations of each Borrower under the provisions of this Section 16 constitute the absolute and unconditional obligations of such Borrower enforceable against it to the full extent permitted under the terms hereof, irrespective of the validity, regularity or enforceability of the Security and Loan Agreement or any other circumstances whatsoever. e. Each Borrower waives (i) notice of acceptance of its joint and several liability, (ii) any right to require the Bank to proceed against any other Borrower or any other person, firm or corporation or to proceed against or exhaust any security held by it at any time or to pursue any other remedy in its power, (iii) any defense that may arise by reason of the incapacity, lack of authority, death or disability of, or revocation hereof by any other Borrower or any other or others or the failure of the Bank to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of any other Borrower or any others, (iv) demand, protest and notice of any kind including, without limiting the generality of the foregoing, notice of the existence, creation or incurring of new or additional indebtedness or of any action or non-action on the part of any Borrower, the Bank, any endorser, creditor of any Borrower under this or any other instrument, or any other person whomsoever, in connection with any obligation or evidence of indebtedness of the Borrowers, (v) any defense based upon an election of remedies by the Bank, including, without limitation, an election to proceed by nonjudicial rather than judicial foreclosure, which election destroys or otherwise impairs subrogation rights of any Borrower or the right of any Borrower to proceed against any other Borrower for reimbursement, or both, and (vi) any defense or right based upon the acceptance by the Bank or an affiliate of the Bank of a deed in lieu of foreclosure, without extinguishing the indebtedness, even if such acceptance destroys, alters or 12 EXHIBIT A Page 10 otherwise impairs subrogation rights of any Borrower or the right of any Borrower to proceed against any other Borrower for reimbursement, or both. 17. This Addendum is executed by and on behalf of the parties as of the date first above written. XIT CORPORATION "Borrower" By: ---------------------------------------- Carmine T. Oliva, Chairman of the Board, President, and CEO XCEL ARNOLD CIRCUITS, INC. "Borrower" By: ---------------------------------------- Carmine T. Oliva, Chairman and CEO IMPERIAL BANK "Bank" By: ---------------------------------------- Mark W. Campbell Senior Vice President 13 XIT CORPORATION and XCEL ARNOLD CIRCUITS, INC. Dated July 22, 1997 Attachment to the Addendum to Security and Loan Agreement The following Reference Provision is by this reference incorporated in the Security and Loan Agreement: REFERENCE PROVISION 1. Other than (i) non-judicial foreclosure and all matters in connection therewith regarding security interests in real or personal property; or (ii) the appointment of a receiver, or the exercise of other provisional remedies (any and all of which may be initiated pursuant to applicable law), each controversy, dispute or claim between the parties arising out of or relating to this Note ("Agreement"), which controversy, dispute or claim is not settled in writing within (30) days after the "Claim Date" (defined as the date on which a party subject to the Agreement gives written notice to all other parties that a controversy, dispute or claim exists), will be settled by a reference proceeding in California in accordance with the provisions of Section 638 et seq. of the California Code of Civil Procedure ("CCP"), or their successor section, which shall constitute the exclusive remedy for the settlement of any controversy, dispute or claim concerning this Agreement, including whether such controversy, dispute or claim is subject to the reference proceeding and except as set forth above, the parties waive their rights to initiate any legal proceedings against each other in any court or jurisdiction other than the Superior Court in the County where the Real Property, if any, is located or Los Angeles County if none (the "Court"). The referee shall be a retired Judge of the Court selected by mutual agreement of the parties, and if they cannot so agree within forty-five (45) days after the Claim Date, the referee shall be promptly selected by the Presiding Judge of the Court (or his representative). The referee shall be appointed to sit as a temporary judge, with all of the powers of a temporary judge, as authorized by law, and upon selection should take and subscribe to the oath of office as provided for in Rule 244 of the California Rules of Court (or any subsequently enacted Rule). Each party shall have one peremptory challenge pursuant to CCP Section 170.6. The referee shall (a) be requested to set the matter for hearing within sixty (60) days after the Claim Date and (b) try any and all issues of law or fact and report a statement of decision upon them, if possible, within ninety (90) days of the Claim Date. Any decision rendered by the referee will be final, binding and conclusive and judgment shall be entered pursuant to CCP Section 644 in any court in the State of California having jurisdiction. Any party may apply for a reference proceeding at any time after thirty (30) days following the notice to any other party of the nature of the controversy, dispute or claim, by filing a petition for a hearing and/or trial. All discovery permitted by this Agreement shall be completed no later than fifteen (15) days before the first hearing date established by the referee. The referee may extend such period in the event of a party's refusal to provide requested discovery for any reason whatsoever, including, without limitation, legal objections raised to such discovery or unavailability of a witness due to absence or illness. No party shall be entitled to "priority" in conducting discovery. Depositions may be taken by either 14 party upon seven (7) days written notice, and request for production or inspection of documents shall be responded to within ten (10) days after service. All disputes relating to discovery which cannot be resolved by the parties shall be submitted to the referee whose decision shall be final and binding upon the parties. Pending appointment of the referee as provided herein, the Court is empowered to issue temporary and/or provisional remedies, as appropriate. 2. Except as expressly set forth in this Agreement, the referee shall determine the manner in which the reference proceeding is conducted including the time and place of all hearings, the order of presentation of evidence, and all other questions that arise with respect to the course of the reference proceeding. All proceedings and hearings conducted before the referee, except for trial, shall be conducted without a court reporter, except that when any party so requests, a court reporter will be used at any hearing conducted before the referee. The party making such a request shall have the obligation to arrange for and pay for the court reporter. The costs of the court reporter at the trial shall be borne equally by the parties. 3. The referee shall be required to determine all issues in accordance with existing case law and the statutory laws of the State of California. The rules of evidence applicable to proceedings at law in the State of California will be applicable to the reference proceeding. The referee shall be empowered to enter equitable as well as legal relief, to provide all temporary and/or provisional remedies and to enter equitable orders that will be binding upon the parties. The referee shall issue a single judgment at the close of the reference proceeding which shall dispose of all of the claims of the parties that are the subject of the reference. The parties hereto expressly reserve the right to contest or appeal from the final judgment or any appealable order or appealable judgment entered by the referee. The parties hereto expressly reserve the right to findings of fact, conclusions of law, a written statement of decision, and the right to move for a new trial or a different judgment, which new trial, if granted, is also to be a reference proceeding under this provision. 4. In the event that the enabling legislation which provides for appointment of a referee is repealed (and no successor statute is enacted), any dispute between the parties that would otherwise be determined by the reference procedure herein described will be resolved and determined by arbitration. The arbitration will be conducted by a retired judge of the Court, in accordance with the California Arbitration Act. Section 1280 through Section 1294.2 of the CCP as amended from time to time. The limitations with respect to discovery as set forth hereinabove shall apply to any such arbitration proceeding. XCEL ARNOLD CIRCUITS, INC. XIT CORPORATION By: By: ----------------------------------- -------------------------------- EX-10.47 7 LEASE AGREEMENT 1 Exhibit 10.47 [California Net Lease] LEASE AGREEMENT THIS LEASE AGREEMENT is made this 28th day of July, 1997, between SCI Limited Partnership-I, a Delaware Limited Partnership, ("Landlord"), and the Tenant named below. TENANT: CXR Telcom Corporation, a Delaware Corporation TENANT'S REPRESENTATIVE, Henry Mourad ADDRESS, AND PHONE NO.: 2040 Fortune Drive Suite 102 San Jose, CA 95131 408-435-8520 PREMISES: That portion of the Building, containing approximately 29,120 rentable square feet, as determined by Landlord and commonly known as 47233 Fremont Boulevard, Fremont, CA as shown on Exhibit A, and the floor plan as shown as Exhibit B. PROJECT: Bayside Commons BUILDING: Shoreline Business Center #8 (14508) TENANT'S PROPORTIONATE SHARE OF PROJECT: 39% TENANT'S PROPORTIONATE SHARE OF BUILDING: 71% LEASE TERM: Beginning on the Commencement Date and ending on the last day of the 60th full calendar month thereafter. COMMENCEMENT DATE: Upon substantial completion of tenant improvements estimated to be October 10, 1997. INITIAL MONTHLY BASE RENT: Twenty Seven Thousand Six Hundred Sixty Four Dollars $27,664 INITIAL ESTIMATED MONTHLY 1. Utilities: $127 OPERATING EXPENSE PAYMENTS: (estimates only and subject to 2. Common Area Charges: $1,134 adjustment to actual costs and expenses according to the 3. Taxes: $3,951 provisions of this Lease) 4. Insurance: $97 INITIAL ESTIMATED MONTHLY OPERATING EXPENSE PAYMENTS: $5,309 INITIAL MONTHLY BASE RENT AND OPERATING EXPENSE PAYMENTS: $32,973 SECURITY DEPOSIT: $57,075 - $27,664 of said Security Deposit will be refunded to Tenant when MicroTel ("Guarantor") provides Landlord with audited financial statements at year end 1997 or there after showing net income in excess of $1,000,000 BROKER: Jim Abarta/Colliers Parrish International, Inc. ADDENDA: Addendum I, II, III, IV, V and VI Exhibit A, B, B-1, C and Guarantee
2 1. GRANTING CLAUSE. In consideration of the obligation of Tenant to pay rent as herein provided and in consideration of the other terms, covenants, and conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord, the Premises, to have and to hold for the Lease Term, subject to the terms, covenants and conditions of this Lease. 2. ACCEPTANCE OF PREMISES. Tenant shall accept the Premises in its condition as of the Commencement Date, subject to all applicable laws, ordinances, regulations, covenants and restrictions. Landlord has made no representation or warranty as to the suitability of the Premises for the conduct of Tenant's business, and Tenant waives any implied warranty that the Premises are suitable for Tenant's intended purposes. Except as provided in Paragraph 10, in no event shall Landlord have any obligation for any defects in the Premises or any limitation on its use. The taking of possession of the Premises shall be conclusive evidence that Tenant accepts the Premises and that the Premises were in good condition at the time possession was taken except for items that are Landlord's responsibility under Paragraph 10 and any punchlist items agreed to in writing by Landlord and Tenant. ANY WORK PERFORMED BY LANDLORD AT ITS SOLE COST PRIOR TO THE COMMENCEMENT DATE SHALL BE IN COMPLIANCE WITH ALL THE APPLICABLE LAWS. LANDLORD SHALL DELIVER ALL BUILDING SYSTEMS (HVAC, ELECTRICAL, PLUMBING AND MECHANICAL) IN GOOD OPERATING CONDITION AND REPAIR. LANDLORD SHALL WARRANT THESE SYSTEMS REMAIN IN GOOD OPERATING CONDITION AND REPAIR FOR A PERIOD ENDING SIX (6) MONTHS AFTER THE COMMENCEMENT DATE. LANDLORD AGREES TO REPAIR ALL ROOF LEAKS AT LANDLORD'S SOLE COST AND EXPENSE (NOT TO BE PASSED THROUGH TO TENANT AS AN OPERATING EXPENSE) FROM THE COMMENCEMENT DATE THROUGH DECEMBER 31, 1997. PROVIDED TENANT IS RESPONSIBLE FOR ALL NORMAL MAINTENANCE COSTS TO ALL OF THE ABOVE ITEMS DURING THIS PERIOD. 3. USE. The Premises shall be used only for the purpose of receiving, storing, shipping and selling (but limited to wholesale sales) products, materials and merchandise made and/or distributed by Tenant and for such other lawful purposes as may be incidental thereto; provided, however, Tenant may also use the Premises for light manufacturing. Tenant shall not conduct or give notice of any auction, liquidation, or going out of business sale on the Premises. Tenant will use the Premises in a careful, safe and proper manner and will not commit waste, overload the floor or structure of the Premises or subject the Premises to use that would damage the Premises. Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise, or vibrations to emanate from the Premises, or take any other action that would constitute a nuisance or would disturb, unreasonably interfere with, or endanger Landlord or any tenants of the Project. Outside storage, including without limitation, storage of trucks and other vehicles, is prohibited without Landlord's prior written consent. Tenant, at its sole expense, shall use and occupy the Premises in compliance with all laws, including, without limitation, the Americans With Disabilities Act, orders, judgments, ordinances, regulations, codes, directives, permits, licenses, covenants and restrictions now or hereafter applicable to the Premises (collectively, "Legal Requirements"). The Premises shall not be used as a place of public accommodation under the Americans With Disabilities Act or similar state statutes or local ordinances or any regulations promulgated thereunder, all as may be amended from time to time. Tenant shall, at its expense, make any alterations or modifications, within or without the Premises, that are required by Legal Requirements related to Tenant's use or occupation of the Premises. Tenant will not use or permit the Premises to be used for any purpose or in any manner that would void Tenant's or Landlord's insurance, increase the insurance risk, or cause the disallowance of any sprinkler credits. If any increase in the cost of any insurance on the Premises or the Project is caused by Tenant's use or occupation of the Premises, or because Tenant vacates the Premises, then Tenant shall pay the amount of such increase to Landlord. Any occupation of the Premises by Tenant prior to the Commencement Date shall be subject to all obligations of Tenant under this Lease. 4. BASE RENT. Tenant shall pay Base Rent in the amount set forth above. The first month's Base Rent, the Security Deposit, and the first monthly installment of estimated Operating Expenses (as hereafter defined) shall be due and payable on the date hereof, and Tenant promises to pay to Landlord in advance, without demand, deduction or set-off, monthly installments of Base Rent on or before the first day of each calendar month succeeding the Commencement Date. Payments of Base Rent for any fractional calendar month shall be prorated. All payments required to be made by Tenant to Landlord hereunder shall be payable at such address as Landlord may specify from time to time by written notice delivered in accordance herewith. The obligation of Tenant to pay Base Rent and other sums to Landlord and the obligations of Landlord under this Lease are independent obligations. Tenant shall have no right at any time to abate, reduce, or set-off any rent due hereunder except as may be expressly provided in this Lease. Tenant waives and releases all statutory liens and offset rights as to rent. If Tenant is delinquent in any monthly installment of Base Rent or of estimated Operating Expenses for more than 5 days, Tenant shall pay to Landlord on demand a late charge equal to 5 percent of such delinquent sum. 2 3 The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as a penalty. 5. SECURITY DEPOSIT. The Security Deposit shall be held by Landlord as security for the performance of Tenant's obligations under this Lease. The Security Deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon each occurrence of an Event of Default (hereinafter defined), Landlord may use all or part of the Security Deposit to pay delinquent payments due under this Lease, and the cost of any damage, injury, expense or liability caused by such Event of Default, without prejudice to any other remedy provided herein or provided by law. Tenant shall pay Landlord on demand the amount that will restore the Security Deposit to its original amount. Landlord's obligation respecting the Security Deposit is that of a debtor, not a trustee; no interest shall accrue thereon. The Security Deposit shall be the property of Landlord, but shall be paid to Tenant when Tenant's obligations under this Lease have been completely fulfilled. Landlord shall be released from any obligation with respect to the Security Deposit upon transfer of this Lease and the Premises to a person or entity assuming Landlord's obligations under this Paragraph 5. LANDLORD SHALL RETURN THE SECURITY DEPOSIT WITHIN SIXTY (60) DAYS AFTER EXPIRATION OR EARLIER TERMINATION OF THE LEASE TERM AFTER TENANT HAS VACATED, PENDING THE TIME IT TAKES TO REPAIR ITEMS NECESSARY TO BRING THE SPACE BACK TO A CONDITION REFERENCED IN PARAGRAPH 21. 6. OPERATING EXPENSE PAYMENTS. During each month of the Lease Term, on the same date that Base Rent is due, Tenant shall pay Landlord an amount equal to 1/12 of the annual cost, as estimated by Landlord from time to time, of Tenant's Proportionate Share (hereinafter defined) of Operating Expenses for the Project. Payments thereof for any fractional calendar month shall be prorated. The term "Operating Expenses" means all costs and expenses incurred by Landlord with respect to the ownership, maintenance, and operation of the Project including, but not limited to costs of: Taxes (hereinafter defined) and fees payable to tax consultants and attorneys for consultation and contesting taxes; insurance; utilities; maintenance, repair and replacement of all portions of the Project, including without limitation, paving and parking areas, roads, roofs alleys, and driveways, mowing, landscaping, exterior painting, utility lines, heating, ventilation and air conditioning systems, lighting, electrical systems and other mechanical and building systems; amounts paid to contractors and subcontractors for work or services performed in connection with any of the foregoing; charges or assessments of any association to which the Project is subject; property management fees payable to a property manager, including any affiliate of Landlord, or if there is no property manager, an administration fee of 10 percent of Operating Expenses payable to Landlord; security services, if any; trash collection, sweeping and removal; and additions or alterations made by Landlord to the Project or the Building in order to comply with Legal Requirements (other than those expressly required herein to be made by Tenant) or that are appropriate to the continued operation of the Project or the Building as a bulk warehouse facility in the market area, provided that the cost of additions or alterations that are required to be capitalized for federal income tax purposes shall be amortized on a straight line basis over a period equal to the lesser of the useful life thereof for federal income tax purposes. Operating Expenses do not include costs, or expenses, depreciation or amortization for capital repairs and capital replacements required to be made by Landlord under Paragraph 10 of this Lease, debt service under mortgages or ground rent under ground leases, costs of restoration to the extent of net insurance proceeds received by Landlord with respect thereto, leasing commissions, or the costs of renovating space for tenants. If Tenant's total payments of Operating Expenses for any year are less than Tenant's Proportionate Share of actual Operating Expenses for such year, then Tenant shall pay the difference to Landlord within 30 days after demand, and if more, then Landlord shall retain such excess and credit it against Tenant's next payments. For purposes of calculating Tenant's Proportionate Share of Operating Expenses, a year shall mean a calendar year except the first year, which shall begin on the Commencement Date, and the last year, which shall end on the expiration of this Lease. With respect to Operating Expenses which Landlord allocates to the entire Project, Tenant's "Proportionate Share" shall be the percentage set forth on the first page of this Lease as Tenant's Proportionate Share of the Project as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Project; and, with respect to Operating Expenses which Landlord allocates only to the Building, Tenant's "Proportionate Share" shall be the percentage set forth on the first page of this Lease as Tenant's Proportionate Share of the Building as reasonably adjusted by Landlord in the future for changes in the physical size of the Premises or the Building. Landlord may equitably increase Tenant's Proportionate Share for any item of expense or cost reimbursable by Tenant that relates to a repair, replacement, or service that benefits only the Premises or only a portion of the Project or Building that includes the Premises or that varies with occupancy or use. The estimated Operating Expenses for the Premises set forth on the first page of this Lease are only estimates, and Landlord makes no guaranty or warranty that such estimates will be accurate. 3 4 AT ANY TIME WITHIN 3 MONTHS AFTER LANDLORD HAS ISSUED A STATEMENT OF OPERATING EXPENSES PAYABLE BY TENANT, AND AFTER AT LEAST 2 DAYS PRIOR WRITTEN NOTICE TO LANDLORD, TENANT WILL HAVE THE RIGHT TO REVIEW AND AUDIT THE BOOKS AND RECORDS OF LANDLORD RELATING TO SUCH OPERATING EXPENSES DURING NORMAL BUSINESS HOURS AND AT THE OFFICE OF LANDLORD AT WHICH SUCH BOOKS AND RECORDS ARE ROUTINELY MAINTAINED. THE AUDIT WILL BE CONDUCTED AT TENANT'S EXPENSE BY A CERTIFIED PUBLIC ACCOUNTANT LICENSED IN THE STATE IN WHICH THE PREMISES ARE SITUATED OR BY TENANT'S CONTROLLER. IF TENANT'S AUDIT REVEALS THAT THE OPERATING EXPENSES CHARGED TO TENANT EXCEED OR WERE LESS THAN TENANT'S PROPORTIONATE SHARE OF THE ACTUAL OPERATING EXPENSES, AND SUCH VARIANCE IS CONFIRMED BY LANDLORD'S CERTIFIED PUBLIC ACCOUNTANT, THEN LANDLORD WILL REIMBURSE TENANT FOR ANY OVERCHARGE, OR TENANT WILL PAY TO LANDLORD ANY UNDERCHARGE, AS APPLICABLE, PROMPTLY AFTER SUCH FINAL DETERMINATION. IN THE EVENT OF A CONFIRMED OVERCHARGE OF OPERATING EXPENSES TO TENANT IN EXCESS OF 5% OF TENANT'S PROPORTIONATE SHARE OF ACTUAL OPERATING EXPENSES IN SUCH YEAR, LANDLORD ALSO SHALL REIMBURSE TENANT FOR THE REASONABLE COST OF TENANT'S AUDIT IF SUCH AUDIT WAS CONDUCTED BY AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT, BUT NOT IN EXCESS OF AN AMOUNT EQUAL TO $1,500. 7. UTILITIES. Tenant shall pay for all water, gas, electricity, heat, light, power, telephone, sewer, sprinkler services, refuse and trash collection, and other utilities and services used on the Premises, all maintenance charges for utilities, and any storm sewer charges or other similar charges for utilities imposed by any governmental entity or utility provider, together with any taxes, penalties, surcharges or the like pertaining to Tenant's use of the Premises. Landlord may cause at Tenant's expense any utilities to be separately metered or charged directly to Tenant by the provider. Tenant shall pay its share of all charges for jointly metered utilities based upon consumption, as reasonably determined by Landlord. No interruption or failure of utilities shall result in the termination of this Lease or the abatement of rent. Tenant agrees to limit use of water and sewer for normal restroom use. 8. TAXES. Landlord shall pay all taxes, assessments and governmental charges (collectively referred to as "Taxes") that accrue against the Project during the Lease Term, which shall be included as part of the Operating Expenses charged to Tenant. Landlord may contest by appropriate legal proceedings the amount, validity, or application of any Taxes or liens thereof. All capital levies or other taxes assessed or imposed on Landlord upon the rents payable to Landlord under this Lease and any franchise tax, any excise, transaction, sales or privilege tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents from the Premises and/or the Project or any portion thereof shall be paid by Tenant to Landlord monthly in estimated installments or upon demand, at the option of Landlord, as additional rent; provided, however, in no event shall Tenant be liable for any net income taxes imposed on Landlord unless such net income taxes are in substitution for any Taxes payable hereunder. If any such tax or excise is levied or assessed directly against Tenant, then Tenant shall be responsible for and shall pay the same at such times and in such manner as the taxing authority shall require. Tenant shall be liable for all taxes levied or assessed against any personal property or fixtures placed in the Premises, whether levied or assessed against Landlord or Tenant. 9. INSURANCE. Landlord shall maintain all risk property insurance covering the full replacement cost of the Building. Landlord may, but is not obligated to, maintain such other insurance and additional coverages as it may deem necessary, including, but not limited to, commercial liability insurance and rent loss insurance. All such insurance shall be included as part of the Operating Expenses charged to Tenant. The Project or Building may be included in a blanket policy (in which case the cost of such insurance allocable to the Project or Building will be determined by Landlord based upon the insurer's cost calculations). Tenant shall also reimburse Landlord for any increased premiums or additional insurance which Landlord reasonably deems necessary as a result of Tenant's use of the Premises. Tenant, at its expense, shall maintain during the Lease Term: all risk property insurance covering the full replacement cost of all property and improvements installed or placed in the Premises by Tenant at Tenant's expense; worker's compensation insurance with no less than the minimum limits required by law; employer's liability insurance with such limits as required by law; and commercial liability insurance, with a minimum limit of $1,000,000 per occurrence and a minimum umbrella limit of $1,000,000, for a total minimum combined general liability and umbrella limit of $2,000,000 (together with such additional umbrella coverage as Landlord may reasonably require) for property damage, personal injuries, or deaths of persons occurring in or about the Premises. Landlord may from time to time require reasonable increases in any such limits. The commercial liability policies shall name Landlord as an additional insured, insure on an occurrence and not a claims-made basis, be issued by insurance companies which are reasonably acceptable to Landlord, not be cancelable unless 30 days' prior written notice shall have been given to Landlord, contain a hostile fire endorsement and a contractual liability endorsement and provide primary coverage to Landlord (any policy issued to Landlord providing 4 5 duplicate or similar coverage shall be deemed excess over Tenant's policies). Such policies or certificates thereof shall be delivered to Landlord by Tenant upon commencement of the Lease Term and upon each renewal of said insurance. The all risk property insurance obtained by Landlord and Tenant shall include a waiver of subrogation by the insurers and all rights based upon an assignment from its insured, against Landlord or Tenant, their officers, directors, employees, managers, agents, invitees and contractors, in connection with any loss or damage thereby insured against. Neither party nor its officers, directors, employees, managers, agents, invitees or contractors shall be liable to the other for loss or damage caused by any risk coverable by all risk property insurance, and each party waives any claims against the other party, and its officers, directors, employees, managers, agents, invitees and contractors for such loss or damage. The failure of a party to insure its property shall not void this waiver. Landlord and its agents, employees and contractors shall not be liable for, and Tenant hereby waives all claims against such parties for, business interruption and losses occasioned thereby sustained by Tenant or any person claiming through Tenant resulting from any accident or occurrence in or upon the Premises or the Project from any cause whatsoever, including without limitation, damage caused in whole or in part, directly or indirectly, by the negligence of Landlord or its agents, employees or contractors. 10. LANDLORD'S REPAIRS. Landlord shall maintain, at its expense, the structural soundness of the roof, AND STRUCTURAL SUPPORTS AND COLUMNS, foundation, and exterior walls of the Building in good repair, reasonable wear and tear and uninsured losses and damages caused by Tenant, its agents and contractors excluded. The term "walls" as used in this Paragraph 10 shall not include windows, glass or plate glass, doors or overhead doors, special store fronts, dock bumpers, dock plates or revelers, or office entries. Tenant shall promptly give Landlord written notice of any repair required by Landlord pursuant to this Paragraph 10, after which Landlord shall have a reasonable opportunity to repair. 11. TENANT'S REPAIRS. Landlord, at Tenant's expense as provided in Paragraph 6, shall maintain in good repair and condition the parking areas and other common areas of the Building, including, but not limited to driveways, alleys, landscape and grounds surrounding the Premises. Subject to Landlord's obligation in Paragraph 10 and subject to Paragraphs 9 and 15, Tenant, at its expense, shall repair, replace and maintain in good condition all portions of the Premises and all areas, improvements and systems exclusively serving the Premises including, without limitation, dock and loading areas, truck doors, plumbing, water, and sewer lines up to points of common connection, fire sprinklers and fire protection systems, entries, doors, ceilings and roof membrane, windows, interior walls, and the interior side of demising walls, and heating, ventilation and air conditioning systems. Such repair and replacements include capital expenditures and repairs whose benefits may extend beyond the Term. Heating, ventilation and air conditioning systems and other mechanical and building systems serving the Premises shall be maintained at Tenant's expense pursuant to maintenance service contracts entered into by Tenant or, at Landlord's election, by Landlord. The scope of services and contractors under such maintenance contracts shall be reasonably approved by Landlord. At Landlord's request, Tenant shall enter into a joint maintenance agreement with any railroad that services the Premises. If Tenant fails to perform any repair or replacement for which it is responsible, Landlord may perform such work and be reimbursed by Tenant within 10 days after demand therefor. Subject to Paragraphs 9 and 15, Tenant shall bear the full cost of any repair or replacement to any part of the Building or Project that results from damage caused by Tenant, its agents, contractors, or invitees and any repair that benefits only the Premises. ANY REPAIR OVER $15,000 (MAJOR REPAIR) OF WHICH TENANT IS RESPONSIBLE SHALL BE PAID BY TENANT AND AMORTIZED OVER THE USEFUL LIFE FOR FEDERAL INCOME TAX PURPOSES. 12. TENANT-MADE ALTERATIONS AND TRADE FIXTURES. Any alterations, additions, or improvements made by or on behalf of Tenant to the Premises ("Tenant-Made Alterations") shall be subject to Landlord's prior written consent. Tenant shall cause, at its expense, all Tenant-Made Alterations to comply with insurance requirements and with Legal Requirements and shall construct at its expense any alteration or modification required by Legal Requirements as a result of any Tenant-Made Alterations. All Tenant-Made Alterations shall be constructed in a good and workmanlike manner by contractors reasonably acceptable to Landlord and only good grades of materials shall be used. All plans and specifications for any Tenant-Made Alterations shall be submitted to Landlord for its approval UPON TENANT REQUEST, LANDLORD SHALL ADVISE TENANT IN WRITING WHETHER IT RESERVES THE RIGHT TO REQUIRE TENANT TO REMOVE ANY ALTERATIONS FROM THE PREMISES UPON TERMINATION OF THE LEASE. Landlord may monitor construction of the Tenant-Made Alterations. Tenant shall reimburse Landlord for its costs in reviewing plans and specifications and in monitoring construction. Landlord's right to review plans and specifications and to monitor construction shall be solely for its own benefit, and Landlord shall have no duty to see that such plans and specifications or construction comply with applicable laws, codes, rules and regulations. Tenant shall provide Landlord with the identities and mailing addresses of all persons performing work or supplying materials, prior to beginning such construction, and Landlord may post 5 6 on and about the Premises notices of non-responsibility pursuant to applicable law. Tenant shall furnish security or make other arrangements satisfactory to Landlord to assure payment for the completion of all work free and clear of liens and shall provide certificates of insurance for worker's compensation and other coverage in amounts and from an insurance company satisfactory to Landlord protecting Landlord against liability for personal injury or property damage during construction. Upon completion of any Tenant-Made Alterations, Tenant shall deliver to Landlord sworn statements setting forth the names of all contractors and subcontractors who did work on the Tenant-Made Alterations and final lien waivers from all such contractors and subcontractors. Upon surrender of the Premises, all Tenant-Made Alterations and any leasehold improvements constructed by Landlord or Tenant shall remain on the Premises as Landlord's property, except to the extent Landlord requires removal at Tenant's expense of any such items or Landlord and Tenant have otherwise agreed in writing in connection with Landlord's consent to any Tenant-Made Alterations. Tenant shall repair any damage caused by such removal. Tenant, at its own cost and expense and without Landlord's prior approval, may erect such shelves, bins, machinery and trade fixtures (collectively "Trade Fixtures") in the ordinary course of its business provided that such items do not alter the basic character of the Premises, do not overload or damage the Premises, and may be removed without injury to the Premises, and the construction, erection, and installation thereof complies with all Legal Requirements and with Landlord's requirements set forth above. Tenant shall remove its Trade Fixtures and shall repair any damage caused by such removal. 13. SIGNS. Tenant shall not make any changes to the exterior of the Premises, install any exterior lights, decorations, balloons, flags, pennants, banners, or painting, or erect or install any signs, windows or door lettering, placards, decorations, or advertising media of any type which can be viewed from the exterior of the Premises, without Landlord's prior written consent. Upon surrender or vacation of the Premises, Tenant shall have removed all signs and repair, paint, and/or replace the building facia surface to which its signs are attached. Tenant shall obtain all applicable governmental permits and approvals for sign and exterior treatments. All signs, decorations, advertising media, blinds, draperies and other window treatment or bars or other security installations visible from outside the Premises shall be subject to Landlord's approval and conform in all respects to Landlord's requirements. 14. PARKING. Tenant shall be entitled to park in common with other tenants of the Project in those areas designated for nonreserved parking. Landlord may allocate parking spaces among Tenant and other tenants in the Project if Landlord determines that such parking facilities are becoming crowded. Landlord shall not be responsible for enforcing Tenant's parking rights against any third parties. 15. RESTORATION. If at any time during the Lease Term the Premises are damaged by a fire or other casualty, Landlord shall notify Tenant within 60 days after such damage as to the amount of time Landlord reasonably estimates it will take to restore the Premises. If the restoration time is estimated to exceed 6 months, either Landlord or Tenant may elect to terminate this Lease upon notice to the other party given no later than 30 days after Landlord's notice. If neither party elects to terminate this Lease or if Landlord estimates that restoration will take 6 months or less, then, subject to receipt of sufficient insurance proceeds, Landlord shall promptly restore the Premises excluding the improvements installed by Tenant or by Landlord and paid by Tenant, subject to delays arising from the collection of insurance proceeds or from Force Majeure events. Tenant at Tenant's expense shall promptly perform, subject to delays arising from the collection of insurance proceeds, or from Force Majeure events, all repairs or restoration not required to be done by Landlord and shall promptly re-enter the Premises and commence doing business in accordance with this Lease. Notwithstanding the foregoing, either party may terminate this Lease if the Premises are damaged during the last year of the Lease Term and Landlord reasonably estimates that it will take more than one month to repair such damage. Tenant shall pay to Landlord with respect to any damage to the Premises the amount of the commercially reasonable deductible under Landlord's insurance policy (currently $10,000) within 10 days after presentment of Landlord's invoice. If the damage involves the Premises of other tenants, Tenant shall pay the portion of the deductible that the cost of the restoration of the Premises bears to the total cost of restoration, as determined by Landlord. Base Rent and Operating Expenses shall be abated for the period of repair and restoration in the proportion which the area of the Premises, if any, which is not usable by Tenant bears to the total area of the Premises. Such abatement shall be the sole remedy of Tenant, and except as provided herein, Tenant waives any right to terminate the Lease by reason of damage or casualty loss. 16. CONDEMNATION. If any part of the Premises or the Project should be taken for any public or quasi-public use under governmental law, ordinance, or regulation, or by right of eminent domain, or by private purchase in lieu thereof (a "Taking" or "Taken"), and the Taking would prevent or materially interfere with Tenant's use of the Premises or in Landlord's judgment would materially interfere with or impair its ownership or operation of the Project, then upon written notice by Landlord this Lease shall terminate and Base Rent shall be apportioned as of said date. If part of the Premises shall be Taken, and 6 7 this Lease is not terminated as provided above, the Base Rent payable hereunder during the unexpired Lease Term shall be reduced to such extent as may be fair and reasonable under the circumstances. In the event of any such Taking, Landlord shall be entitled to receive the entire price or award from any such Taking without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant's interest, if any, in such award. Tenant shall have the right, to the extent that same shall not diminish Landlord's award, to make a separate claim against the condemning authority (but not Landlord) for such compensation as may be separately awarded or recoverable by Tenant for moving expenses and damage to Tenant's Trade Fixtures, if a separate award for such items is made to Tenant. 17. ASSIGNMENT AND SUBLETTING. Without Landlord's prior written consent, which Landlord shall not unreasonably withhold, Tenant shall not assign this Lease or sublease the Premises or any part thereof or mortgage, pledge, or hypothecate its leasehold interest or grant any concession or license within the Premises and any attempt to do any of the foregoing shall be void and of no effect. For purposes of this paragraph, a transfer of the ownership interests controlling Tenant shall be deemed an assignment of this Lease unless such ownership interests are publicly traded. Notwithstanding the above, Tenant may assign or sublet the Premises, or any part thereof, to any entity controlling Tenant, controlled by Tenant or under common control with Tenant (a "Tenant Affiliate"), without the prior written consent of Landlord. Tenant shall reimburse Landlord for all of Landlord's reasonable out-of-pocket expenses in connection with any assignment or sublease IN AN AMOUNT NOT TO EXCEED $500.00. Upon Landlord's receipt of Tenant's written notice of a desire to assign or sublet the Premises, or any part thereof (other than to a Tenant Affiliate), Landlord may, by giving written notice to Tenant within 10 days after receipt of Tenant's notice, terminate this Lease with respect to the space described in Tenant's notice, as of the date specified in Tenant's notice for the commencement of the proposed assignment or sublease. If Landlord so terminates the Lease, Landlord may enter into a lease directly with the proposed sublease or assignee. Tenant may withdraw its notice to sublease or assign by notifying Landlord within 10 days after Landlord has given Tenant notice of such termination, in which case the Lease shall not terminate but shall continue. It shall be reasonable for the Landlord to withhold its consent to any assignment or sublease in any of the following instances: (i) an Event of Default has occurred and is continuing that would not be cured upon the proposed sublease or assignment; (ii) the assignee or sublessee does not have a net worth calculated according to generally accepted accounting principles at least equal the net worth of the Tenant at the time it executed the Lease; (iii) the intended use of the Premises by the assignee or sublessee is not reasonably satisfactory to Landlord; (iv) the intended use of the Premises by the assignee or sublessee would materially increase the pedestrian or vehicular traffic to the Premises or the Project; (v) occupancy of the Premises by the assignee or sublessee would, in Landlord's opinion, violate an agreement binding upon Landlord or the Project with regard to the identity of tenants, usage in the Project, or similar matters; (vi) the identity or business reputation of the assignee or sublessee will, in the good faith judgment of Landlord, tend to damage the goodwill or reputation of the Project; (vii) the assignment or sublet is to another tenant in the Project and is at rates which are below those charged by Landlord for comparable space in the Project; (viii) in the case of a sublease, the subtenant has not acknowledged that the Lease controls over any inconsistent provision in the sublease; or (ix) the proposed assignee or sublessee is a governmental agency. Tenant and Landlord acknowledge that each of the foregoing criteria are reasonable as of the date of execution of the Lease. The foregoing criteria shall not exclude any other reasonable basis for Landlord to refuse its consent to such assignment or sublease. Any approved assignment or sublease shall be expressly subject to the terms and conditions of this Lease. Tenant shall provide to Landlord all information concerning the assignee or sublessee as Landlord may request. Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of Tenant's obligations under this Lease shall at all times remain fully responsible and liable for the payment of the rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's approval has been obtained for any such assignments or sublettings). In the event that the rent ACTUALLY PAID by a sublessee or assignee (or a combination of the rental payable under such sublease or assignment plus any bonus or other consideration therefor or incident thereto) exceeds the rental payable under this Lease, then Tenant shall be bound and obligated to pay Landlord as additional rent hereunder 50% OF such excess rental and other excess consideration AFTER DEDUCTING TENANT'S REASONABLE, OUT OF POCKET COSTS TO EFFECT THE ASSIGNMENT OR SUBLEASE, INCLUDING, WITHOUT LIMITATION, BROKERAGE COMMISSION, LEGAL FEES, AND REDECORATING AND REFURBISHING COSTS, (ALL SAID COSTS SHALL BE AMORTIZED OVER THE REMAINING LEASE TERM PRIOR TO DEDUCTING FROM ADDITIONAL RENT) within 10 days following receipt thereof by Tenant. 7 8 If this Lease be assigned or if the Premises be subleased (whether in whole or in part) or in the event of the mortgage, pledge, or hypothecation of Tenant's leasehold interest or grant of any concession or license within the Premises or if the Premises be occupied in whole or in part by anyone other than Tenant, then upon a default by Tenant hereunder Landlord may collect rent from the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold interest was hypothecated, concessionee or licensee or other occupant and, except to the extent set forth in the preceding paragraph, apply the amount collected to the next rent payable hereunder; and all such rentals collected by Tenant shall be held in trust for Landlord and immediately forwarded to Landlord. No such transaction or collection of rent or application thereof by Landlord, however, shall be deemed a waiver of these provisions or a release of Tenant from the further performance by Tenant of its covenants, duties, or obligations hereunder. 18. INDEMNIFICATION. Except for the negligence OR WILLFUL MISCONDUCT of Landlord, its agents, employees or contractors, and to the extent permitted by law, Tenant agrees to indemnify, defend and hold harmless Landlord, and Landlord's agents, employees and contractors, from and against any and all losses, liabilities, damages, costs and expenses (including attorneys' fees) resulting from claims by third parties for injuries to any person and damage to or theft or misappropriation or loss of property occurring in or about the Project and arising from the use and occupancy of the Premises or from any activity, work, or thing done, permitted or suffered by Tenant in or about the Premises or due to any other act or omission of Tenant, its subtenants, assignees, invitees, employees, contractors and agents. The furnishing of insurance required hereunder shall not be deemed to limit Tenant's obligations under this Paragraph 18. 19. INSPECTION AND ACCESS. Landlord and its agents, representatives, and contractors may enter the Premises at any reasonable time to inspect the Premises and to make such repairs as may be required or permitted pursuant to this Lease and for any other business purpose. Landlord and Landlord's representatives may enter the Premises during business hours for the purpose of showing the Premises to prospective purchasers and, during the LAST SIX (6) MONTHS of the Lease Term, to prospective tenants. Landlord may erect a suitable sign on the Premises stating the Premises are available to let or that the Project is available for sale. Landlord may grant easements, make public dedications, designate common areas and create restrictions on or about the Premises, provided that no such easement, dedication, designation or restriction materially interferes with Tenant's use or occupancy of the Premises. At Landlord's request, Tenant shall execute such instruments as may be necessary for such easements, dedications or restrictions. LANDLORD OR ITS AGENTS SHALL GIVE TENANT 24 HOURS NOTICE EXCEPT IN CASE OF EMERGENCY, TENANTS REPRESENTATION SHALL BE PRESENT. 20. QUIET ENJOYMENT. If Tenant shall perform all of the covenants and agreements herein required to be performed by Tenant, Tenant shall, subject to the terms of this Lease, at all times during the Lease Term, have peaceful and quiet enjoyment of the Premises against any person claiming by, through or under Landlord. 21. SURRENDER. Upon termination of the Lease Term or earlier termination of Tenant's right of possession, Tenant shall surrender the Premises to Landlord in the same condition as received, broom clean, ordinary wear and tear and casualty loss and condemnation covered by Paragraphs 15 and 16 excepted. Any Trade Fixtures, Tenant-Made Alterations and property not so removed by Tenant as permitted or required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and disposition of such property. All obligations of Tenant hereunder not fully performed as of the termination of the Lease Term shall survive the termination of the Lease Term, including without limitation, indemnify obligations, payment obligations with respect to Operating Expenses and obligations concerning the condition and repair of the Premises. 22. HOLDING OVER. If Tenant retains possession of the Premises after the termination of the Lease Term, unless otherwise agreed in writing, such possession shall be subject to immediate termination by Landlord at any time, and all of the other terms and provisions of this Lease (excluding any expansion or renewal option or other similar right or option) shall be applicable during such holdover period, except that Tenant shall pay Landlord from time to time, upon demand, as Base Rent for the holdover period, an amount equal to 150% OF the Base Rent in effect on the termination date, computed on a monthly basis for each month or part thereof during such holding over. All other payments shall continue under the terms of this Lease. In addition, Tenant shall be liable for all damages incurred by Landlord as a result of such holding over. No holding over, by Tenant, whether with or without consent of LANDLORD, WHICH SHALL NOT BE UNREASONABLY WITHHELD shall operate to extend this Lease except as otherwise expressly provided, and this Paragraph 22 shall not be construed as consent for Tenant to retain possession of the Premises. 8 9 23. EVENTS OF DEFAULT. Each of the following events shall be an event of default ("Event of Default") by Tenant under this Lease: (i) TENANT SHALL FAIL TO PAY ANY INSTALLMENT OF BASE RENT OR ANY OTHER PAYMENT REQUIRED HEREIN WHEN DUE, AND SUCH FAILURE SHALL CONTINUE FOR A PERIOD OF 5 DAYS AFTER WRITTEN NOTICE PROVIDED THAT LANDLORD SHALL NOT BE REQUIRED TO PROVIDE NOTICE OF MONETARY DEFAULT MORE THAN TWICE IN ANY 12 MONTH PERIOD OR MORE THAN FOUR (4) TIMES DURING THE TERM OF THIS LEASE (AS IT MAY BE EXTENDED) FROM THE DATE SUCH PAYMENT WAS DUE. (ii) Tenant or any guarantor or surety of Tenant's obligations hereunder shall (A) make a general assignment for the benefit of creditors; (B) commence any case, proceeding or other action seeking to have an order for relief entered on its behalf as a debtor or to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or of any substantial part of its property (collectively a "proceeding for relief"); (C) become the subject of any proceeding for relief which is not dismissed within 60 days of its filing or entry; or (D) die or suffer a legal disability (if Tenant, guarantor, or surety is an individual) or be dissolved or otherwise fail to maintain its legal existence (if Tenant, guarantor or surety is a corporation, partnership or other entity). (iii) Any insurance required to be maintained by Tenant pursuant to this Lease shall be cancelled or terminated or shall expire or shall be reduced or materially changed, except, in each case, as permitted in this Lease. (iv) Tenant shall not occupy or shall vacate the Premises or shall fail to continuously operate its business at the Premises for the permitted use set forth herein, whether or not Tenant is in monetary or other default under this Lease. (v) Tenant shall attempt or there shall occur any assignment, subleasing or other transfer of Tenant's interest in or with respect to this Lease except as otherwise permitted in this Lease. (vi) Tenant shall fail to discharge any lien placed upon the Premises in violation of this Lease within 30 days after any such lien or encumbrance is filed against the Premises. (vii) Tenant shall fail to Comply with any provision of this Lease other than those specifically referred to in this Paragraph 23, and except as otherwise expressly provided herein, such default shall continue for more than 30 days after Landlord shall have given Tenant written notice of such default, UNLESS THE NATURE OF THE DEFAULT IS SUCH THAT IT CANNOT BE REASONABLY CURED WITHIN 30 DAYS, IN WHICH EVENT TENANT SHALL NOT BE IN DEFAULT HEREUNDER SO LONG AS TENANT COMMENCES THE CURE WITHIN 30 DAYS AND THEREAFTER DILIGENTLY PROSECUTES SUCH CURE TO COMPLETION, BUT, SUBJECT TO PARAGRAPH 33, IN NO EVENT SHALL SUCH CURE PERIOD EXTEND BEYOND 90 DAYS. 24. LANDLORD'S REMEDIES. Upon each occurrence of an Event of Default and so long as such Event of Default shall be continuing, Landlord may at any time thereafter at its election: terminate this Lease or Tenant's right of possession (but Tenant shall remain liable as hereinafter provided), and/or pursue any other remedies at law or in equity. Upon the termination of this Lease or termination of Tenant's right of possession, it shall be lawful for Landlord, without formal demand or notice of any kind, to re-enter the Premises by summary dispossession proceedings or any other action or proceeding authorized by law and to remove Tenant and all persons and property therefrom. If Landlord re-enters the Premises, Landlord shall have the right to keep in place and use, or remove and store, all of the furniture, fixtures and equipment at the Premises. Except as otherwise provided in the next paragraph, if Tenant breaches this Lease and abandons the Premises prior to the end of the term hereof, or if Tenant's right to possession is terminated by Landlord because of an Event of Default by Tenant under this Lease, this Lease shall terminate. Upon such termination Landlord may recover from Tenant the following, as provided in Section 1951.2 of the Civil Code of California: (i) the worth at the time of award of the unpaid Base Rent and other charges under this Lease that had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the reasonable value of the unpaid Base Rent and other charges under this Lease which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of award by which the reasonable value of the unpaid Base Rent and other charges under this Lease for the balance of the 9 10 term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or that in the ordinary course of things would be likely to result therefrom. As used herein, the following terms are defined: (a) The "worth at the time of award" of the amounts referred to in Sections (i) and (ii) is computed by allowing interest at the lesser of 18 percent per annum or the maximum lawful rate. The "worth at the time of award" of the amount referred to in Section (iii) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent; (b) The "time of award" as used in clauses (i), (ii), and (iii) above is the date on which judgment is entered by a court of competent jurisdiction; (c) The "reasonable value" of the amount referred to in clause (ii) above is computed by determining the mathematical product of (1) the "reasonable annual rental value" (as defined herein) and (2) the number of years, including fractional parts thereof, between the date of termination and the time of award. The "reasonable value" of the amount referred to in clause (iii) is computed by determining the mathematical product of (1) the annual Base Rent and other charges under this Lease and (2) the number of years including fractional parts thereof remaining in the balance of the term of this Lease after the time of award. Even though Tenant has breached this Lease and abandoned the Premises, this Lease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover rent as it becomes due. This remedy is intended to be the remedy described in California Civil Code Section 1951.4, and the following provision from such Civil Code Section is hereby repeated: "The Lessor has the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations)." Any such payments due Landlord shall be made upon demand therefor from time to time and Tenant agrees that Landlord may file suit to recover any sums falling due from time to time. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect in writing to terminate this Lease for such previous breach. Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Premises and/or a termination of this Lease by Landlord, whether by agreement or by operation of law, it being understood that such surrender and/or termination can be effected only by the written agreement of Landlord and Tenant. Any law, usage, or custom to the contrary notwithstanding, Landlord shall have the right at all times to enforce the provisions of this Lease in strict accordance with the terms hereof; and the failure of Landlord at any time to enforce its rights under this Lease strictly in accordance with same shall not be construed as having created a custom in any way or manner contrary to the specific terms, provisions, and covenants of this Lease or as having modified the same. Tenant and Landlord further agree that forbearance or waiver by Landlord to enforce its rights pursuant to this Lease or at law or in equity, shall not be a waiver of Landlord's right to enforce one or more of its rights in connection with any subsequent default. A receipt by Landlord of rent or other payment with knowledge of the breach of any covenant hereof shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision of this Lease shall be deemed to have been made unless expressed in writing and signed by Landlord. To the greatest extent permitted by law, Tenant waives the service of notice of Landlord's intention to re-enter as provided for in any statute, or to institute legal proceedings to that end, and also waives all right of redemption in case Tenant shall be dispossessed by a judgment or by warrant of any court or judge. The terms "enter," "re-enter," "entry" or "re-entry," as used in this Lease, are not restricted to their technical legal meanings. Any reletting of the Premises shall be on such terms and conditions as Landlord in its sole discretion may determine (including without limitation a term different am the remaining Lease Term, rental concessions, alterations and repair of the Premises, lease of less than the entire Premises to any tenant and leasing any or all other portions of the Project before reletting the Premises). Landlord shall not be liable, nor shall Tenant's obligations hereunder be diminished, because of Landlord's failure to relet the Premises or collect rent due in respect of such reletting, PROVIDED THAT NOT WITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN LANDLORD SHALL HAVE A DUTY TO MITIGATE DAMAGES UPON AN EVENT OF DEFAULT. 25. TENANT'S REMEDIES/LIMITATION OF LIABILITY. Landlord shall not be in default hereunder unless Landlord fails to perform any of its obligations hereunder within 30 days after written notice from Tenant specifying such failure (unless such performance will, due to the nature of the obligation, require a period of time in excess of 30 days, then after such period of time as is reasonably necessary). All obligations of Landlord hereunder shall be construed as covenants, not conditions; and, except as may be otherwise expressly provided in this Lease, Tenant may not terminate this Lease for breach of Landlord's obligations hereunder. All obligations of Landlord under this Lease will be binding upon Landlord only during the period of its ownership of the Premises and not thereafter. The term 10 11 "Landlord" in this Lease shall mean only the owner, for the time being of the Premises, and in the event of the transfer by such owner of its interest in the Premises, such owner shall thereupon be released and discharged from all obligations of Landlord thereafter accruing, but such obligations shall be binding during the Lease Term upon each new owner for the duration of such owner's ownership. Any liability of Landlord under this Lease shall be limited solely to its interest in the Project, and in no event shall any personal liability be asserted against Landlord in connection with this Lease nor shall any recourse be had to any other property or assets of Landlord. 26. WAIVER OF JURY TRIAL. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO. 27. SUBORDINATION. This Lease and Tenant's interest and rights hereunder are and shall be subject and subordinate at all times to the lien of any first mortgage, now existing or hereafter created on or against the Project or the Premises, and all amendments, restatements, renewals, modifications, consolidations, refinancing, assignments and extensions thereof, without the necessity of any further instrument or act on the part of Tenant. Tenant agrees, at the election of the holder of any such mortgage, to attorn to any such holder. Tenant agrees upon demand to execute, acknowledge and deliver such instruments, confirming such subordination and such instruments of attornment as shall be requested by any such holder. Notwithstanding the foregoing, any such holder may at any time subordinate its mortgage to this Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall be deemed prior to such mortgage without regard to their respective dates of execution, delivery or recording and in that event such holder shall have the same rights with respect to this Lease as though this Lease had been executed prior to the execution, delivery and recording of such mortgage and had been assigned to such holder. The term "mortgage" whenever used in this Lease shall be deemed to include deeds of trust, security assignments and any other encumbrances, and any reference to the "holder" of a mortgage shall be deemed to include the beneficiary under a deed of trust. 28. MECHANIC'S LIENS. Tenant has no express or implied authority to create or place any lien or encumbrance of any kind upon, or in any manner to bind the interest of Landlord or Tenant in, the Premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the Premises and that it will save and hold Landlord harmless from all loss, cost or expense based on or arising out of asserted claims or liens against the leasehold estate or against the interest of Landlord in the Premises or under this Lease. Tenant shall give Landlord immediate written notice of the placing of any lien or encumbrance against the Premises and cause such lien or encumbrance to be discharged within 30 days of the filing or recording thereof, provided, however, Tenant may contest such liens or encumbrances as long as such contest prevents foreclosure of the lien or encumbrance and Tenant causes such lien or encumbrance to be bonded or insured over in a manner satisfactory to Landlord within such 30 day period. 29. ESTOPPEL CERTIFICATES. Tenant agrees, from time to time, within 10 days after request of Landlord, to execute and deliver to Landlord, or Landlord's designee, any estoppel certificate requested by Landlord, stating that this Lease is in full force and effect, the date to which rent has been paid, that Landlord is not in default hereunder (or specifying in detail the nature of Landlord's default), the termination date of this Lease and such other matters pertaining to this Lease as may be requested by Landlord. Tenant's obligation to furnish each estoppel certificate in a timely fashion is a material inducement for Landlord's execution of this Lease. No cure or grace period provided in this Lease shall apply to Tenant's obligations to timely deliver an estoppel certificate. Tenant hereby irrevocably appoints Landlord as its attorney in fact to execute on its behalf and in its name any such estoppel certificate if Tenant fails to execute and deliver the estoppel certificate within 10 days after Landlord's written request thereof. 30. ENVIRONMENTAL REQUIREMENTS. Except for Hazardous Material contained in products used by Tenant in de minimis quantities for ordinary cleaning and office purposes AND PROVIDED IN ADDENDUM VI, Tenant shall not permit or cause any party to bring any Hazardous Material upon the Premises or transport, store, use, generate, manufacture or release any Hazardous Material in or about the Premises without Landlord's prior written consent. Tenant, at its sole cost and expense, shall operate its business in the Premises in strict compliance with all Environmental Requirements and shall remediate 11 12 in manner satisfactory to Landlord any Hazardous Materials released on or from the Project by Tenant, its agents, employees, contractors, subtenants or invitees. Tenant shall complete and certify to disclosure statements as requested by Landlord from time to time relating to Tenant's transportation, storage, use, generation, manufacture, or release of Hazardous Materials on the Premises. The term "Environmental Requirements" means all applicable present and future statutes, regulations, ordinances, rules, codes, judgments, orders or other similar enactments of any governmental authority or agency regulating or relating to health, safety, or environmental conditions on, under, or about the Premises or the environment, including without limitation, the following: the Comprehensive Environmental Response, Compensation and Liability Act; the Resource Conservation and Recovery Act; and all state and local counterparts thereto, and any regulations or policies promulgated or issued thereunder. The term "Hazardous Materials" means and includes any substance, material, waste, pollutant, or contaminant listed or defined as hazardous or toxic, under any Environmental Requirements, asbestos and petroleum, including crude oil or any fraction thereof, natural gas, or synthetic gas usable for fuel (or mixtures of natural gas and such synthetic gas). As defined in Environmental Requirements, Tenant is and shall be deemed to be the "operator" of Tenant's "facility" and the "owner" of all Hazardous Materials brought on the Premises by Tenant, its agents, employees, contractors or invitees, and the wastes, by-products, or residues generated, resulting, or produced therefrom. Tenant shall indemnify, defend, and hold Landlord harmless from and against any and all losses (including, without limitation, diminution in value of the Premises or the Project and loss of rental income from the Project), claims, demands, actions, suits, damages (including, without limitation, punitive damages), expenses (including, without limitation, remediation, removal, repair, corrective action, or cleanup expenses), and costs (including, without limitation, actual attorneys' fees, consultant fees or expert fees and including, without limitation, removal or management of any asbestos brought into the Premises or disturbed in breach of the requirements of this Paragraph 30, regardless of whether such removal or management is required by law) which are brought or recoverable against, or suffered or incurred by Landlord as a result of any release of Hazardous Materials for which Tenant is obligated to remediate as provided above or any other breach of the requirements under this Paragraph 30 by Tenant, its agents, employees, contractors, subtenants, assignees or invitees, regardless of whether Tenant has knowledge of such noncompliance. The obligations of Tenant under this Paragraph 30 shall survive any termination of this Lease. Landlord shall have access to, and a right to perform inspections and tests of, the Premises to determine Tenant's compliance with Environmental Requirements, its obligations under this Paragraph 30, or the environmental condition of the Premises. Access shall be granted to Landlord upon Landlord's prior notice to Tenant and at such times so as to minimize, so far as may be reasonable under the circumstances, any disturbance to Tenant's operations. Such inspections and tests shall be conducted at Landlord's expense, unless such inspections or tests reveal that Tenant has not complied with any Environmental Requirement, in which case Tenant shall reimburse Landlord for the reasonable cost of such inspection and tests. Landlord's receipt of or satisfaction with any environmental assessment in no way waives any rights that Landlord holds against Tenant. 31. RULES AND REGULATIONS. Tenant shall, at all times during the Lease Term and any extension thereof, comply with all reasonable rules and regulations at any time or from time to time established by Landlord covering use of the Premises and the Project. The current rules and regulations are attached hereto. In the event of any conflict between said rules and regulations and other provisions of this Lease, the other terms and provisions of this Lease shall control. Landlord shall not have any liability or obligation for the breach of any rules or regulations by other tenants in the Project. 32. SECURITY SERVICE. Tenant acknowledges and agrees that, while Landlord may patrol the Project, Landlord is not providing any security services with respect to the Premises and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises. 33. FORCE MAJEURE. Landlord shall not be held responsible for delays in the performance of its obligations hereunder when caused by strikes, lockouts, labor disputes, acts of God, inability to obtain labor or materials or reasonable substitutes therefor, governmental restrictions, governmental regulations, governmental controls, delay in issuance of permits, enemy or hostile governmental action, civil commotion, fire or other casualty, and other causes beyond the reasonable control of Landlord ("Force Majeure"). 12 13 34. ENTIRE AGREEMENT. This Lease constitutes the complete agreement of Landlord and Tenant with respect to the subject matter hereof. No representations, inducements, promises or agreements, oral or written, have been made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant, which are not contained herein, and any prior agreements, promises, negotiations, or representations are superseded by this Lease. This Lease may not be amended except by an instrument in writing signed by both parties hereto. 35. SEVERABILITY. If any clause or provision of this Lease is illegal, invalid or unenforceable under present or future laws, then and in that event, it is the intention of the partlease is illegal, invalid or unenforceable under present is hereto that the remainder of this Lease shall not be affected thereby. It is also the intention of the parties to this Lease that in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there be added, as a part of this Lease, a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 36. BROKERS. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction and that no broker, agent or other person brought about this transaction, other than the broker, if any, set forth on the first page of this Lease, and Tenant agrees to indemnify and hold Landlord harmless from and against any clause by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. 37. MISCELLANEOUS. (a) Any payments or charges due from Tenant to Landlord hereunder shall be considered rent for all purposes of this Lease. (b) If and when included within the term "Tenant," as used in this instrument, there is more than one person, firm or corporation, each shall be jointly and severally liable for the obligations of Tenant. (c) All notices required or permitted to be given under this Lease shall be in writing and shall be sent by registered or certified mail, return receipt requested, or by a reputable national overnight courier service, postage prepaid, or by hand delivery addressed to the parties at their addresses below, and with a copy sent to Landlord at 14100 East 35th Place, Aurora, Colorado 80011. Either party may by notice given aforesaid change its address for all subsequent notices. Except where otherwise expressly provided to the contrary, notice shall be deemed given upon delivery. (d) Except as otherwise expressly provided in this Lease or as otherwise required by law, Landlord retains the absolute right to withhold any consent or approval. (e) At Landlord's request BUT NO MORE THAN ONCE PER YEAR, Tenant shall furnish Landlord with true and complete copies of its most recent annual and quarterly financial statements prepared by Tenant or Tenant's accountants and any other financial information or summaries that Tenant typically provides to its lenders or shareholders. (f) Neither this Lease nor a memorandum of lease shall be filed by or on behalf of Tenant in any public record. Landlord may prepare and file, and upon request by Landlord Tenant will execute, a memorandum of lease. (g) The normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Lease or any exhibits or amendments hereto. (h) The submission by Landlord to Tenant of this Lease shall have no binding force or effect, shall not constitute an option for the leasing of the Premises, nor confer any right or impose any obligations upon either party until execution of this Lease by both parties. (i) Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The captions inserted in this Lease are for convenience only and in no way affect the interpretation of this Lease. (j) Any amount not paid by Tenant within 5 days after its due date in accordance with the terms of this Lease shall bear interest from such due date until paid in full at the lesser of the highest rate permitted by applicable law or 15 percent per year. It is expressly the intent of Landlord and Tenant at 13 14 all times to comply with applicable law governing the maximum rate or amount of any interest payable on or in connection with this Lease. If applicable law is ever judicially interpreted so as to render usurious any interest called for under this Lease, or contracted for, charged, taken, reserved, or received with respect to this Lease, then it is Landlord's and Tenant's express intent that all excess amounts theretofore collected by Landlord be credited on the applicable obligation (or, if the obligation has been or would thereby be paid in full, refunded to Tenant), and the provisions of this Lease immediately shall be deemed reformed and the amounts thereafter collectible hereunder reduced, without the necessity of the execution of any new document, so as to comply with the applicable law, but so as to permit the recovery of the fullest amount otherwise called for hereunder. (k) Construction and interpretation of this Lease shall be governed by the laws of the state in which the Project is located, excluding any principles of conflicts of laws. (l) Time is of the essence as to the Performance of Tenant's and Landlord's obligations under this Lease. (m) All exhibits and addenda attached hereto are hereby incorporated into this Lease and made a part hereof. In the event of any conflict between such exhibits or addenda and the terms of this Lease, such exhibits or addenda shall control. 38. LIMITATION OF LIABILITY OF TRUSTEES, SHAREHOLDERS, AND OFFICERS OF SECURITY CAPITAL INDUSTRIAL TRUST. Any obligation or liability whatsoever of Security Capital Industrial Trust, a Maryland real estate investment trust, which may arise at any time under this Lease or any obligation or liability which may be incurred by it pursuant to any other instrument, transaction, or undertaking contemplated hereby shall not be personally binding upon, nor shall resort for the enforcement thereof be had to the property of, its trustees, directors, shareholders, officers, employees or agents, regardless of whether such obligation or liability is in the nature of contract, tort, or otherwise. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year first above written. TENANT: LANDLORD: CXR Telcom Corporation, a SCI Limited Partnership-I, a California Corporation Delaware Limited Partnership By: /s/ Henry Mourad By: /s/ Ned K. Anderson -------------------------------- ----------------------------------- Title: President Ned K. Anderson Title: Senior Vice President Address: Address: 2040 Fortune Drive 47775 Fremont Boulevard Suite 102 Fremont, CA 94538 San Jose, CA 95131 14 15 Rules and Regulations 1. The sidewalk, entries, and driveways of the Project shall not be obstructed by Tenant, or its agents, or used by them for any purpose other than ingress and egress to and from the Premises. 2. Tenant shall not place any objects, including antennas, outdoor furniture, etc., in the parking areas, landscaped areas or other areas outside of its Premises, or on the roof of the Project. 3. Except for seeing-eye dogs, no animals shall be allowed in the offices, halls, or corridors in the Project. 4. Tenant shall not disturb the occupants of the Project or adjoining buildings by the use of any radio or musical instrument or by the making of loud or improper noises. 5. If Tenant desires telegraphic, telephonic or other electric connections in the Premises, Landlord or its agent will direct the electrician as to where and how the wires may be introduced; and, without such direction, no boring or cutting of wires will be permitted. Any such installation or connection shall be made at Tenant's expense. 6. Tenant shall not install or operate any steam or gas engine or boiler, or other mechanical apparatus in the Premises, except as specifically approved in the Lease. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Project. 7. Parking any type of recreational vehicles is specifically prohibited on or about the Project. Except for the overnight parking of operative vehicles, no vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is disabled, it shall be removed within 48 hours. There shall be no "For Sale" or other advertising signs on or about any parked vehicle. All vehicles shall be parked in the designated parking areas in conformity with all signs and other markings. All parking will be open parking, and no reserved parking, numbering or lettering of individual spaces will be permitted except as specified by Landlord. 8. Tenant shall maintain the Premises free from rodents, insects and other pests. 9. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of the Rules and Regulations of the Project. 10. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. Landlord shall not be responsible to Tenant for any loss of property on the Premises, however occurring, or for any damage done to the effects of Tenant by the janitors or any other employee or person. 11. Tenant shall give Landlord prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures, heating apparatus, or any other service equipment affecting the Premises. 12. Tenant shall not permit storage outside the Premises, including without limitation, outside storage of trucks and other vehicles, or dumping of waste or refuse or permit any harmful materials to be placed in any drainage system or sanitary system in or about the Premises. 13. All moveable trash receptacles provided by the trash disposal firm for the Premises must be kept in the trash enclosure areas, if any, provided for that purpose. 14. No auction, public or private, will be permitted on the Premises or the Project. 15. No awnings shall be placed over the windows in the Premises except with the prior written consent of Landlord. 16. The Premises shall not be used for lodging, sleeping or cooking or for any immoral or illegal purposes or for any purpose other than that specified in the Lease. No gaming devices shall be operated in the Premises. 17. Tenant shall ascertain from Landlord the maximum amount of electrical current which can safely be used in the Premises, taking into account the capacity of the electrical wiring in the Project and the Premises and the needs of other tenants, and shall not use more than such safe capacity. Landlord's consent to the installation of electric equipment shall not relieve Tenant from the obligation not to use more electricity than such safe capacity. 18. Tenant assumes full responsibility for protecting the Premises from theft, robbery and pilferage. 19. Tenant shall not install or operate on the Premises any machinery or mechanical devices of a nature not directly related to Tenant's ordinary use of the Premises and shall keep all such machinery free of vibration, noise and air waves which may be transmitted beyond the Premises. 15 16 HVAC Maintenance/Service Contract Requirements A service contract with a Landlord approved HVAC contractor must become effective within thirty (30) days of occupancy and service visits should be performed on a quarterly basis. The following are the approved HVAC contractors: Phoenix Heating and Air Conditioning 408/487-0390 Cal-Air Conditioning 408/947-0155 ICOM 408/298-8101 We suggest that you send the following list to one of the above HVAC contractors to be assured that these items are included in the maintenance contract: 1. Adjust belt tension; 2. Lubricate all moving parts, as necessary; 3. Inspect and adjust all temperature and safety controls; 4. Check refrigeration system for leaks and operation; 5. Check refrigeration system for moisture; 6. Inspect compressor oil level and crank case heaters; 7. Check head pressure, suction pressure and oil pressure; 8. Inspect air filters and replace when necessary; 9. Check space conditions; 10. Check condensate drains and drain pans and clean, if necessary; 11. Inspect and adjust all valves; 12. Check and adjust dampers; 13. Run machine through complete cycle, Note: A certificate must be provided for our files not later than thirty (30) days after mutual execution hereof. Failure to provide such certificate or perform said services, when required, shall constitute material default of this lease. 16 17 CXR MATERIAL LISTING CXR MATERIAL SAFETY DATA SHEET
CXR # DESCRIPTION QUANTITY - ----- ----------- -------- CXRXAMP1 WATER SOLUBLE MASK/PT-650 1 CASE (24 PER CASE) CXRXAMP3 FLUX STRIPPER 9 CASES (12 PER CASE) CXRXAMP4 KLEENOX OR-904 9 JARS - 16 OZ. EACH CXRXAMP5 AQUA-SOL FLUX #183 55 GALLON DRUM (STORED OUTSIDE) CXRXAMP6 BER SOLDER FOR PC BOARDS 13 BOXES (50 LBS. EACH) CXRXAMP6 ISOPROPYL ALCOHOL 99% 55 GALLON DRUM (STORED OUTSIDE) 12 GALLON DRUM (INSIDE) CXRXAMP11 2-TON CLEAR EPOXY HARDENER 1 TUBE CXRXAMP12 KRAZY GLUE 203 10 BOTTLES CXRXAMP13 KRAZY GLUE ACCELERATOR 10 BOTTLES MISC SOLDER DROSS 30 GALLON DRUM
17 18 ADDENDUM I BASE RENT ADJUSTMENTS ATTACHED TO AN A PART OF THE LEASE AGREEMENT DATED JULY 28, 1997, BETWEEN SCI Limited Partnership-I and CXR Telcom Corporation Base Rent shall equal the following amounts for the respective periods set forth below:
Period Monthly Base Rent ------ ----------------- 10/l/97 to 9/30/99 $27,664 10/l/99 to 9/30/00 $28,538 10/l/00 to 9/30/02 $29,411
18 19 ADDENDUM II CONSTRUCTION (TURNKEY) ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JULY 28, 1997, BETWEEN SCI Limited Partnership-I and CXR Telcom Corporation (a) Landlord agrees to furnish or perform at Landlord's sole cost and expense those items of construction and those improvements (the "Tenant Improvements") specified below: - New paint throughout except in the warehouse. - Wall demolition per the plan. - New walls and patching of carpet as required where walls demoed. - New VCT at wave solder room and replace ceiling tiles. - New carpet consisting of 30 oz. direct glue down cut pile or level loop at the following rooms: engineering, demo room, conference room 2, PO 1, reception area, sales and marketing & administration - Patch carpet at po's 3&4, 6&7, & 9&10. - VCT patching at production as required. - New VCT in production material control room. - Demolition as noted. - Vision windows in two new doors. - Reuse of existing doors and sidelights as needed. - Seal and texture wallcovering where walls removed. - Final Clean up. - Minor HVAC and sprinkler rework for new work. - Re-caulk existing sinks at all restrooms. - Replace any damaged or soiled ceiling tiles. - Shampoo carpets. - VCT - striped; waxed NOTE: Landlord shall also coordinate the retrofit of the existing lighting systems for energy efficiency. CXR will contract and pay for the cost of lighting retrofit in its entirety. CXR will receive the benefit of the rebate given after the job has been completed. (b) If Tenant shall desire any changes, Tenant shall so advise Landlord in writing and Landlord shall determine whether such changes can be made in a reasonable and feasible manner. Any and all costs of reviewing any requested changes, and any and all costs of making any changes to the Tenant Improvements which Tenant may request and which Landlord may agree to shall be at Tenant's sole cost and expense and shall be paid to Landlord upon demand and before execution of the change order. (c) Landlord shall proceed with and complete the construction of the Tenant Improvements. As soon as such improvements have been Substantially Completed, Landlord shall notify Tenant in writing of the date that the Tenant Improvements were Substantially Completed. Such date, unless an earlier date is specified as the Commencement Date in this Lease or otherwise agreed to in writing between Landlord and Tenant, shall be the "Commencement Date," unless the completion of such improvements was delayed due to any act or omission of, or delay caused by, Tenant including, without limitation, Tenant's failure to approve plans, complete submittals or obtain permits within the time periods agreed to by the parties or as reasonably required by Landlord, in which case the Commencement Date shall be the date such improvements would have been completed but for the delays caused by Tenant. The Tenant Improvements shall be deemed substantially completed ("Substantially Completed") when, in the opinion of the construction manager (whether an employee or agent of Landlord or a third party construction manager), the Premises are substantially completed except for punch list items which do not prevent in any material way the use of the Premises for the purposes for which they were intended. After the Commencement Date Tenant shall, upon demand, execute and deliver to Landlord a letter of acceptance of delivery of the Premises. 19 20 If Landlord has not achieved Substantial Completion of Tenant Improvements on or before November 30, 1997, then Tenant may, at its option, terminate this Lease and upon such termination Landlord shall promptly return the Security Deposit to Tenant. (d)The failure of Tenant to take possession of or to occupy the Premises shall not serve to relieve Tenant of obligations arising on the Commencement Date or delay the payment of rent by Tenant. Subject to applicable ordinances and building codes governing Tenant's right to occupy or perform in the Premises, Tenant shall be allowed to install its tenant improvements, machinery, equipment, fixtures, or other property on the Premises during the final stages of completion of construction provided that Tenant does not thereby interfere with the completion of construction or cause any labor dispute as a result of such installations, and provided further that Tenant does hereby agree to indemnify, defend, and hold Landlord harmless from any loss or damage to such property, and all liability, loss, or damage arising from any injury to the Project or the property of Landlord, its contractors, subcontractors, or materialmen, and any death or personal injury to any person or persons arising out of such installations, whether or not any such loss, damage, liability, death, or personal injury was caused by Landlord's negligence. Any such occupancy or performance in the Premises shall be in accordance with the provisions governing Tenant-Made Alterations and Trade Fixtures in the Lease, and shall be subject to Tenant providing to Landlord satisfactory evidence of insurance for personal injury and property damage related to such installations and satisfactory payment arrangements with respect to installations permitted hereunder. Delay in putting Tenant in possession of the Premises shall not serve to extend the term of this Lease or to make Landlord liable for any damages arising therefrom. (e)Except for incomplete punch list items, Tenant upon the Commencement Date shall have and hold the Premises as the same shall then be without any liability or obligation on the part of Landlord for making any further alterations or improvements of any kind in or about the Premises. Landlord agrees to pass through any warranties received by Landlord for any Tenant Improvements performed on Premises prior to commencement. 20 21 ADDENDUM III RENEWAL OPTION (BASEBALL ARBITRATION) ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JULY 28, 1997, BETWEEN SCI Limited Partnership-I and CXR Telcom Corporation (a)Provided that as of the time of the giving of the Extension Notice and the Commencement Date of the Extension Term (as such terms are defined below), (x) Tenant is the Tenant originally named herein, (y) Tenant actually occupies all of the Premises initially demised under this Lease and any space added to the Premises, and (z) no Event of Default exists, or would exist but for the passage of time or the giving of notice, or both; then Tenant shall have the right to extend the Lease Term for an additional term of 5 years (such additional term is hereinafter called the "Extension Term") commencing on the day following the expiration of the Lease Term (hereinafter referred to as the "Commencement Date of the Extension Term"). Tenant must give Landlord notice (hereinafter called the "Extension Notice") of its election to extend the term of the Lease Term at least 9 months, but not more than 6 months, prior to the scheduled expiration date of the Lease Term. (b)The Base Rent payable by Tenant to Landlord during the Extension Term shall be the greater of: (i) the Base Rent in effect on the expiration of the Lease Term (if the Base Rent is stated as an annual or other periodic rate, adjusted for the length of the Lease Term), and (ii) the Fair Market Rent, as defined and determined pursuant to Paragraphs (c), (d), and (e) below. (c)The term "Fair Market Rent" shall mean the Base Rent, expressed as an annual rent per square foot of floor area, which Landlord would have received from leasing the Premises for the Extension Term to an unaffiliated person which is not then a tenant in the Project, assuming that such space were to be delivered in "as-is" condition, and taking into account the rental which such other tenant would most likely have paid for such premises, including market escalations, provided that Fair Market Rent shall not in any event be less than the Base Rent for the Premises as of the expiration of the Lease Term. Fair Market Rent shall not be reduced by reason of any costs or expenses saved by Landlord by reason of Landlord's not having to find a new tenant for the Premises (including without limitation brokerage commissions, cost of improvements necessary to prepare the space for such tenant's occupancy, rent concession, or lost rental income during any vacancy period). Fair Market Rent means only the rent component defined as Base Rent in the Lease and does not include reimbursements and payments by Tenant to Landlord with respect to operating expenses and other items payable or reimbursable by Tenant under the Lease. In addition to its obligation to pay Base Rent (as determined herein), Tenant shall continue to pay and reimburse Landlord as set forth in the Lease with respect to such operating expenses and other items with respect to the Premises during the Extension Term. The arbitration process described below shall be limited to the determination of the Base Rent and shall not affect or otherwise reduce or modify the Tenant's obligation to pay or reimburse Landlord for such operating expenses and other reimbursable items. (d)Landlord shall notify Tenant of its determination of the Fair Market Rent (which shall be made in Landlord's sole discretion and shall in any event be not less than the Base Rent in effect as of the expiration of the Lease Term) for the Extension Term, and Tenant shall advise Landlord of any objection within 10 days of receipt of Landlord's notice. Failure to respond within the 10-day period shall constitute Tenant's acceptance of such Fair Market Rent. If Tenant objects, Landlord and Tenant shall conunence negotiations to attempt to agree upon the Fair Market Rent within 30 days of Landlord's receipt of Tenant's notice. If the parties cannot agree, each acting in good faith but without any obligation to agree, then the Lease Term shall not be extended and shall terminate on its scheduled termination date and Tenant shall have no further right hereunder or any remedy by reason of the parties' 21 22 failure to agree unless Tenant or Landlord invokes the arbitration procedure provided below to determine the Fair Market Rent. (e)Arbitration to determine the Fair Market Rent shall be in accordance with the Real Estate Valuation Arbitration Rules of the American Arbitration Association. Unless otherwise required by state law, arbitration shall be conducted in the metropolitan area where the Project is located by a single arbitrator unaffiliated with either party. Either party may elect to arbitrate by sending written notice to the other party and the Regional Office of the American Arbitration Association within 5 days after the 30-day negotiating period provided in Paragraph (d), invoking the binding arbitration provisions of this paragraph. Landlord and Tenant shall each submit to the arbitrator their respective proposal of Fair Market Rent. The arbitrator must choose between the Landlord's proposal and the Tenant's proposal and may not compromise between the two or select some other amount. Notwithstanding any other provision herein, the Fair Market Rent determined by the arbitrator shall not be less than, and the arbitrator shall have no authority to determine a Fair Market Rent less than, the Base Rent in effect as of the scheduled expiration of the Lease Term. The cost of arbitration shall be paid by Landlord if the Fair Market Rent is that proposed by Landlord and by Tenant if the Fair Market Rent is that proposed by Tenant; and shall be borne equally otherwise. If the arbitrator has not determined the Fair Market Rent as of the end of the Lease Term, Tenant shall pay 105 percent of the Base Rent in effect under the Lease as of the end of the Lease Term until the Fair Market Rent is determined as provided herein. Upon such determination, Landlord and Tenant shall make the appropriate adjustments to the payments between them. (f)The parties consent to the jurisdiction of any appropriate court to enforce the arbitration provisions of this Addendum and to enter judgment upon the decision of the arbitrator. (g)Except for the Base Rent as determined above, Tenant's occupancy of the Premises during the Extension Term shall be on the same terms and conditions as are in effect immediately prior to the expiration of the initial Lease Term; provided, however, Tenant shall have no further right to extend the Lease Term pursuant to this addendum or to any allowances, credits or abatements or options to expand, contract, renew or extend the Lease. (h)If Tenant does not send the Extension Notice within the period set forth in Paragraph (a), Tenant's right to extend the Lease Term shall automatically terminate. Time is of the essence as to the giving of the Extension Notice and the notice of Tenant's objection under Paragraph (d). (i)Landlord shall have no obligation to refurbish or otherwise improve the Premises for the Extension Term. The Premises shall be tendered on the Commencement Date of the Extension Term in "as-is" condition. (j)If the Lease is extended for the Extension Term, then Landlord shall prepare and Tenant shall execute an amendment to the Lease confirming the extension of the Lease Term and the other provisions applicable thereto. (k)If Tenant exercises its right to extend the term of the Lease for the Extension Term pursuant to this Addendum, the term "Lease Term" as used in the Lease, shall be construed to include, when practicable, the Extension Term except as provided in (g) above. 22 23 ADDENDUM IV NON-DISTURBANCE AGREEMENT ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JULY 28, 1997, BETWEEN SCI Limited Partnership-I and CXR Telcom Corporation Tenant shall not be obligated to subordinate the Lease or its interest therein to any future mortgage, deed of trust or ground lease on the Project unless concurrently with such subordination the holder of such mortgage or deed of trust or the ground lessor under such ground lease agrees not to disturb Tenant's possession of the Premises under the terms of the Lease in the event such holder or ground lessor acquires title to the Premises through foreclosure, deed in lieu of foreclosure or otherwise. Tenant shall be solely responsible for any fees or expenses charged by the holder of such mortgage or deed of trust in connection with the granting of such non-disturbance agreement. 23 24 ADDENDUM V VACATION OF PREMISES ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JULY 28, 1997, BETWEEN SCI Limited Partnership-I and CXR Telcom Corporation Tenant's vacating of the Premises shall not constitute an Event of Default if, prior to vacating the Premises, Tenant has made arrangements reasonably acceptable to Landlord to (a) insure that Tenant's insurance for the Premises will not be voided or cancelled with respect to the Premises as a result of such vacancy, (b) insure that the Premises are secured and not subject to vandalism, and (c) insure that the Premises will be properly maintained after such vacation. Tenant shall inspect the Premises at least once each month and report monthly in writing to Landlord on the condition of the Premises. 24 25 ADDENDUM VI STORAGE AND USE OF PERMITTED HAZARDOUS MATERIALS ATTACHED TO AND A PART OF THE LEASE AGREEMENT DATED JULY 28, 1997, BETWEEN SCI Limited Partnership-I and CXR Telcom Corporation 1. Permitted Hazardous Materials and Use. (a) Tenant has requested Landlord's consent to use the Hazardous Materials listed below in its business at the Premises (the "Permitted Hazardous Materials"). Subject to the conditions set forth herein, Landlord hereby consents to the Use (hereinafter defined) of the Permitted Hazardous Materials. Any Permitted Hazardous Materials on the Premises will be generated, used, received, maintained, treated, stored, or disposed in a manner consistent with good engineering practice and in compliance with all Environmental Requirements. Permitted Hazardous Materials (including maximum quantities): The storage, uses or processes involving the Permitted Hazardous Materials (the "Use") are described below. Use [If Limited to receiving and storage, so specify]: 2. No Current Investigation. Tenant represents and warrants that it is not currently subject to an inquiry, regulatory investigation, enforcement order, or any other proceeding regarding the generation, use, treatment, storage, or disposal of a Hazardous Material. 3. Notice and Reporting. Tenant immediately shall notify Landlord in writing of any spill, release, discharge, or disposal of any Hazardous Material in, on or under the Premises or the Project. All reporting obligations imposed by Environmental Requirements are strictly the responsibility of Tenant. Tenant shall supply to Landlord within 5 business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations relating in any way to Tenant's use of the Premises. 4. Indemnification. Tenant's indemnity obligation under the Lease with respect to Hazardous Materials shall include indemnification for the liabilities, expenses and other losses described therein as a result of the Use of the Hazardous Materials or the breach of Tenant's obligations or representations set forth above. It is the intent of this provision that Tenant be strictly liable to Landlord as a result of the Use of Hazardous Materials without regard to the fault or negligence of Tenant, Landlord or any third party. 5. Disposal Upon Lease Termination. At the expiration or earlier termination of the Lease, Tenant, at its sole cost and expense, shall: (i) remove and dispose off-site any drums, containers, receptacles, structures, or tanks storing or containing Hazardous Materials (or which have stored or contained Hazardous Materials) and the contents thereof; (ii) remove, empty, and purge all underground and above ground storage tank systems, including connected piping, of all vapors, liquids, sludges and residues; and (iii) restore the Premises to its original condition. Such activities shall be performed in compliance with all Environmental Requirements and to the satisfaction of Landlord. Landlord's satisfaction with such activities or the condition of the Premises does not waive, or release Tenant from, any obligations hereunder. 25 26 EXHIBIT A - SITE PLAN [DIAGRAM] EXHIBIT B - FLOOR PLAN - INTERIOR [DIAGRAM] 26 27 EXHIBIT B-1 SECURITY CAPITAL INDUSTRIAL TRUST CUSTOMER FINISH WORK LETTER AGREEMENT OFFICE-AREA 1. CABINETS: Coffee bar and/or lunch room base cabinet(s) shall be 6'0" long plastic laminate with chrome wire pulls. 2. COUNTERTOPS: The coffee bar top shall have a square front edge with a 4" splash in plastic laminate. 3. LAVATORY COUNTERTOPS: In multiple accommodation toilet rooms with multiple lavatories, the lavatories shall be installed in a plastic laminated countertop with a bullnose front edge and a 4" backsplash. Smaller tenant spaces shall receive wall mounted lavatories. 4. ROOF INSULATION: The insulation above conditioned office area ceilings shall be minimum R-11 fiberglass batts. 5. THERMAL WALL INSULATION: Walls between conditioned and unconditioned spaces shall receive minimum R-1 unfaced fiberglass batt insulation. 6. ACOUSTIC INSULATION: All toilet room walls and ceilings shall receive 3 1/2" unfaced fiberglass batt acoustic insulation. 7. DOORS AND FRAMES: 3'-0" x 7-0'x 1-3/4", solid core, birch, B-3 stain prefinished with anodized aluminum frames or prefinished black (Timely) steel frames. 8. INTERIOR DOOR HARDWARE: Schlage "AL" series Saturn in a brushed chrome 626 finish. 9. INTERIOR WINDOWS: None 10. MIRRORS: toilet rooms shall have mirrors the length of the lavatory top or 24 x 36 if the lavatory is wall hung. 11. DRYWALL PARTITIONS: office walls shall be undergrid 3-5/8" x 25 Ga. metal studs at 24" o.c. with 5/8" gypsum board. 12. DRYWALL FINISH: All drywall and exposed concrete walls within the office and toilet rooms shall receive a skip trowel textured or smooth finish. 13. WAINSCOT: Toilet room wet walls shall have 4'-6" high white Pionite wainscot. 14. ACOUSTIC CEILING TILE: Office areas shall have an exposed grid acoustic ceiling with 24" x 48" non-directional fissured tile, installed at 9'-0" 15. OFFICE CARPET: Designweave or Shaw direct glue-down, 26 oz. face weight level loop or 30 oz cut-pile carpet without pad. 16. LUNCH ROOM: shall have vinyl composition tile (VCT) flooring 1/8" gauge, standard grade, as manufactured by Tarkett or Armstrong. 17. RUBBER BASE: The office areas shall have a 4" high topset rubber base as manufactured by Burke, Roppe, or Tarkett, installed in all areas receiving floor covering except the toilet rooms. 18. TOILET ROOM: The flooring shall be sheet vinyl by Armstrong "Suffield", "Best of Both Worlds" or "Seagate" with a 6" covered base. 19. PAINT: One (1) coat of paint in a standard light color interior flat latex, except in the toilet rooms and at the coffee bar which shall receive one (1) coat of latex semi-gloss enamel over one (1) coat of PVA sealer. If the walls are smooth finished, they shall receive two (2) coats of paint. 20. TOILET ACCESSORIES: Napkin Disposals: Bobrick B-270 sanitary napkin disposals in each women's toilet stall. Paper Towel Dispenser: Bobrick B-369 (for single accommodation toilet rooms) or a Bobrick B-3944 (for multiple accommodation toilet rooms) recessed paper towel dispenser with a waste receptacle. Seat Cover Dispenser: Bobrick B-221 seat cover dispenser in each toilet stall. Toilet Paper Holder: Bobrick B-686 double toilet paper holder. Grab Bars: Bobrick No. B6806-36 and B6806-42 stainless steel handicap grab bars per code. 21. TOILET PARTITIONS: Metal, floor mounted, overhead braced toilet partitions with a backed enamel finish by Global Steel, Knickerbocker or equal in manufactures standard color. 22. BLINDS: All exterior windows, except storefront doors, shall receive mini-blinds by Bali, "inside mount", in a light building standard color with a valance. 23. PLUMBING FIXTURES AND TRIM: Lavatory for vanity: American Standard or equal, "Oval Horizon", model 3303.013, white, self-rimming with a Delta Model 523 WF HDF single lever type faucet assembly with a grid strainer and bright chrome finish. Wall-hung lavatory: American Standard or equal, "Lucerne", model 0355.012, 27 28 white, wall mounted lavatory with a Delta Model 523 WF HDP single lever type faucet assembly with a grid strainer and bright chrome finish. Water closet: American Standard or equal, "Cadet Aquameter", elongated, 1.5 GPF, model 3042.12, white, with an Olsonite #95 seat and a Sloan #111 flush valve. Urinal: American Standard or equal, "Allbrook", model 6540.017, white, with a Sloan 180-1.5 flush valve. Coffee bar sink: Elkay or equal,"Peacemaker Starlite", model PSR-1918, stainless steel, with a Delta #100 faucet. Water heater: Sized to meet demand installed in a smitty pan draining into a hub drain with a trap primer. 24. Fire sprinkler heads shall be chrome with white escutcheons, semirecessed, not centered, on the ceiling tiles. 25. The HVAC system shall maintain 75 degrees indoors, on a 100 degree outdoor day. 26. The HVAC system shall be connected to a 7-day skip-a-day time clock and include a bypass timer at each thermostat. 27. All thermostats shall have an automatic change-over feature and a locking cover. 28. Toilet rooms shall have an exhaust fan. 29. All conditioned areas shall have a supply register and a deducted return register. Supply and return air registers shall be white baked enamel 2' x 2' with a perforated face, flush mounted. Supply air registers shall have a 4-way blow. 30. Office lighting: shall be 2' x 4' three lamp lay-in fluorescent light fixtures with standard acrylic lens and T-12 low watt type lamps, 75 foot candles a 3' A.F.F. or as permitted by code but no less than two (2) fixtures per office. 31. Furnish and install two (2) 110V duplex receptacles in each office. 32. Furnish and install a dedicated 110 volt fourplex outlet at the telephone board and two dedicated 110V outlets at the coffee bar. 33. Furnish and install a 2" diameter P.V.C. or steel (where required by code) conduit for phone system from the building telephone service entrance to a telephone board within the tenant space. WAREHOUSE 34. FULL HEIGHT DRYWALL PARTITIONS @ tenant demising walls: Metal studs with one layer of 5/8" type "X" gypsum board on each side from the floor to the roof deck. 35. OFFICE/WAREHOUSE WALL: Metal studs with two layers of 5/8" type "X" gypsum board on each side to 6" A.F.F. 36. WAREHOUSE WALL FINISH: All drywall shall be fire taped only. Spot nails in firetaped areas. 37. CONCRETE FLOOR SEALER: Exposed concrete floors shall receive one coat of acrylic concrete sealer. 38. WAREHOUSE LIGHTING: Provide 16' high output fluorescent strip light fixtures or metal halide fixtures to achieve 15 foot candles of light measured at 30" above the floor in the warehouse space. 28 29 EXHIBIT C SIGN CRITERIA BAYSIDE COMMONS WINDOW SIGNS IDENTIFICATION: Each Tenant will be allowed one window sign placed either to the left or to the right of the entrance door, whichever provides the best visibility. Company names, logos or symbols will be allowed in this area - color and size to be determined by the Tenant, all other copy in this area except for logos or symbols will be white pressure sensitive letters. Copy should start at 5' from grade working down to no more than 3 1/2' from grade. Sign layout including copy, sizes and color must be approved by the building management. One security decal only may be applied to the front door glass in the lower comer if the Tenant so desires. All exterior alarm bells are to be mounted to the rear of the building only. DIRECTORY SIGN IDENTIFICATION: A monument directory sign has been provided for each building. If only one tenant occupies an entire building, that Tenant shall be allowed to utilize the entire directory sign area for its sensitive vinyl letters in the Handel Gothic style with a letter height suitable for the area allowed, and a logo may be used. Layout is to be approved by building management. If two Tenants occupy a building, signs shall consist of 4: Handel Gothic, Spar-Cal dark mauve pressure sensitive vinyl letters condensed to 60.4%. Directory signs shall list the street number and the company names only, no slogans or symbols allowed. If three Tenants occupy a building, signs shall consist of 4: Handel Gothic, Spar-Cal dark mauve pressure sensitive vinyl letters condensed to 60.4%. Directory signs shall list the street number and the company names only, no slogans or symbols allowed. REAR LOADING SIGNS: Each Tenant will be allowed to identify its rear door for shipping and receiving purposes. The company name shall be placed on a 36" x 24" aluminum panel adjacent to the rear doors. Copy shall consist of 3" vinyl capital letters only in the Spar-Cal dark mauve Handel Gothic style. Company names and logos only are allowed. MANAGEMENT RESERVES THE RIGHT TO DENY ANY COPY IT CONSIDERS UNSUITABLE. LAYOUT IS TO BE APPROVED BY BUILDING MANAGEMENT. THE COST OF ALL LETTERING AND LOGOS WILL BE THE RESPONSIBILITY OF THE TENANT. NO OTHER SIGNS ARE ALLOWED IN THE WINDOWS OR DOORS. 29 30 LEASE GUARANTY (CORPORATION) The undersigned (collectively the "Guarantor") hereby absolutely and unconditionally, jointly and severally, guarantees the prompt, complete, and full punctual payments by the Tenant under that certain Lease Agreement (such lease, as amended, being herein referred to as the "Lease"), dated July 28, 1997, between SCI Limited Partnership, a Delaware Limited Partnership, as Landlord ("Landlord"), and CXR Telcom Corporation, a California Corporation, as Tenant ("Tenant") covering the premises located at 47233 Fremont Boulevard, Fremont, California. This Guaranty shall include any liability Tenant shall acquire under the Lease for any period following the term of the Lease. The obligation of the Guarantor is primary and independent of Tenant's obligations under the Lease and may be enforced directly against the Guarantor independently of and without proceeding against the Tenant or exhausting or pursuing any remedy against Tenant or any other person or entity. This instrument may not be changed, modified, discharged, or terminated orally or in any manner other than by an agreement in writing signed by Guarantor and the Landlord. The obligations of Guarantor under this Guaranty shall not be released or otherwise affected by reason of any sublease, assignment, or other transfer of the Tenant's interest under the Lease, whether or not Landlord consents to such sublease, assignment, or other transfer. The obligations of Guarantor hereunder shall not be released by Landlord's receipt, application, or release of security given for the performance and observance of covenants and conditions in said Lease contained on Tenant's part to be performed or observed nor by any modification of said Lease; but in case of any such modification the liability of Guarantor shall be determined in accordance with the terms of any such modification of the Lease. Guarantor waives any defense or right arising by reason of any disability or lack of authority or power of Tenant and shall remain liable hereunder if Tenant or any other party shall not be liable under the Lease for such reason. Until all the covenants and conditions in said Lease on Tenant's part to be performed and observed are fully affirmed and observed, Guarantor (i) shall have no right of authorities against Tenant by reason of any payments or preformed and observed by the Guarantor, in compliance with the obligations of the Guarantor hereunder; (ii) waives any right to enforce any remedy which Guarantor now or hereunder shall have against Tenant by reason of any one or more payments or acts of performance in compliance with the obligations of Guarantor hereunder: and (iii) subordinates any liability or indebtedness of Tenant now or hereafter held by Guarantor to the obligations of Tenant to the Landlord under said Lease. The liability of Guarantor hereunder shall not be released or otherwise affected by (i) the release or discharge of Tenant in any insolvency, bankruptcy, reorganization, receivership, or other debtor relief proceeding involving Tenant (collectively "proceeding for relief"); (ii) the impairment, limitation, or modification of the liability of Tenant or the estate of the Tenant in any proceeding for relief, or of any law referring to bankruptcy, insolvency, or of any remedy for the enforcement of Tenant's liability under the Lease, resulting from the operation of any law pertaining to bankruptcy, insolvency, or similar proceeding or other law or from the decision in any court; (iii) the rejection or disaffirmation of the Lease in any proceeding for relief; or (iv) the cessation from any cause whatsoever of the liability of Tenant. This Guaranty shall continue to be effective or be rescinded, as the case may be, if at any time any payment by Tenant to Landlord under the Lease is rescinded or must otherwise be returned by Landlord and its successors and assigns, and is and shall be binding upon Guarantor and its successors and assigns, but Guarantor may not assign its obligations hereunder. GUARANTOR AND LANDLORD WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND GUARANTOR ARISING OUT OF THIS GUARANTY OR ANY OTHER DOCUMENT OR INSTRUMENT EXECUTED IN CONNECTION HEREWITH OR ANY TRANSACTION RELATED TO THE GUARANTY. 30 31 Guarantor agrees to pay all costs and expenses, including reasonable attorneys fees, incurred by Landlord in enforcing the terms of this Guaranty. This Guaranty shall be governed by and constructed in accordance with the internal laws of the State which governs the Lease excluding any principals of conflicts of laws. For the purpose solely of litigating any dispute under this Guaranty, the undersigned submits to the jurisdiction of the courts of said state. If the Guarantor is more than one person or entity, the liability of each such Guarantor shall be joint and several. WITNESS THE EXECUTION hereof this 28th day of July, 1997. GUARANTOR: MicroTel International, Inc. By: /s/ Carmine T. Oliva --------------------------------- Name: Carmine T. Oliva ------------------------------- Title: President and Chief Executive Officer 31 EX-23.1 8 CONSENT OF BDO SEIDMAN, LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS MicroTel International, Inc. Ontario, California We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated April 14, 1997, relating to the financial statements of MicroTel International, Inc., which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN, LLP San Francisco, California September 22, 1997 EX-23.2 9 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Microtel International, Inc.: The audits referred to in our report dated December 13, 1996, except for note 13, which is as of June 18, 1997, included the related financial statement schedule as of September 30, 1996, and for each of the years in the three-year period ended September 30, 1996, included in the registration statement. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to the use of our reports included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP Orange County, California September 22, 1997 EX-23.3 10 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.3 CONSENT OF DELOITTE & TOUCHE LLP We consent to the use in this Amendment No.1 to Registration Statement No. 333-29925 of MicroTel International, Inc. on Form S-1 of our report dated August 31, 1994 (November 18, 1994 as to paragraphs two through four in Note 2), (which report expresses an unqualified opinion and includes explanatory paragraphs referring to certain factors which raise substantial doubt about the Company's ability to continue as a going concern and to a certain related party transaction), appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. /s/Deloitte & Touche LLP - ------------------------ DELOITTE & TOUCHE LLP San Jose, California September 18, 1997 EX-23.4 11 INDEPENDENT AUDITORS' REPORT (HARDCASTLE BURTON) 1 EXHIBIT 23.4 [LOGO] Our reference GP/GC/X00980 Your reference HARDCASTLE BURTON Chartered Accountants Registered Auditors Lake House, Market Hill Royston, Herts SG8 9JN Tel: 01763 247371 Fax: 01763 245521 e-mail: mailbox@hb.royston.co.uk Offices at: Hoddesdon Redbourn Northwood Newmarket FAO Martin J. Conroy Gallagher, Briody & Butler Counsellors at Law 212 Carnegie Center Suite 402 Princetown New Jersey 08540 15 September 1997 Dear Sir XCEL CORPORATION LIMITED As requested, we hereby enclose an original signed audit report on the above company's financial statements for the year ended 30 September 1996. Furthermore, we hereby consent to this audit report being included within the S-1 filing. Yours faithfully HARDCASTLE BURTON /s/HARDCASTLE BURTON A member firm of THE UK 200 GROUP PRACTICING CHARTERED ACCOUNTANTS Partners: Consultant Alan V. Melvin Brian W. Harley Philip J. Tostevin C. Berry Hardcastle John F.T. Neighbour Colin J. Hayfield Gary S. Pyle John F. Palmer B. Peter Homent Keith A. Grover Mark T. Wilkins Brian D. Claxton John S. Clarke Authorised To Carry On Investment Business By The Institute Of Chartered Accountants In England And Wales EX-27 12 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1996 SEP-30-1996 786,149 0 4,614,893 46,586 6,504,736 12,414,172 7,972,331 2,912,411 19,813,466 10,251,260 2,677,617 776,099 0 9,018,077 (3,172,426) 19,613,466 31,248,596 31,248,596 23,056,559 23,056,559 0 17,247 506,591 1,105,049 22,137 1,082,912 0 0 0 1,082,912 .17 .17
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