-----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, Azf5DkmWMUy4mqTE3fZf2AMsGvwPT+Q5qiSGf+o0NtWCOI/omBt4gEuX/6G2n8A0 nX4EzOiubF7H+yiD0V7XbA== 0000912057-00-055234.txt : 20010101 0000912057-00-055234.hdr.sgml : 20010101 ACCESSION NUMBER: 0000912057-00-055234 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 21 FILED AS OF DATE: 20001229 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROTEL INTERNATIONAL INC CENTRAL INDEX KEY: 0000854852 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 770226211 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-41580 FILM NUMBER: 799447 BUSINESS ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: ONTARIO STATE: CA ZIP: 91730 BUSINESS PHONE: 9092972699 MAIL ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: ONTARIO STATE: CA ZIP: 91730 FORMER COMPANY: FORMER CONFORMED NAME: CXR CORP DATE OF NAME CHANGE: 19920703 S-1/A 1 a2034174zs-1a.txt S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 2000 REGISTRATION NO. 333-41580 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- MICROTEL INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 3825 77-0226211 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation Industrial Classification Identification No.) or organization) Code Number) 9485 HAVEN AVENUE, SUITE 100 RANCHO CUCAMONGA, CA 91730 (909) 297-2699 (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. 9485 HAVEN AVENUE, SUITE 100 RANCHO CUCAMONGA, CA 91730 (909) 297-2699 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: LARRY A. CERUTTI, ESQ. CRISTY LOMENZO PARKER, ESQ. RUTAN & TUCKER, LLP 611 ANTON BOULEVARD, 14TH FLOOR COSTA MESA, CALIFORNIA 92626 (714) 641-5100 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/ If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: / / If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box: / /
CALCULATION OF REGISTRATION FEE ====================================================================================================================== Amount Proposed Maximum Proposed Maximum Title of Each Class of To Be Offering Price Aggregate Amount of Securities To Be Registered Registered(1) Per Share(2) Offering Price(2) Registration Fee(3) - ---------------------------------------------------------------------------------------------------------------------- Common stock, $.0033 par value 1,980,506(4) $0.58 $1,148,693 $560.92 ======================================================================================================================
(1) In the event of a stock split, stock dividend, anti-dilution adjustment or similar transaction involving common stock of the registrant, in order to prevent dilution, the number of shares registered shall be automatically increased to cover the additional shares in accordance with Rule 416(a) under the Securities Act. Pursuant to Rule 429, includes 1,195,000 shares being carried forward from the Registrant's Registration Statement No. 333-64695 and 785,506 shares that are not presently covered by any other registration statement. (2) Estimated solely for purposes of determining the registration fee for the shares covered by this registration statement that are not presently covered by any other registration statement. Calculated pursuant to Rule 457(c) under the Securities Act, on the basis of the average of the high and low prices per share as reported for such securities on the NASD's OTC Bulletin Board on July 13, 2000. (3) A registration fee in the amount of $502.21 was paid upon the initial filing of this registration statement, $120.26 of which was paid to cover the 785,506 shares that are covered by this registration statement and are not presently covered by any other registration statement. This fee was based upon an average of the bid and asked prices per share of $0.58 as reported for such securities on the NASD's OTC Bulletin Board on July 13, 2000 and a fee rate of 0.00264. A registration fee of $2,105.92 was paid by the Registrant under Registration Statement No. 333-64695 covering the 5,710,967 shares originally registered thereunder, $440.66 of which fee relates to the 1,195,000 shares being carried forward which had a proposed maximum offering price per share of $1.25 based upon the exercise price of the warrants to which the registered shares relate. (4) Includes 1,758,006 shares of common stock issuable upon exercise of warrants. Pursuant to Rule 429, this registration statement contains a combined prospectus that covers 1,195,000 shares being carried forward from the Registrant's Registration Statement No. 333-64695, in addition to the 785,506 shares being registered for the first time hereunder. 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. =============================================================================== SUBJECT TO COMPLETION, DATED DECEMBER 29, 2000 PROSPECTUS 1,980,506 SHARES MICROTEL INTERNATIONAL, INC. COMMON STOCK The shares of our Company's common stock being offered pursuant to this prospectus are being offered by certain of our security holders identified herein for their own accounts. Our common stock trades on the NASD's OTC Bulletin Board under the symbol "MCTL." On December 19, 2000, the high and low prices for a share of our common stock were $0.32 and $0.23, respectively. The mailing address and the telephone number of our principal executive offices are 9485 Haven Avenue, Suite 100, Rancho Cucamonga, California 91730, (909) 297-2699. -------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------- The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is , 2000. TABLE OF CONTENTS
DESCRIPTION PAGE NO. - ----------- -------- Prospectus Summary.................................................................. 3 Risk Factors........................................................................ 7 Special Note Regarding Forward-Looking Statements................................... 15 Use of Proceeds..................................................................... 16 Dividend Policy..................................................................... 16 Price Range of Common Stock......................................................... 17 Capitalization...................................................................... 18 Selected Consolidated Financial Data................................................ 19 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 21 Business............................................................................ 36 Management.......................................................................... 57 Certain Relationships and Related Transactions...................................... 68 Principal and Selling Security Holders.............................................. 72 Plan of Distribution................................................................ 75 Description of Capital Stock........................................................ 77 Legal Matters....................................................................... 81 Experts............................................................................. 81 Additional Information.............................................................. 81 Index to Financial Statements and Financial Statement Schedule...................... F-1
-2- PROSPECTUS SUMMARY This summary highlights some information from this prospectus. Because it is a summary, it necessarily does not contain all of the information necessary to your investment decision. To understand this offering fully, you should read carefully the entire prospectus. OUR COMPANY We are a Delaware corporation that was formed July 14, 1989 under the name CXR Corp. We amended our certificate of incorporation to change our name to CXR Corporation in October 1989 and then to MicroTel International, Inc. in March 1995. Through our three direct wholly-owned operating subsidiaries, XIT Corporation, CXR Telcom Corporation and CXR, S.A., and through the divisions and subsidiaries of our subsidiaries, we design, manufacture, assemble, and market products and services in the following two material business segments: Telecommunications -- Telecommunications Test Instruments (analog and digital test instruments used in the installation, maintenance, management and optimization of public and private communication networks) -- Transmission and Network Access Products (range of products for accessing public and private networks for the transmission of data, voice and video) Electronic Components (digital switches and electronic power supplies) Our sales are primarily in North America, Europe and Asia. Although a majority of our sales in 2000 were to customers in the telecommunications industry, we also have significant sales to industrial, medical, aerospace and military customers. 3 THE OFFERING Common stock offered by selling security holders 1,980,506 (1) Common stock outstanding prior to this offering 20,569,759 (2) Common stock outstanding following this offering 22,327,765 (1)(2) if all shares are sold Use of Proceeds All proceeds of this offering will be received by selling security holders (other than amounts, if any, received by us upon exercise of warrants whose underlying shares of common stock are covered by this prospectus). Risk Factors You should read the "Risk Factors" section beginning on page 7, as well as other cautionary statements throughout this prospectus, before investing in shares of our common stock. - ------------------- (1) Assumes exercise of all of the warrants whose underlying shares of common stock are covered by this prospectus in exchange for 1,758,006 shares of common stock and immediate resale of all of such shares. (2) As of December 19, 2000, a total of 20,569,759 shares of common stock were issued and outstanding, excluding : -- 1,745,100 shares reserved for issuance under our stock option plans, of which options to purchase 1,586,689 shares are outstanding; -- 616,765 shares issuable upon conversion of our Series A Preferred Stock; -- 1,500,000 shares to become issuable upon conversion of our Series B Preferred Stock; -- 1,592,685 shares issuable upon exercise of outstanding warrants, other than the warrants whose underlying shares of common stock are covered by this prospectus; and -- any additional shares of common stock we may issue from time to time after December 19, 2000. 4 SUMMARY FINANCIAL INFORMATION The following selected consolidated financial data is qualified in its entirety by and should be read in conjunction with the consolidated financial statements and the notes to those statements and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statements of operations and comprehensive income data set forth below with respect to the years ended December 31, 1998 and 1999 and the consolidated balance sheet data at December 31, 1998 and 1999 are derived from, and are qualified by reference to, the consolidated audited financial statements included elsewhere in this prospectus. The consolidated statements of operations and comprehensive income data set forth below with respect to the nine month periods ended September 30, 1999 and 2000 and the consolidated balance sheet data at September 30, 2000 are derived from unaudited financial statements included elsewhere in this prospectus, which, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial data for such periods. The historical results are not necessarily indicative of results to be expected for any future periods.
THREE CONSOLIDATED STATEMENTS OF MONTHS OPERATIONS AND COMPREHENSIVE ENDED NINE MONTHS ENDED INCOME DATA: YEAR ENDED SEPT. 30, DEC. 31, YEAR ENDED DEC. 31, SEPT. 30, -------------------- -------- ----------------------------- ------------------- 1995 1996 1996 1997 1998 1999 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Net sales........................ $ 13,737 $14,270 $ 3,100 $27,251 $ 30,100 $ 25,913 $ 19,444 $19,559 Cost of sales.................... 10,218 9,442 2,332 18,069 17,353 17,066 12,269 10,645 -------- --------- --------- --------- --------- ---------- ---------- -------- Gross profit..................... 3,519 4,828 768 9,182 12,747 8,847 7,175 8,914 Selling, general and administrative expenses....... 3,585 3,426 1,045 8,608 10,202 10,132 8,494 6,923 Engineering and product development expenses.......... -- -- -- 1,797 2,202 1,841 1,462 772 Write-down of goodwill........... -- -- -- 5,693 -- -- -- -- --------- --------- ---------- ---------- --------- ---------- ---------- ------- Income (loss) from operations.... (66) 1,402 (277) (6,916) 343 (3,126) (2,781) 1,219 Total other income............... 484 304 49 (627) (643) (193) 501 118 -------- --------- ---------- ---------- --------- ---------- ---------- ------- Income (loss) from continuing operations before income taxes 418 1,706 (228) (7,543) (300) (3,319) (2,280) 1,337 Income tax expense............... (41) 20 30 97 101 128 25 13 --------- --------- --------- --------- --------- ---------- ---------- -------- Income (loss) from continuing operations.................... 459 1,686 (258) (7,640) (401) (3,447) (2,305) 1,324 Discontinued operations: Loss from operations of discontinued segment....... (122) (603) (647) (2,053) (1,364) (1,146) $ (949) $ (276) Gain (loss) on disposal of discontinued segment including provision for phase out period of $158 in 2000 .............. -- -- -- -- 580 (3) $ 331 $ (634) -------- --------- --------- ---------- --------- ----------- ----------- -------- Net income (loss)................ $ 337 $ 1,083 $ (905) $(9,693) $ (1,185) $ (4,596) $ (2,923) $ 414 Foreign currency translation adjustment................. 10 $ (89) $ 126 $ (260) $ 206 $ (325) $ (180) $ (435) -------- ---------- --------- ---------- --------- ----------- ----------- --------- Total comprehensive income (loss) $ 347 $ 994 $ (779) $(9,953) $ (979) $ (4,921) $ (3,103) $ (21) ======== ========= ========== ========== ========== =========== =========== ========= Basic earnings (loss) per share from continuing operations.... $ 0.09 $ 0.27 $ (0.05) $ (0.76) $ (0.03) $ (0.21) $ (0.14) $ 0.07 ======== ========= ========== ========== ========== =========== =========== ========= Diluted earnings (loss) per share from continuing operations.... $ 0.09 $ 0.27 $ (0.05) $ (0.76) $ (0.03) $ (0.21) $ (0.14) $ 0.06 ======== ========= ========== ========== ========== =========== =========== ========= Basic earnings (loss) per share from discontinued operations.. $(0.02) $ (0.10) $ (0.10) $ (0.20) $ (0.07) $ (0.07) $ (0.04) $ (0.05) ======== ========= ========== ========== ========== =========== =========== ========= Diluted earnings (loss) per share from discontinued operations.. $(0.02) $ (0.10) $ (0.10) $ (0.20) $ (0.07) $ (0.07) $ (0.04) $ (0.04) ======== ========= ========== ========== ========== =========== =========== ========= Basic earnings (loss) per share.. $ 0.07 $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ (0.18) $ 0.02 ======== ========= ========== ========== ========== =========== =========== ========= Diluted earnings (loss) per share $ 0.07 $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ (0.18) $ 0.02 ======== ========= ========== ========== ========== =========== =========== ========= Weighted average shares outstanding, basic............ 4,995 5,841 6,064 10,137 11,952 16,638 16,192 19,141 ======== ========= ========== ========== ========== =========== =========== ========= Weighted average shares outstanding, diluted.......... 4,995 5,841 6,064 10,137 11,952 16,638 16,192 21,347 ======== ========= ========== ========== ========== =========== =========== =========
5 SUMMARY FINANCIAL INFORMATION (CONTINUED)
AS OF SEPT. 30, 2000 ---- CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS) Working capital................................................................. $ 2,717 Total assets.................................................................... 18,490 Total liabilities............................................................... 12,904 Total stockholders' equity...................................................... 5,310 Redeemable preferred stock...................................................... 276
No cash dividends on our common stock were declared during any of the periods presented above. Shares outstanding and earnings (loss) per share have been restated to give effect to the recapitalization of XIT Corporation (the accounting acquirer) in the reverse acquisition of MicroTel International, Inc. by XIT Corporation on March 26, 1997. The historical financial data above for periods prior to the merger is that of XIT Corporation. In conjunction with the reverse acquisition accounting treatment, XIT Corporation 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 Corporation's fiscal year ended September 30, 1996 and the beginning of its new fiscal year on January 1, 1997. 6 RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND OTHER INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT. RISKS RELATED TO OUR BUSINESS WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT WHICH MAY CONTINUE IN THE FUTURE AND WHICH MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS. Our consolidated financial statements have been prepared assuming we will continue as a going concern. We incurred significant net operating losses in each of the years ended December 31, 1999, 1998 and 1997. We realized a net loss of approximately $4.6 million for the twelve months ended December 31, 1999, as compared to incurring a net loss of approximately $1.2 million for the twelve months ended December 31, 1998 and a net loss of approximately $9.7 for the twelve months ended December 31, 1997. Additionally, we were in default of our previously outstanding domestic credit facility agreement because we were not in compliance with an adjusted net worth covenant contained in that agreement. These factors raised substantial doubt about our ability to continue as a going concern and led our independent certified public accountants to modify their unqualified opinion to include an explanatory paragraph related to our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. For the nine-month period ended September 30, 2000, we reported net income of approximately $0.4 million. Our accumulated deficit and accumulated comprehensive loss through September 30, 2000 were approximately $19.4 million and $0.7 million, respectively, and as of that date we had a total stockholders' equity of approximately $5.3 million. We expect to realize net income during the quarter and year ended December 31, 2000. However, there is no assurance that we actually will realize net income for these periods or maintain profitable operations in the future. If we are unable to do so, there may be a material adverse effect on our cash flows, which could cause us to violate covenants under our credit facility and could impede our ability to raise capital, if needed, through debt or equity financing. FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT FOREIGN CURRENCY WHICH MUST BE CONVERTED INTO UNITED STATES DOLLARS FOR INCLUSION IN OUR CONSOLIDATED FINANCIAL STATEMENTS. AS A RESULT, EXCHANGE RATE FLUCTUATIONS MAY ADVERSELY IMPACT OUR REPORTED RESULTS OF OPERATIONS. We have established and acquired international subsidiaries that prepare their balance sheets in the relevant foreign currency. In order to be included in our consolidated financial statements, these balance sheets are converted, at the then current exchange rate, into United States dollars, and the statements of operations are converted using weighted average exchange rates for the applicable period. Accordingly, fluctuations of the foreign currencies relative to the United States dollar could have an effect on our consolidated financial statements. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. However, because historically the majority of our currency exposure has related to financial statement translation rather than to particular transactions, we do not intend to enter into, nor have we historically entered into, forward currency contracts or hedging arrangements in an effort to mitigate our currency exposure. 7 THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE. WE EXPECT THEM TO BECOME MORE COMPETITIVE IN THE FUTURE, WHICH COULD RESULT IN SIGNIFICANT PRICE COMPETITION, REDUCED REVENUES, LOWER PROFIT MARGINS OR LOSS OF MARKET SHARE. The telecommunications and electronic components markets are highly competitive. These markets may experience pricing and margin pressure that could adversely affect our business, financial condition and operating results. A number of development stage companies and major domestic and international companies offer products and services within the same markets that we target. Some of our competitors and potential competitors have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than us. Our competitors may develop products and services that are superior to ours or that achieve greater market acceptance. Our future success will depend significantly upon our ability to increase our share of our target markets and to sell additional products, product enhancements and services to our customers. Competition may decrease: -- our market share; -- the prices we receive for our products and services; -- our revenues; and/or -- our profit margins. Any of these decreases could adversely affect our business, financial condition and operating results. As a result, we may not be able to compete successfully. IN ORDER TO COMPETE SUCCESSFULLY, WE MUST KEEP PACE WITH THE RAPID CHANGES INVOLVING THE ELECTRONIC COMPONENTS AND TELECOMMUNICATIONS INDUSTRIES. The electronic components and telecommunications industries are characterized by rapid technological advances, changes in customer requirements, evolving industry standards and frequent new product and services introductions and enhancements. New products and services based on new technologies or new industry standards may quickly render existing products and services obsolete. Our future success will depend upon our ability to enhance our current products and services and to develop and introduce new products and services that keep pace with technological developments, respond to the growth in the markets in which we compete, encompass evolving customer requirements and achieve market acceptance. Any failure on our part to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in developing or introducing new products and services, could result in a loss of competitiveness, revenues, profit margins or market share. There is no assurance that any new products, services or enhancements which we develop will achieve market acceptance. WE RELY ON A RELATIVELY LIMITED NUMBER OF CUSTOMERS, AND THE LOSS OF ANY SIGNIFICANT CUSTOMER COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS AND FINANCIAL CONDITION. We derive a significant portion of our revenues from a relatively limited number of customers. For the nine months ended September 30, 2000, our ten largest customers accounted for approximately 36% of our revenues. We anticipate that our ten largest customers will continue to account for a large portion of our revenues for the foreseeable future. The loss of any one or more of these major customers would likely have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. 8 OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY AFFECT OUR BUSINESS IF DEMAND IS REDUCED. During the nine months ended September 30, 2000, the sale of telecommunications equipment and related services accounted for approximately 55% of our total sales. In many cases we have long-term contracts with our telecommunications customers but do not receive long-term purchase orders or commitments under such contracts. Rather, we receive purchase orders for only such quantities of telecommunications equipment as are required from time to time by our customers. During the nine months ended September 30, 2000, the sale of electronic components accounted for approximately 45% of our total sales. In some cases we have long-term contracts with our electronic components customers. However, in most cases we receive purchase orders for only such quantities of electronic components as are required from time to time by our customers. Accordingly, we are highly dependent on the successful sales of our telecommunications products and electronic components. A significant reduction in sales of these products resulting from changes in industry, including the entry of new competitors into the market, from the introduction of new or improved technology or an unanticipated shift in the needs of our customers, or for other reasons, would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. OUR BUSINESS COULD SUFFER IF WE ARE UNABLE TO OBTAIN COMPONENTS OF OUR PRODUCTS FROM OUTSIDE SUPPLIERS. The major components of our products include circuit boards, microprocessors, chipsets and memory components. Most of these components are available from multiple sources. However, certain components used in our products are currently obtained from single or limited sources. Certain modem chipsets used in our data communications products have been in short supply and are frequently on allocation by semiconductor manufacturers. Similar to others in the electronics industry, we recently have, from time to time, experienced difficulty in obtaining certain components. We do not have guaranteed supply arrangements with any of our suppliers, and there can be no assurance that these suppliers will continue to meet our requirements. Shortages of components could not only limit our production capacity but also could result in higher costs due to the higher costs of components in short supply or the need to utilize higher cost substitute components. An extended interruption in the supply of any of these components or a reduction in their quality or reliability would have a material adverse effect on our financial condition and results of operations. While we believe that with respect to our single source components we could obtain similar components from other sources, we could be required to alter product designs to use alternative components. There can be no assurance that severe shortages of components will not occur in the future that could increase the cost or delay the shipment of our products and have a material adverse effect on our financial condition and results of operations. Significant increases in the prices of these components could also have a material adverse effect on our results of operations because we may not be able to adjust product pricing to reflect the increases in component costs. OUR COMMITMENT OF SIGNIFICANT RESOURCES AND EXPANSION OF OUR ACTIVITIES ABROAD COULD PROVE TO BE UNPROFITABLE DUE TO RISKS INHERENT IN INTERNATIONAL BUSINESS ACTIVITIES. Sales of our products and services to customers located outside the United States accounted for approximately 52% of our net sales for the nine months ended September 30, 2000. We expect to commit significant resources in the foreseeable future to expand our operations abroad. Accordingly, we are 9 subject to a number of risks associated with international business activities that could adversely affect our operations abroad and slow our growth. These risks generally include, among others: - foreign currency fluctuations; and - differing technological advances, preferences or requirements; - difficulties in managing and staffing our foreign operations; - increased collection risks; - tariffs and other trade restrictions; and - general economic conditions. Any of these risks could adversely affect our business, financial condition and operating results. THERE ARE RISKS THAT OUR PRODUCTS MAY BE RETURNED BY OUR CUSTOMERS. We are exposed to the risk of product returns from our customers as a result of returns due to defective products or product components. Generally, our electronic components carry a one-year limited parts and labor warranty and our telecommunications products carry a two-year limited parts and labor warranty. Typically our telecommunications products may be returned within 30 days of purchase if a new order is received, and the new order will be credited with 80% of the selling price of the returned item. Products returned under warranty typically are tested and repaired or replaced at our option. Historically, product returns have not had a material impact on our operations or financial condition. While we believe that product returns should not be material in future periods, it is expected that a relatively modest number of returns will continue. However, there can be no assurance that significant levels of product returns will not occur in the future, which may have a material adverse effect on our operations. IF WE ARE UNABLE TO SUCCESSFULLY CONSUMMATE ADDITIONAL ACQUISITIONS, OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER. Our business strategy has included growth through acquisitions. We consider acquisitions that improve our competitive capabilities in our businesses or provide additional market penetration or business opportunities in areas that are consistent with our business plan. Identifying and pursuing strategic acquisition opportunities and integrating acquired products and businesses requires a significant amount of management time and skill. Acquisition transactions are accompanied by a number of risks, including, among other things: - the difficulty of assimilating the operations, technology and personnel of the acquired companies; - the potential disruption of our ongoing business; - expenses associated with the transactions; - additional expenses associated with amortization of acquired intangible assets; - the difficulty of maintaining uniform standards, controls, procedures and policies; - the impairment of relationships with employees and customers as a result of any integration of new management personnel; and - the potential unknown liabilities associated with acquired businesses. If we proceed with future acquisitions, our failure to adequately address these issues could have a material adverse effect on our business, results of operations and financial condition. 10 WE RELY HEAVILY ON OUR KEY EMPLOYEES, AND THE LOSS OF THEIR SERVICES COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS. Our success is highly dependent upon the continued services of key members of our management, including our Chairman of the Board, President and Chief Executive Officer, Carmine T. Oliva, and our Executive Vice President, Graham Jefferies. The loss of Mr. Oliva, Mr. Jefferies or one or more other key members of management could have a material adverse effect on us. Although we have entered into employment agreements with several key employees, we have not entered into any employment agreement with any executive officer of our company other than with Mr. Oliva and Mr. Jefferies. We maintain key-man life insurance on Mr. Oliva and Mr. Jefferies. However, we cannot assure you that we will be able to maintain this insurance in effect or that the coverage will be sufficient to compensate us for the loss of the services of Mr. Oliva or Mr. Jefferies. THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO FLUCTUATE. Our quarterly operating results have varied in the past and may continue to fluctuate significantly in the future due to a number of factors, many of which are beyond our control. If our operating results do not meet the expectations of investors, our stock price may decline. Fluctuations in our operating results may result from a number of factors, including the following: - the number of purchasers of our electronics hardware products and the volume of products purchased by those purchasers; - the demand for our electronics hardware products worldwide; - the prices that we are able to charge for our products and services; - costs related to possible acquisitions of new technologies and businesses; - changes affecting the telecommunications industry, including consolidations and restructuring of United States and foreign telephone companies; - changes affecting the electronics industry, including the contraction of military, commercial, governmental and aerospace spending; - the amount and timing of capital expenditures and other costs relating to the expansion of our business; and - general economic conditions. We believe that period-to-period comparisons of our operating results will not necessarily be meaningful in predicting future performance. OUR FAILURE TO MANAGE GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS. Our strategy envisions a period of rapid growth that may put a strain on our administrative and operational resources. While we believe that we have established a significant infrastructure to support growth, our ability to effectively manage growth will require us to continue to expand the capabilities of our operational and management systems and to attract, train, manage and retain qualified engineers, technicians, salespersons and other management personnel. There can be no assurance that we will be able to do so. If we are unable to successfully manage our growth, our business, prospects, financial condition, results of operations and cash flows could be adversely affected. 11 BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS, MISAPPROPRIATION OF THESE RIGHTS OR CLAIMS OF INFRINGEMENT OR LEGAL ACTIONS RELATED TO INTELLECTUAL PROPERTY COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION. Our future success will be highly dependent on proprietary technology, particularly in our telecommunications business. However, we do not hold any patents and we currently rely on a combination of contractual rights, copyrights, trademarks and trade secrets to protect our proprietary rights. Our management believes that because of the rapid pace of technological change in the industries in which we operate, the legal intellectual property protection for our products is a less significant factor in our success than the knowledge, abilities and experience of our employees, the frequency of our product enhancements, the effectiveness of our marketing activities and the timeliness and quality of our support services. Consequently, we rely to a great extent on trade secret protection for much of our technology. However, there can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors or customers will not independently develop comparable or superior technologies or obtain unauthorized access to our proprietary technology. We may receive infringement claims from third parties relating to our products and technologies. In such event, we intend to investigate the validity of any such claims and, if we believe the claims have merit, we intend to respond through licensing or other appropriate actions. Certain of these claims may relate to technology included in components purchased by us from third party vendors for incorporation into our products. In such event, we would forward these claims to the appropriate vendor. If we or our component manufacturers were unable to license or otherwise provide any such necessary technology on a cost-effective basis, we could be prohibited from marketing products containing that technology, incur substantial costs in redesigning products incorporating that technology, or incur substantial costs defending any legal action taken against us, all of which could have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows. IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, WE COULD FACE SIGNIFICANT LIABILITIES. We are subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous chemicals used in our circuit board manufacturing processes. Any failure to comply with present and future regulations could subject us to future liabilities or the suspension of production. These regulations could also restrict our ability to expand our facilities or could require us to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. We may also from time to time be subject to lawsuits with respect to environmental matters. The extent of our liability under any such suit is not determinable and may have a material adverse affect on us. IF OUR PRODUCTS FAIL TO COMPLY WITH EVOLVING GOVERNMENT AND INDUSTRY STANDARDS AND REGULATIONS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS. We design our products to comply with a significant number of industry standards and regulations, some of which are evolving as new technologies are deployed. In the United States, our telecommunications products must comply with various regulations defined by the United States Federal Communications Commission, or FCC, and Underwriters Laboratories as well as industry standards established by Telcordia Technologies, Inc., formerly Bellcore, and the American National Standards Institute. Internationally, our telecommunications products must comply with standards established by the European Committee for Electrotechnical Standardization, the European Committee for Standardization, the European Telecommunications Standards Institute, telecommunications authorities in various countries as well as with recommendations of the International Telecommunications Union. The 12 failure of our products to comply, or delays in compliance, with the various existing and evolving standards could negatively impact our ability to sell our products. THE LIMITATION ON OUR USE OF NET OPERATING LOSS CARRYFORWARDS MAY NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS AND CASH FLOWS. We have substantial net operating loss, or NOL, carryforwards for federal and state tax purposes. Because of our ownership changes resulting from a merger in 1997, the use of these NOL carryforwards to offset future taxable income will be limited. To the extent we are unable to fully use these NOL carryforwards to offset future taxable income, we will be subject to income taxes on such future taxable income, which will negatively impact our results of operations and cash flows. RISKS RELATED TO THIS OFFERING OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OFFERED BY THIS PROSPECTUS. The market prices of securities of technology-based companies, including electronics hardware companies, currently are highly volatile. The market price of our common stock has fluctuated significantly in the past. The market price of our common stock may continue to exhibit significant fluctuations in response to the following factors, many of which are beyond our control: - variations in our quarterly operating results; - changes in market valuations of similar companies and stock market price and volume fluctuations generally; - economic conditions specific to the electronics hardware industry; - announcements by us or our competitors of new or enhanced products, technologies or services or significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments; - regulatory developments; - additions or departures of key personnel; and - future sales of our common stock or other securities. The price at which you purchase shares of common stock offered by this prospectus may not be indicative of the price of our stock that will prevail in the trading market. You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you. Moreover, in the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. BECAUSE WE ARE SUBJECT TO THE "PENNY STOCK" RULES, THE LEVEL OF TRADING ACTIVITY IN OUR STOCK MAY BE REDUCED. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on Nasdaq). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and 13 level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell these securities to persons other than established customers and "accredited investors" must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares. WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADEQUATE FINANCING MAY NOT BE AVAILABLE. Our future capital requirements will depend upon many factors, including the magnitude of our sales and marketing efforts, the development of new products and services, possible future strategic acquisitions, the progress of our research and development efforts and the status of competitive products and services. We believe that current and future available capital resources will be adequate to fund our operations for the foreseeable future. However, to the extent we are in need of any additional financing, there can be no assurance that any such additional financing will be available to us on acceptable terms, or at all. If additional funds are raised by issuing equity securities, further dilution to the existing stockholders may result. If adequate funds are not available, we may be required to delay, scale back or eliminate our marketing efforts or to obtain funds through arrangements with partners or others that may require us to relinquish rights to certain of our technologies or potential products, services or other assets. Accordingly, the inability to obtain such financing could adversely affect our business, financial condition and results of operations. SHARES OF OUR COMMON STOCK ELIGIBLE FOR PUBLIC SALE AFTER THIS OFFERING COULD ADVERSELY AFFECT OUR STOCK PRICE. Sales of a substantial number of shares of our common stock in the public market, or the perception that sales could occur, could adversely affect the market price for our common stock. This offering will result in additional shares of our common stock being available on the public market. In addition, our current stockholders beneficially own a large number of shares of common stock that are outstanding or are issuable upon exercise of options or warrants or upon conversion of preferred stock, which shares of common stock they are able to sell in the public market. These sales also might make it difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. BECAUSE OUR STOCK IS NOT LISTED ON A NATIONAL SECURITIES EXCHANGE, YOU MAY FIND IT DIFFICULT TO DISPOSE OF OR OBTAIN QUOTATIONS FOR OUR COMMON STOCK. Until May 12, 1999, our common stock was quoted on the Nasdaq SmallCap Market. We were unable to maintain the minimum bid price of $1.00 per share and our stock was delisted from that market. Since May 13, 1999, our common stock has been traded under the symbol "MCTL" on the OTC Bulletin Board. Because our stock trades on the OTC Bulletin Board rather than on a national securities exchange, you may find it difficult to either dispose of, or to obtain quotations as to the price of, our common stock. 14 OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF OUR COMPANY POSSIBLY PREVENTING YOU FROM OBTAINING HIGHER STOCK PRICES FOR YOUR SHARES. Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights of those shares, without any further vote or action by our stockholders. Of these shares, 250 have been designated as Series A Preferred, 200 of which were issued and 25 of which are currently outstanding. In addition, 150,000 shares have been designated as Series B Preferred Stock, 150,000 of which have been issued and are currently outstanding. The rights of the holders of our common stock are subject to the rights of the holders of our currently outstanding preferred stock and will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control of our company. Furthermore, such preferred stock may have other rights, including economic rights senior to the common stock, and, as a result, the issuance thereof could adversely affect the market value of our common stock. THE ANTI-TAKEOVER EFFECTS OF DELAWARE LAW COULD ADVERSELY AFFECT THE PERFORMANCE OF OUR STOCK. Section 203 of the General Corporation Law of Delaware prohibits us from engaging in certain business combinations with interested stockholders, as defined by statute. These provisions may have the effect of delaying or preventing a change in control of our company without action by our stockholders, even if a change in control would be beneficial to our stockholders, and therefore could adversely affect the price of our common stock. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains certain forward-looking statements, including among others: - the projected growth in the telecommunications and electronic components; - our business strategy for expanding our presence in these markets; - anticipated trends in our financial condition and results of operations; and - our ability to distinguish ourselves from our current and future competitors. You can identify forward-looking statements generally by the use of forward-looking terminology such as "believes," "expects," "may," "will," "intends," "plans," "should," "could," "seeks," "pro forma," "anticipates," "estimates," "continues," or other variations thereof, including their use in the negative, or by discussions of strategies, opportunities, plans or intentions. You may find these forward-looking statements under the captions "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," as well as captions elsewhere in this prospectus. A number of factors could cause results to differ materially from those anticipated by such forward-looking statements, including those discussed under "Risk Factors" and "Business." These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other 15 factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward-looking statements. USE OF PROCEEDS We will not receive any of the proceeds from the sale of the shares of common stock offered pursuant to this prospectus by the selling security holders. Rather, the selling security holders will receive those proceeds directly. However, we will receive cash infusions of capital if and when the selling security holders exercise warrants with cash in exchange for shares of common stock offered pursuant to this prospectus. On December 19, 2000, the high and low prices for a share of our common stock were $0.32 and $0.23, respectively. The warrants whose underlying 1,758,006 shares of common stock are being offered pursuant to this prospectus have exercise prices ranging from $0.25 to $2.50. We intend to use proceeds, if any, from the exercise of these warrants for working capital, business development and general corporate purposes. DIVIDEND POLICY No dividends on our common stock have been paid by us to date. Our line of credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash dividends on our common stock. The certificates of designation related to our Series A Preferred Stock and our Series B Preferred Stock provide that shares of those series of preferred stock are not entitled to receive cash dividends. We currently intend to retain future earnings to fund the development and growth of our business and, therefore, do not anticipate paying cash dividends on our common stock within the foreseeable future. Any future payment of dividends on our common stock will be determined by our board of directors and will depend on our financial condition, results of operations, contractual obligations and other factors deemed relevant by our board of directors. 16 PRICE RANGE OF COMMON STOCK Until May 12, 1999, our common stock was traded on the Nasdaq SmallCap Market. On May 13, 1999, the listing of our common stock on the Nasdaq SmallCap Market was discontinued, and thereafter our common stock has been traded on the NASD's OTC Bulletin Board under the symbol "MCTL." The table below shows for each fiscal quarter indicated the high and low bid prices per share of our common stock. The prices shown reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
Price Range Low High --- ---- 1998: First Quarter (January 1 - March 31)............................. $ .875 $ 1.625 Second Quarter (April 1 - June 30)............................... .75 1.28125 Third Quarter (July 1 - September 30)............................ .4375 1.00 Fourth Quarter (October 1 - December 31)......................... .375 .84375 1999: First Quarter.................................................... .375 1.125 Second Quarter................................................... .1875 .5625 Third Quarter.................................................... .18 .40 Fourth Quarter................................................... .16 .44 2000: First Quarter.................................................... .42 2.8125 Second Quarter................................................... .4375 1.25 Third Quarter.................................................... .4375 .8438
As of December 19, 2000, we had 20,569,759 shares of common stock outstanding held of record by approximately 3,576 stockholders, and the high and low prices of our common stock on the OTC Bulletin Board on that date were $0.32 and $0.23, respectively. 17 CAPITALIZATION The following table sets forth our capitalization as of September 30, 2000. You should read this information together with our consolidated financial statements and the notes relating to those statements appearing elsewhere in this prospectus.
SEPT. 30, 2000 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) Cash and cash equivalents.......................................... $ 694 ----------- Long-term debt, less current portion............................... 1,186 Convertible redeemable convertible preferred stock, $10,000 unit value. Authorized 250 shares; issued and outstanding 25 shares (aggregate liquidation preference of $250)..................... 276 Stockholders' equity: Preferred Stock, $0.01 par value. Authorized 10,000,000 shares Convertible Series B preferred stock, $0.01 par value, 150,000 shares authorized, 150,000 shares issued and outstanding (aggregate liquidation preference of $960)................................ 938 Common Stock, $0.0033 par value. Authorized 25,000,000 shares; issued and outstanding, 20,569,711...................................... 68 Additional paid-in capital......................................... 24,379 Accumulated deficit................................................ (19,414) Accumulated other comprehensive loss............................... (661) ----------- Total stockholders' equity...................................... 5,310 --------- Total capitalization............................................ $ 6,772 ========
18 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data is qualified in its entirety by and should be read in conjunction with the consolidated financial statements and the notes to those statements and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The consolidated statements of operations and comprehensive income data set forth below with respect to the years ended December 31, 1998 and 1999 and the consolidated balance sheet data at December 31, 1998 and 1999 are derived from, and are qualified by reference to, the consolidated audited financial statements included elsewhere in this prospectus. The consolidated statements of operations and comprehensive income data set forth below with respect to the nine month periods ended September 30, 1999 and 2000 and the consolidated balance sheet data at September 30, 2000 are derived from unaudited financial statements included elsewhere in this prospectus, which, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial data for such periods. The historical results are not necessarily indicative of results to be expected for any future periods.
THREE CONSOLIDATED STATEMENTS OF MONTHS OPERATIONS AND COMPREHENSIVE ENDED NINE MONTHS ENDED INCOME DATA: YEAR ENDED SEPT. 30, DEC. 31, YEAR ENDED DEC. 31, SEPT. 30, ------------------- --------- --------------------------- ----------------------- 1995 1996 1996 1997 1998 1999 1999 2000 ---- ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Net sales........................ $ 13,737 $14,270 $ 3,100 $27,251 $ 30,100 $ 25,913 $ 19,444 $19,559 Cost of sales.................... 10,218 9,442 2,332 18,069 17,353 17,066 12,269 10,645 -------- --------- --------- --------- --------- ---------- ---------- -------- Gross profit..................... 3,519 4,828 768 9,182 12,747 8,847 7,175 8,914 Selling, general and administrative expenses....... 3,585 3,426 1,045 8,608 10,202 10,132 8,494 6,923 Engineering and product development expenses.......... -- -- -- 1,797 2,202 1,841 1,462 772 Write-down of goodwill........... -- -- -- 5,693 -- -- -- -- ----------- --------- ----------- --------- --------- ---------- ---------- --------- Income (loss) from operations.... (66) 1,402 (277) (6,916) 343 (3,126) (2,781) 1,219 Total other income............... 484 304 49 (627) (643) (193) 501 118 -------- --------- ---------- --------- --------- ---------- ---------- --------- Income (loss) from continuing operations before income taxes 418 1,706 (228) (7,543) (300) (3,319) (2,280) 1,337 Income tax expense............... (41) 20 30 97 101 128 25 13 --------- --------- --------- --------- --------- ---------- ---------- -------- Income (loss) from continuing operations.................... 459 1,686 (258) (7,640) (401) (3,447) (2,305) 1,324 Discontinued operations: Loss from operations of discontinued segment....... (122) (603) (647) (2,053) (1,364) (1,146) $ (949) $ (276) Gain (loss) on disposal of discontinued segment including provision for phase out period of $158 in 2000 ........... -- -- -- -- 580 (3) $ 331 $ (634) ---------- -------- ---------- --------- ---------- ------------ -------- --------- Net income (loss)................ $ 337 $ 1,083 $ (905) $(9,693) $ (1,185) $ (4,596) $ (2,923) $ 414 Foreign currency translation adjustment................. 10 $ (89) $ 126 $ (260) $ 206 $ (325) $ (180) $ (435) -------- ---------- ---------- --------- --------- ----------- ----------- --------- Total comprehensive income (loss) $ 347 $ 994 $ (779) $(9,953) $ (979) $ (4,921) $ (3,103) $ (21) ======== ========= ========== ========= ========== =========== =========== ========= Basic earnings (loss) per share from continuing operations.... $ 0.09 $ 0.27 $ (0.05) $ (0.76) $ (0.03) $ (0.21) $ (0.14) $ 0.07 ========= ========== ========== ========== ========== =========== =========== ======== Diluted earnings (loss) per share from continuing operations.... $ 0.09 $ 0.27 $ (0.05) $ (0.76) $ (0.03) $ (0.21) $ (0.14) $ 0.06 ========= ========== ========== ========== ========== =========== =========== ======== Basic earnings (loss) per share from discontinued operations.. $(0.02) $ (0.10) $ (0.10) $ (0.20) $ (0.07) $ (0.07) $ (0.04) $ (0.05) ========= ========== ========== ========== ========== =========== =========== ========= Diluted earnings (loss) per share from discontinued operations.. $(0.02) $ (0.10) $ (0.10) $ (0.20) $ (0.07) $ (0.07) $ (0.04) $ (0.04) ========= ========== ========== ========== ========== =========== =========== ========= Basic earnings (loss) per share.. $ 0.07 $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ (0.18) $ 0.02 ========= ========== ========== ========== ========== =========== =========== ========
19
Diluted earnings (loss) per share $ 0.07 $ 0.17 $ (0.15) $ (0.96) $ (0.10) $ (0.28) $ (0.18) $ 0.02 ========= ========== ========== ========== ========== =========== =========== ======== Weighted average shares outstanding, basic............ 4,995 5,841 6,064 10,137 11,952 16,638 16,192 19,141 ========= ========== ========== ========== ========== =========== =========== ======== Weighted average shares outstanding, diluted.......... 4,995 5,841 6,064 10,137 11,952 16,638 16,192 21,347 ========= ========== ========== ========== ========== =========== =========== ========
AS OF SEPTEMBER 30, AS OF DECEMBER 31, ------------------- ------------------------------------------ AS OF SEPT. 30, 1995 1996 1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- ---- ---- CONSOLIDATED BALANCE SHEET DATA: (in thousands) Working capital..................... $ 1,809 $ 3,911 $ 3,554 $ 4,095 $ 4,107 $ 1,080 $ 2,717 Total assets........................ 11,006 12,870 12,316 18,224 18,633 15,468 18,490 Total liabilities................... 5,569 7,384 7,563 12,213 11,635 11,079 12,904 Total stockholders' equity.......... 5,437 5,486 4,753 6,011 5,482 3,801 5,310 Redeemable preferred stock.......... -- -- -- 714 1,516 588 276
No cash dividends on our common stock were declared during any of the periods presented above. Shares outstanding and earnings (loss) per share have been restated to give effect to the recapitalization of XIT Corporation (the accounting acquirer) in the reverse acquisition of MicroTel International, Inc. by XIT Corporation on March 26, 1997. The historical financial data above for periods prior to the merger is that of XIT Corporation. In conjunction with the reverse acquisition accounting treatment, XIT Corporation 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 Corporation's fiscal year ended September 30, 1996 and the beginning of its new fiscal year on January 1, 1997. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND NOTES AND THE INFORMATION INCLUDED UNDER THE CAPTION "RISK FACTORS" INCLUDED ELSEWHERE IN THIS PROSPECTUS. OVERVIEW We are a Delaware corporation that was formed July 14, 1989 under the name CXR Corp. to hold the shares of two of our three present direct wholly-owned operating subsidiaries, CXR Telcom Corporation, a Delaware corporation and CXR, S.A., a company organized under the laws of France. These two subsidiaries manufacture, assemble and distribute transmission and network access products and telecommunications test instruments. We amended our certificate of incorporation to change our name to CXR Corporation in October 1989 and then to MicroTel International, Inc. in March 1995. On March 26, 1997 we acquired our third present direct wholly-owned operating subsidiary, XIT Corporation. XIT Corporation was a private, closely-held New Jersey corporation that was formed in 1983 and had been operating in the United States, England and Japan as a designer, manufacturer and marketer of information display and input products and printed circuit boards for the international telecommunications, medical, industrial, military and aerospace markets. Our acquisition of XIT Corporation occurred in the form of a merger of a newly formed and wholly-owned subsidiary of our company with and into XIT Corporation. The merger involved an exchange by the former shareholders of XIT Corporation of all of the outstanding shares of XIT Corporation for newly issued shares of MicroTel International, Inc. representing a majority ownership interest in MicroTel International, Inc. Because the merger resulted in a change in control of MicroTel International, Inc., the merger was accounted for as a reverse acquisition, and historical financial information of XIT Corporation is used as the historical financial information of MicroTel International, Inc. We previously organized our operations in three business segments: -- Instrumentation and Test Equipment; -- Components and Subsystem Assemblies; and -- Circuits. In an effort to focus our attention and working capital on our telecommunications test instruments and our transmission and network access products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc. in April 1998 and sold substantially all of the assets of HyComp, Inc., a manufacturer of hybrid circuits, in April 1999. In October 2000, we decided to discontinue our circuits segment. On November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material circuit board business and was a division of XIT Corporation. We intend to retain our Monrovia, California circuit board manufacturing facility as a captive supplier of circuit boards to XIT Corporation's Digitran Division. Consequently, through our three direct wholly-owned operating subsidiaries, XIT Corporation, CXR Telcom Corporation and CXR, S.A., and through the divisions and subsidiaries of our subsidiaries, 21 we presently design, manufacture, assemble, and market products and services in the following two material business segments: Telecommunications -- Telecommunications Test Instruments (analog and digital test instruments used in the installation, maintenance, management and optimization of public and private communication networks) -- Transmission and Network Access Products (range of products for accessing public and private networks for the transmission of data, voice and video) Electronic Components (digital switches and electronic power supplies) Our sales are primarily in North America, Europe and Asia. Although a majority of our sales in 1999 were to customers in the telecommunications industry, we also have significant sales to industrial, medical, aerospace and military customers. Revenues are recorded when products are shipped if shipped FOB shipping point or when received by the customer if shipped FOB destination. 22 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total net sales.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ------------------------ ------------- 1997 1998 1999 1999 2000 ---- ---- ---- ---- ---- Net sales........................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales....................... 66.3 57.7 65.9 63.1 54.4 --------------------------------------------------------------------------- Gross profit........................ 33.7 42.3 34.1 36.9 45.6 Selling, general and admini- strative expenses................ 31.6 33.9 39.1 43.7 35.4 Engineering and product development expenses............. 6.6 7.3 7.1 7.5 3.9 Writedown of goodwill 20.9 -- -- -- -- --------------------------------------------------------------------------- Operating income (loss)............. (25.4) 1.1 (12.1) (14.3) 6.2 Interest expense.................... (2.0) (1.7) (1.1) (1.1) (1.3) Other income (expense).............. (0.2) (0.4) 0.4 3.7 1.9 --------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes............................ (27.6) (1.0) (12.8) (11.7) 6.7 Income taxes........................ 0.4 0.3 (0.5) (0.2) -- --------------------------------------------------------------------------- Income (loss) from continuing operations....................... (28.0) (1.3) (13.3) (11.9) 6.7 Loss from discontinued operations....................... (7.5) (4.5) (4.4) (4.9) (1.4) Gain (loss) on disposal of discontinued segment............. -- 1.9 -- 1.7 (3.2) --------------------------------------------------------------------------- Net income (loss)................... (35.5)% (3.9)% (17.7)% (15.0)% 2.1% ---------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 CONTINUING OPERATIONS NET SALES. Net sales for the nine months ended September 30, 2000 increased by $115,000 (0.6%) to $19,559,000 as compared to $19,444,000 for the nine months ended September 30, 1999. Net sales of our telecommunications products and services for the nine months ended September 30, 2000 decreased by $599,000 (5.3%) to $10,680,000, as compared to $11,279,000 for the comparable period in 1999 primarily due to a $1,765,000 decrease in sales of our CXR, S.A. subsidiary from $7,651,000 during the nine months ended September 30, 1999 to $5,886,000 during the comparable period in 2000. This decrease in CXR, S.A. sales was primarily due to the late release of budgets of some of CXR, S.A.'s customers. This overall decline in net sales was partially offset by an increase of $485,000 in net sales for CXR Telcom Corporation, or CXR Telcom, our subsidiary located in Fremont, California, and the addition of $681,000 in sales for T-Com, LLC, or T-Com, a company located in Sunnyvale, California whose assets we acquired as of August 2000 in order to expand our 23 telecommunications test equipment products to include central office equipment. The increase in sales for CXR Telcom primarily resulted from the new CXR HALCYON 700 series test equipment that replaced the older CXR 5200 model that was being phased out in the prior year. The sales of test equipment increased by $1,030,000 in the first nine months of 2000 as compared to the comparable period in 1999. Net sales of electronic components for the nine months ended September 30, 2000 increased by $714,000 (8.7%) to $8,879,000 as compared to $8,165,000 for the comparable period in 1999 primarily due to an increase in sales of $619,000 of XIT Corporation's Digitran Division. Contributing to this increase was a large order for switches placed by BAE Systems, Canada, which accounted for $646,000 of this increase. GROSS PROFIT. Gross profit as a percentage of total net sales increased to 45.6% for the nine months ended September 30, 2000 as compared to 36.9% for the comparable period in 1999. In dollar terms, total gross profit increased by $1,739,000 (24.2%) to $8,914,000 for the nine months ended September 30, 2000 as compared to $7,175,000 for the comparable period in 1999. Gross profit for our telecommunications segment increased in dollar terms by $464,000 (10.8%) to $4,766,000 for the nine months ended September 30, 2000 as compared to $4,302,000 for the comparable period in 1999 and increased as a percentage of related net sales from 38.1% in 1999 to 44.6% in 2000 due largely to a more favorable gross profit on sales of products by newly acquired T-Com, and higher gross profit on new CXR Telcom products. Gross profit for our electronic components segment increased in total dollar terms by $1,275,000 (44.4%) to $4,148,000 for the nine months ended September 30, 2000 as compared to $2,873,000 for the comparable period in 1999 and increased as a percentage of related net sales from 35.2% in 1999 to 46.7% in 2000 primarily due to improved profit margins in connection with sales made by XIT Corporation which resulted from manufacturing efficiencies, reduced overhead in connection with the move from the Ontario facility to our Rancho Cucamonga facility, higher production volumes and a larger percentage of higher margin night vision switches. These increases were slightly offset by a decline in profit margin of sales of our U.K. subsidiary due to lower sales volume. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $1,571,000 (18.5%) to $6,923,000 for the nine months ended September 30, 2000 as compared to $8,494,000 for the comparable period in 1999. This decrease is attributable to a reduction in selling expenses of $414,000 and a reduction in our general and administrative expenses of $1,157,000 (21.6%) to $4,208,000 for the nine months ended September 30, 2000 as compared to $5,365,000 for the comparable period in 1999. The decrease in general and administrative expense was primarily due to the fact that certain expenses incurred in the comparable period of 1999 were not incurred in 2000. These expenses include a $466,000 expense related to the establishment of a reserve for a note receivable, a $522,000 charge related to our investor relations efforts and a $193,000 charge related to a contingent stock agreement. In addition, during the first nine months of 2000 we continued in our overall cost cutting efforts. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our telecommunications segment and decreased by $690,000 (47.2%) to $772,000 for the nine months ended September 30, 2000 as compared to $1,462,000 for the comparable period in 1999. The majority of this reduction is due to eliminating the CXR engineering function in Fremont, California for test instruments and concentrating our engineering efforts in our St. Charles, Illinois facility and the transfer of transmission and network access product engineering to CRS S.A. in France with no additional staffing. 24 OTHER INCOME AND EXPENSE. Interest expense was $263,000 for the nine months ended September 30, 2000 as compared to $209,000 for the comparable period in 1999. This increase in interest expense was primarily a result of higher interest rates and fees associated with our new credit facility with Wells Fargo Business Credit, Inc. Other income, net of $381,000 in the 2000 period included a $197,000 gain on the sale of stock of Wi-Lan, Inc., and $727,000 of recorded earnings based on the equity method as a result of earnings related to our former investment in Digital Transmission Systems, Inc., which investment we made in January 1999 in connection with our entry into the wireless telecommunications business and a $83,000 loss on the sale of a partnership interest. This expense was offset with the net effect of the equity in earnings of the unconsolidated subsidiary and the write-down of our investment in this subsidiary. INCOME TAXES. Income taxes, while nominal in both respective periods, consist primarily of foreign taxes as we are in a loss carryforward position for federal income tax purposes. DISCONTINUED OPERATIONS As a result of our decision in October 2000 to discontinue our last remaining material circuits business, which operated within the XCEL Etch Tek Division of our XIT Corporation subsidiary, our circuits segment has been accounted for as discontinued operations. We reported a net loss from discontinued operations of $910,000 for the nine months ended September 30, 2000 as compared to a net loss of $618,000 for the nine months ended September 30, 1999. The nine months ended September 30, 2000 included a loss of $634,000 from the disposal of our discontinued operations as compared to a gain of $331,000 for the comparable period in 1999 for the sale of HyComp, Inc., a subsidiary in our circuits segment. Net sales for our circuits business for the nine months ended September 30, 2000 increased by $122,000 (6.2%) to $2,088,000 as compared to $1,966,000 for the comparable period in 1999 primarily due to our efforts to increase sales in this area to unrelated third parties in connection with a reduction in intercompany sales. Selling, general and administrative expenses related to our discontinued operations declined by $298,000 (39.6%) to $454,000 for the nine months ended September 30, 2000 as compared to $752,000 for the comparable period in 1999 primarily due to the sale of HyComp, Inc. in 1999. YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 CONTINUING OPERATIONS NET SALES. Net sales for the year ended December 31, 1999 decreased by $4,187,000 (13.9%) to $25,913,000 as compared to $30,100,000 for the year ended December 31, 1998. Net sales of our telecommunications products and services decreased by $1,866,000 (10.6%) to $15,666,000 for 1999, as compared to $17,532,000 for 1998. This decrease was primarily due to reduced sales of our older CXR 5200 series of telecommunications test sets which we were in the process of replacing with our new CXR HALCYON 700 series of equipment because the older models were not computer compatible and were larger and heavier than the newer models. Sales of our older models, which totaled $15,000 during 1999, declined at a faster rate than the increase in sales of our new models, which sales totaled $1,940,000 during 1999. The decrease in net sales attributable to the decline in sales of our older model test equipment was partially offset by a $937,000 increase in U.S. sales of our transmission products. An increase in sales by CXR, S.A. was not fully recognized by us as a result of a 25 13.9% decline in the value of the French Franc in relation to the U.S. dollar. The net sales of CXR, S.A. in its functional currency of French Francs were 16.9% greater in 1999 than in 1998. However, because of the decline in the value of the French Franc in relation to the U.S. dollar, CXR, S.A. net sales in U.S. dollars were 1.5% less in 1999 than in 1998. Net sales of electronic components decreased by $2,321,000 (18.5%) to $10,247,000 for 1999 as compared to $12,568,000 for 1998 primarily due to the discontinuance of our XCEL-Lite products, which represented no sales in 1999 as compared to sales of $576,000 in 1998, and discontinuance of low margin subsystem assembly business, which represented sales of $404,000 in 1999 as compared to $696,000 in 1998. GROSS PROFIT. Gross profit as a percentage of total net sales decreased to 34.1% for 1999 as compared to 42.4% for 1998. In dollar terms, total gross profit decreased by $3,900,000 (30.6%) to $8,847,000 for 1999 as compared to $12,747,000 for 1998. Gross profit for our telecommunications segment decreased in dollar terms by $2,836,000 (35.2%) to $5,216,000 for 1999 as compared to $8,052,000 for 1998 and decreased as a percentage of related net sales from 45.9% in 1998 to 33.3% in 1999 due largely to a 48% reduction in sales of our older test equipment that had a higher margin than early initial production runs of our newer products and due to a 77% increase in sales of our lower margin transmission products. Our gross profit in this segment was also negatively affected by the total reduction in sales that caused a lower absorption of fixed costs. In addition, because of our cash flow constraints, we were unable to pay many of our suppliers in a timely fashion. As a result, we were forced to use higher cost suppliers for some of our parts. However, margins on the new test instruments are expected to meet or exceed the margins of older products as production lot sizes increase and other efficiencies are achieved as the products mature. As of April 2000, all lower margin transmission products had been transferred from California to France, where those products are more efficiently produced, thus achieving a higher margin on the same products now being exported from France for resale in the U.S. Gross profit for our electronic components segment decreased in total dollar terms by $1,064,000 (22.7%) to $3,631,000 for 1999 as compared to $4,695,000 for 1998 and decreased as a percentage of related net sales from 37.3% in 1998 to 34.1% in 1999 primarily due to additional costs incurred in connection with the move from the Ontario facility to our Rancho Cucamonga facility. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $70,000 (0.7%) to $10,132,000 for 1999 as compared to $10,202,000 for 1998. Our general and administrative expenses increased by $400,000 (7.0%) to $6,094,000 for 1999 as compared to $5,694,000 for 1998 primarily due to the non-cash expense of $522,000 in shares of our common stock and warrants to purchase our common stock to our investor relations firms in connection with our plan to increase our company's visibility within the investment community. Offsetting such increases in general and administrative expenses were reductions in expenses due to the transfer of the administrative functions of CXR Telcom to our corporate office. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses, which consist primarily of research and product development activities of our telecommunications segment, decreased by $361,000 (16.4%) to $1,841,000 in 1999 as compared to $2,202,000 for 1998. This reduction was primarily due to elimination of the CXR engineering function in Fremont, California in May 1999, which reduced engineering expenses by $294,000. The engineering staff for our United States-based test equipment products is primarily housed in our St. Charles, Illinois facility. We believe that engineering and product development are important to our future profitability. 26 All engineering for our instrumentation products has been consolidated in France at our CXR, S.A. facility. OTHER INCOME AND EXPENSE. Interest expense was $297,000 in 1999 as compared to interest expenses of $507,000 in 1998. This decrease in interest expense was primarily a result in decreased average borrowings during 1999. Other expenses, net of $194,000 in 1999 includes the net effect of the equity in earnings of the unconsolidated subsidiary and the write-down of our investment in this subsidiary. INCOME TAXES. Income taxes, while nominal in both respective periods, consist primarily of foreign taxes as we are in a loss carryforward position for federal income tax purposes. At December 31, 1999, we had total net deferred income tax assets of approximately $18,335,000. Such potential income tax benefits, a significant portion of which relates to net operating loss carryforwards, have been subjected to a 100% valuation allowance since realization of such assets is not more likely than not in light of our recurring losses from operations. DISCONTINUED OPERATIONS As a result of our decision to discontinue our last remaining material circuits subsidiary in October 2000, our circuits segment has been accounted for as discontinued operations. We reported a net loss from discontinued operations of $1,149,000 for 1999 as compared to a net loss of $784,000 for 1998. Net sales for our circuits business for 1999 decreased by $4,774,000 (66.7%) to $2,388,000 as compared to $7,162,000 for 1998 primarily due to the sale of HyComp, Inc. on March 31, 1999 and the sale of XCEL Arnold Circuits, Inc. on March 31, 1998, which accounted for $3,880,000 of the reduction, as well as a lack of working capital to acquire materials necessary to support customer delivery requirements in the remaining XCEL Etch Tek Division because available working capital was dedicated to higher margin components and telecommunications products. Gross profit for our circuits business decreased in total dollar terms by $598,000 (93%) to $45,000 in 1999 as compared to gross profit of $643,000 in 1998 and decreased as a percentage of related net sales from 9.0% in 1998 to 1.9% in 1999 primarily due to the sale of HyComp, Inc. in 1999, which accounted for $1,042,000 of the reduction, and the booking of a reserve in the amount of $250,000 to cover potential warranty claims associated with products sold by HyComp, Inc. prior to its sale. YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 CONTINUING OPERATIONS NET SALES. Net sales for the year ended December 31, 1998 increased by $2,849,000 (10.5%) to $30,100,000 as compared to $27,251,000 for the year ended December 31, 1997. Net sales for our telecommunications segment for 1998 increased by $2,478,000 (16.5%) to $17,532,000 as compared to $15,054,000 for 1997 primarily due to increased sales by our subsidiary CXR, S.A. This increase in CXR, S.A.'s net sales was partially offset by a slight decline in sales of our CXR Telcom business unit as a result of the earliest growth in sales of the new test instruments we acquired through our acquisition of Critical Communications Incorporated in October 1997. Net sales for our electronic components segment for 1998 increased slightly by $371,000 (3.0%) to $12,568,000 as compared to $12,197,000 for 1997 primarily due to an increase in sales of digital 27 switch products of $1,434,000. This increase offset a $756,000 decline in sales of custom engineered subsystem components. GROSS PROFIT. Gross profit as a percentage of total net sales increased to 42.4% for 1998 as compared to 33.7% for 1997. In dollar terms, total gross profit increased by $3,565,000 (38.8%) to $12,747,000 for 1998 as compared to $9,182,000 for 1997. Gross profit for our telecommunications segment increased in dollar terms by $1,733,000 (27.4%) to $8,052,000 for 1998 as compared to $6,319,000 for 1997 and increased as a percentage of related net sales from 42.0% in 1997 to 45.9% in 1998 primarily due to the fact that a larger portion of total sales in this segment came from high margin products, including our new line of test instruments at our CXR Telcom subsidiary. In addition, the sales mix at our CXR, S.A. subsidiary shifted to higher margin, internally manufactured products. Gross profit for our electronic components segment increased in dollar terms by $1,832,000 (64.0%) to $4,695,000 for 1998 as compared to $2,863,000 for 1997 and increased as a percentage of related net sales from 23.4% in 1997 to 37.3% in 1998 primarily due to a favorable shift in product mix to higher margin digital switch products and custom power supply products. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $1,594,000 (18.5%) to $10,202,000 for 1998 as compared to $8,608,000 for 1997. This increase was primarily due to an increase in selling expense, which includes sales and marketing expenses associated with the inclusion of operations of CXR Telcom and CXR, S.A. for the entire twelve months of 1998 as compared to nine months in 1997, which increase was offset by lower commission expenses in 1998 as compared to 1997. In addition, general and administrative expenses increased by $569,000 (12.0%) to $5,581,000 for 1998 as compared to $4,984,000 for 1997 primarily due to the inclusion of operations of CXR Telcom and CXR, S.A. for the entire twelve months of 1998 as compared to only nine months in 1997 and due to increased legal fees. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our telecommunications segment and increased by $405,000 (22.5%) to $2,202,000 in 1998 as compared to $1,797,000 in 1997 primarily due to an increase in our engineering staff associated with the introduction of new test instruments. OTHER INCOME AND EXPENSE. Interest expense decreased $43,000 from $550,000 for 1997 to $507,000 for 1998 primarily due to a decrease in average borrowings during 1998. Fluctuations in other expense (income), net resulted principally from differences in foreign currency exchange gains and losses incurred during the respective periods. INCOME TAXES. Income taxes, while nominal in both respective periods, consists primarily of foreign taxes as we are in a loss carryforward position for federal income tax purposes. At December 31, 1998, we had total net deferred income tax assets of approximately $16,591,000. These potential income tax benefits, a significant portion of which relate to net operating loss carryforwards, have been subjected to a 100% valuation allowance since realization of such assets is not more likely than not in light of our recurring losses from operations. 28 DISCONTINUED OPERATIONS As a result of our decision to discontinue our last remaining material circuits subsidiary in October 2000, our circuits segment has been accounted for as discontinued operations. We reported a net loss from discontinued operations of $784,000 for 1998 as compared to a net loss of $2,053,000 for 1997. Net sales of our circuits business for 1998 decreased by $8,684,000 (54.8%) to $7,162,000 as compared to $15,846,000 for 1997 primarily due to the sale of XCEL Arnold Circuits, Inc. on March 31, 1998 as well as a decrease in sales for XIT Corporation's XCEL Etch Tek Division of approximately $1,033,000. This decrease in sales was due in large part to our inability to obtain sufficient working capital to acquire the necessary raw materials and process supplies to accept higher levels of "quick-turn" order commitments. Gross profit for our circuits business decreased in dollar terms by $600,000 (48.3%) to $643,000 for 1998 as compared to $1,243,000 for 1997 and increased as a percentage of related net sales from 7.8% in 1997 to 9.0% in 1998 primarily due to higher costs of sales for XIT Corporation's XCEL Etch Tek Division in 1998 as compared to 1997 due to the underabsorption of fixed manufacturing costs related to declining sales levels. LIQUIDITY AND CAPITAL RESOURCES During the year ended December 31, 1999, we funded our operations primarily through proceeds from our prior line of credit with Congress Financial Corporation or Congress Financial, and revenue generated from our operations. During the nine months ended September 30, 2000, we continued to fund our operations through revenue generated from our operations and through a new line of credit with Wells Fargo Business Credit, Inc. During the latter part of 1999, we embarked on a cost reduction program in an effort to improve our cash flow position and profitability. This program included a significant reduction in personnel, the downsizing and relocation of our corporate headquarters and the sale of investments we had in other companies. As described below, these cost measures, together with our new line of credit, have had a positive impact on our company. As of December 31, 1999 we had working capital of $1,080,000 and an accumulated deficit of $19,759,000. As of that date, we had $480,000 in cash and cash equivalents and $6,168,000 of accounts receivable. As of September 30, 2000 we had working capital of $2,717,000 and an accumulated deficit of $19,414,000. As of that date, we had $694,000 in cash and cash equivalents and $5,804,000 of accounts receivable. Cash used in our operating activities totaled $619,000 for the nine months ended September 30, 2000 as compared to cash provided by operating activities of $579,000 for the nine months ended September 30, 1999. This decrease in cash provided by operations during the nine months ended September 30, 2000 resulted primarily from payments of $2,668,000 to reduce accounts payable and accrued expenses. This decrease was partially offset by our vigorous accounts receivable collection efforts which provided cash of $1,179,000 during this period. Cash provided by our investing activities totaled $791,000 for the nine months ended September 30, 2000 as compared to cash used in investing activities of $121,000 for the nine months ended September 30, 1999. Included in the current period's results is $520,000 from the sale of shares of common stock we held in Digital Transmission Systems, Inc. and $918,000 from the sale of shares of 29 common stock we held in Wi-Lan, Inc. Partially offsetting this investing cash flow was the acquisition of Belix, Inc. which used net cash of $592,000 and the acquisition of the assets of T-Com which used $83,000 in cash. Cash provided by financing activities totaled $389,000 for the nine months ended September 30, 2000 as compared to cash used of $685,000 for the nine months ended September 30, 1999 primarily due to the reduction in notes payable and long term debt. On June 23, 2000, our credit facility with Congress Financial expired while we were out of compliance with the adjusted net worth covenant of this facility. Congress Financial extended this facility through August 14, 2000. On August 16, 2000, we obtained a credit facility from Wells Fargo Business Credit, Inc. This facility provides for a revolving loan of up to $3,000,000 secured by our inventory and accounts receivable and a term loan in the amount of $687,000 secured by our machinery and equipment. The annual interest rate on both portions of the credit facility is the prime rate plus 2%. The facility contains a performance-based interest reduction feature. Based upon our current and expected financial performance, we anticipate a reduction in the interest rate to the prime rate plus 1% upon completion of the audit of our financial statements for the year ended December 31, 2000. The balance outstanding under this credit facility was $2,144,000 on September 30, 2000. There was $342,000 of additional borrowings available as of September 30, 2000. The credit facility expires on August 23, 2003. Our foreign subsidiaries have obtained credit facilities with Lloyds Bank in England, Banc National du Paris, Societe General and Banque Hervet in France and Johan Tokyo Credit Bank in Japan. We believe that current and future available capital resources, revenues generated from operations, and other existing sources of liquidity, including our credit facility with Wells Fargo Business Credit, Inc., will be adequate to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. If, however, our capital requirements or cash flow vary materially from our current projections or if unforeseen circumstances occur, we may require additional financing sooner than we anticipate. Failure to raise necessary capital could restrict our growth, limit our development of new products or hinder our ability to compete. The consolidated financial statements included in this prospectus have been prepared assuming we will continue as a going concern. During the years ended December 31, 1999, 1998 and 1997, we experienced significant operating losses. Additionally, we were in default of our previously outstanding domestic credit facility agreement because we were not in compliance with an adjusted net worth covenant contained in that agreement. These factors raised substantial doubt about our ability to continue as a going concern and led our independent certified public accountants to modify their unqualified opinion to include an explanatory paragraph related to our ability to continue as a going concern. The consolidated condensed financial statements included in this prospectus do not include any adjustments that might result from the outcome of this uncertainty. Although we have reported income from continuing operations for the nine months ended September 30, 2000 and we have replaced our previous domestic credit facility, there can be no assurance that we will continue to be profitable or that we will be able to generate necessary additional capital in the future. 30 IMPACT OF YEAR 2000 To date, we have not experienced any material effects related to computer operations and the arrival of the year 2000. Management does not expect any disruptions due to the year 2000, because management believes all its current systems are year 2000 compliant. At some of our domestic facilities, we installed accounting and operations management computer applications that are year 2000 compliant and operate on computer operating systems that are also year 2000 compliant. We did not initiate these changes in application and operating software systems in order to accommodate the year 2000 issue but rather to upgrade and enhance its management information systems capability. As a part of our selection criteria, we considered the impact of the year 2000 issue. We have not experienced year 2000 disruptions with our suppliers or customers, and management believes that our suppliers and customers are year 2000 compliant with respect to their systems that could affect us. Although no significant problems have materialized to date, we will continue to monitor our systems throughout the year 2000. EFFECTS OF INFLATION The impact of inflation and changing prices has not been significant on the financial condition or results of operations of either us or our operating subsidiaries. EURO CONVERSION Our operating subsidiaries located in France and the United Kingdom have combined net sales from operations approximating 36% of our total net sales for the nine months ended September 30, 2000. Net sales from the French subsidiary participating in the Euro conversion were 27% of our net sales for the nine months ended September 30, 2000. We continue to review the impact of the Euro conversion on our operations. In 1998, our European operations took steps to ensure their capability of entering into Euro transactions as of January 1, 1999. No material changes to information technology and other systems were necessary to accommodate these transactions because such systems already were capable of using multiple currencies. While it is difficult to assess the competitive impact of the Euro conversion on our European operations, at this time we do not foresee any material impediments to our ability to compete for orders from customers requesting pricing using the new exchange rate. Since we have no significant direct sales between our United States and European operations, we regard exchange rate risk as nominal. 31 SELECTED QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain quarterly financial data for the eleven quarters ended September 30, 2000. This quarterly information is unaudited, has been prepared on the same basis as our annual financial statements, and, in our opinion, reflects all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the information for periods presented. Operating results for any quarter are not necessarily indicative of results for any future period.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE QUARTER ENDED INCOME DATA ------------- MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS) Net sales................ $6,715 $7,524 $7,852 $8,009 $ 6,677 $ 6,319 $6,448 $ 6,469 $5,860 $6,828 $6,871 Cost of sales............ 4,376 4,413 4,477 4,087 4,127 3,938 4,203 4,798 3,534 4,032 3,080 ------ ------ ------ ------ ------- ------- ------ ------- ------ ------ ----- Gross profit............. 2,339 3,111 3,375 3,922 2,550 2,381 2,245 1,671 2,326 2,796 3,791 Selling, general and administrative expenses 2,497 2,461 2,413 2,831 3,408 2,235 2,385 2,104 2,110 2,346 2,467 Engineering and product development expenses... 504 506 573 619 526 477 459 379 243 253 277 ------ ------ ------ ------ ------- ------- ------ ------- ------ ------ ----- Income (loss) from (662) 144 389 472 (1,384) (331) (599) (812) (27) 197 1,047 operations............. Other income (expenses), net.................... (90) (130) (201) (222) 391 218 (131) (671) 20 31 67 ------ ------ ------ ------ ------- ------- ------ ------- ------ ------ ----- Income (loss) from continuing operations (752) 14 188 250 (993) (113) (730) (1,483) (7) 228 1,114 before income taxes.... Income tax expense....... 15 22 5 59 8 5 12 103 7 4 2 ------ ------ ------ ------ ------- ------- ------- ------- ------ ------ ----- Income (loss) from continuing operations.. (767) (8) 183 191 (1,001) (118) (742) (1,586) (14) 224 1,112 Discontinued operations: Loss from operations of discontinued segment (851) (119) (249) (145) (304) (462) (292) (88) (76) (116) (84) Gain (loss) on disposal of discontinued segment 670 (90) -- -- 331 (334) -- - -- -- (634) ------ ------ ------ ------ ------- ------- ------- ------- ------ ------ ----- Net income (loss)........ $ (948) $ (217) $ (66) $ 46 $ (974) $ (914) $(1,034) $(1,674) $ (90) $ 108 $ 394 Other comprehensive gain (loss), net........... 102 (54) (118) 276 (263) (161) 244 (145) 296 (433) (218) ------ ------ ------ ------ ------- ------- ------- ------- ------ ------ ------ Total comprehensive gain (loss)................. $ (846) $(271) $ (184) $ 322 $(1,237) $(1,075) $ (790) $(1,819) $ 206 $(325) $ 176 ======= ====== ====== ====== ======= ======= ======= ======= ====== ===== ======
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE AS A PERCENTAGE OF NET SALES INCOME DATA ---------------------------- MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, 1998 1998 1998 1998 1999 1999 1999 1999 2000 2000 2000 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (IN THOUSANDS) Net sales................ 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Cost of sales............ 65% 59% 57% 51% 62% 62% 65% 74% 60% 59% 45% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Gross profit............. 35% 41% 43% 49% 38% 38% 35% 26% 40% 41% 55% Selling, general and administrative expenses 37% 33% 31% 35% 51% 43% 37% 33% 36% 34% 36% Engineering and product development expenses... 8% 7% 7% 8% 8% 8% 7% 6% 4% 4% 4% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Income (loss) from (10%) 1% 5% 6% (21%) (13%) (9%) (13%) -- 3% 15% operations............. Other income (expenses), net.................... (1%) (2%) (3%) (3%) 6% 3% (2%) (10%) -- -- 1% ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Income (loss) from (11%) (1%) 2% 3% (15%) (10%) (11%) (23%) -- 3% 16% continuing operations before income taxes.... Income tax expense....... -- -- -- 1% -- -- -- 2% -- -- -- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Income (loss) from continuing operations.. (11%) (1%) 2% 2% (15%) (10%) (11%) (25%) -- 3% 16% Discontinued operations: Loss from operations of discontinued segment (13%) (1%) (3%) (2%) (5%) (5%) (5%) (1%) (1%) (2%) (1%) Gain (loss) on disposal of discontinued segment 10% (1%) -- -- 5% -- -- -- -- -- (9%) ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net income (loss)............. (14%) (3%) (1%) --% (15%) (15%) (16%) (26%) (1%) 1% 6% Other comprehensive gain (loss), net........... 1% (1%) (1%) 4% (4%) (2%) 4% (2%) 5% (6%) (3%) ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Total comprehensive gain (loss)................. (13%) (4%) (2%) 4% (19%) (17%) (12%) (28%) 4% (5%) 3% ===== ==== ==== ==== ===== ===== ===== ===== ==== ==== ====
Our operating results have fluctuated from quarter to quarter due to a variety of reasons. We note below some of the larger changes in various line items in the table above. 32 For the quarter ended March 31, 1998, our discontinued operations included a gain of $670,000 on the sale of XCEL Arnold Circuits, Inc. In the quarter ended June 30, 1998, we had an improvement in net sales of $809,000 (12.1%) to $7,524,000 from $6,715,000 for the quarter ended March 31, 1998. This improvement in net sales was primarily due to a $604,000 increase in net sales of our electronic components segment. This improvement in sales assisted us in reducing our loss from continuing operations to a loss of $8,000 for the quarter ended June 30, 1998 from a loss of $767,000 in the prior quarter. For the three months ended September 30, 1998, our net sales from continuing operations increased by $328,000 (4.4%) to $7,852,000 from $7,524,000 in the quarter ended June 30, 1998. The improvement was due to an increase in net sales of our electronic components segment, which more than offset a slight decrease in net sales of our telecommunications segment. The improvement in net sales was a primary factor in our generating income of $183,000 from continuing operations in the third quarter of 1998. Net sales from continuing operations climbed in the quarter ended December 31, 1998 by $157,000 (2.0%) to $8,009,000 as compared to sales of $7,852,000 in the quarter ended September 30, 1998. Income from continuing operations rose slightly to $192,000 in the three months ended December 31, 1998 from $183,000 in the three months ended September 30, 1998. Net sales from continuing operations for the quarter ended March 31, 1999 were slightly below net sales from continuing operations for the quarter ended March 31, 1998. However the loss from continuing operations for the quarter ended March 31, 1999 increased by $234,000 (30.5%) to $1,001,000 from $767,000 in the quarter ended March 31, 1998. The primary reason for the increase in the loss from continuing operations was $522,000 of expense related to our investor relations efforts. A gain of $331,000 was recorded for the gain on the sale of HyComp, Inc. in the first quarter of 1999 and included in discontinued operations. Net sales from continuing operations for the quarter ended June 30, 1999 declined by $1,205,000 (16.0%) to $6,319,000 from $7,524,000 for the quarter ended June 30, 1998. Gross margins declined slightly to 37.7% for the quarter ended June 30, 1999 from 41.3% for the quarter ended June 30, 1998. The decrease in net sales was due to declines in sales in both the telecommunications segment and the electronic components segment. The loss from discontinued operations for the quarter ended June 30, 1999 includes $440,000 of a net write-off, included in other income and expenses, for a note receivable received as part of the proceeds from the sale of XCEL Arnold Circuits, Inc. Net sales from continuing operations for the quarter ended September 30, 1999 declined $1,404,000 (17.9%) to $6,448,000 from $7,852,000 for the quarter ended September 30, 1998. The primary reason for the reduction in net sales was the reduced sales of our older CXR 5200 series telecommunications test sets that we were in the process of replacing with our new CXR HALCYON 700 series of equipment because the older models were not computer compatible and were larger and heavier than the new models. Sales of our older models, which totaled $12,658 during the quarter ended September 30, 1999, declined at a faster rate than the increase in sales of our new models, which sales totaled $ 757,746 during the quarter ended September 30, 1999. A loss of $742,000 from continuing operations was incurred in the third quarter of 1999. Net sales of continuing operations for the quarter ended December 31, 1999 declined by $1,540,000 (19.2%) to $6,469,000 from $8,009,000 in the fourth quarter of 1998. The primary reason for the decline was lower sales for our telecommunications segment, which lower sales mainly resulted from 33 reduced sales of our older CXR 5200 series telecommunications test sets that we were in the process of replacing with our new CXR HALCYON 700 series of equipment. We wrote down the carrying value of our Digital Transmission System, Inc. stock by $419,000 to the value received in consideration for the sale of the stock in January 2000. This amount was included in other expense and contributed to the loss from continuing operations of $1,586,000 for the quarter ended December 31, 1999. Net sales from continuing operations for the quarter ended March 31, 2000 declined by $817,000 (12.2%) to $5,860,000 from $6,677,000 for the quarter ended March 31, 1999. The primary cause of the sales reduction was the decline in sales of our electronic components segment of $654,000 during the quarter ended March 31, 2000. The majority of the decline in the electronic components segment net sales resulted from short-term delays in production releases of certain contracts at our U. K. facility that manufactures power supplies. However, due to a reduction in administrative expenses, we were able to limit our loss from continuing operations to only $14,000 despite a considerable reduction in sales in the first quarter of 2000 as compared to the first quarter of 1999. Administrative expense in the quarter ended March 31, 1999 included $522,000 of expenses related to our investor relations efforts. Net sales from continuing operations for the quarter ended June 30, 2000 increased by $509,000 (8.1%) to $6,828,000 from $6,319,000 for the quarter ended June 30, 1999. This increase was primarily the result of the acquisition of Belix Ltd., or Belix, a power supply manufacturer based in the U. K. The Belix acquisition was effective March 31, 2000 and contributed $658,000 of revenue in the second quarter of 2000. Income from continuing operations in the quarter ended June 30, 2000 was $224,000 as compared to a loss from continuing operations of $118,000 in the quarter ended June 30, 1999. The primary contributor to the improved profit was an overall increase in gross margins in both our telecommunications and electronic components segments resulting in a gross margin of 41.0% for the quarter ended June 30, 2000 as compared to a gross margin of 37.7% for the quarter ended June 30, 1999. Gross margins were improved by moving our U. S. electronic components segment manufacturing operation to a smaller facility and improving the efficiency of manufacturing the new CXR HALCYON test sets in our telecommunications segment. Net sales from continuing operations for the quarter ended September 30, 2000 increased by $422,000 (6.6%) to $6,871,000 from $6,448,000 for the quarter ended September 30, 1999. Our electronic components segment provided an increase of $858,000 primarily due to a larger order for digital switches from BAE Systems, Canada which accounted for $504,000 of this increase. The increase in sales of our electronic component segment was offset by a $435,000 decrease in sales of our telecommunications segment mainly due to lower sales reported by our facility in France which resulted from late approvals of the capital budgets of some of its customers. Gross margins improved to 55% in the third quarter of 2000 from 34.8% in the third quarter of 1999. Contributing to the gross profit increase was the high gross profit generated by the assets of T-Com that were newly acquired for our telecommunications segment. In addition, efficiencies due to the relocation of our Digitran Division of XIT Corporation improved overall margins in our electronic components segment. These improvements in operating performance resulted in income from continuing operations of $1,112,000 for the quarter ended September 30, 2000 as compared to a loss from continuing operations of $742,000 for the quarter ended September 30, 1999. During the quarter ended September 30, 2000 we sold XCEL Etch Tek, the last of our former circuits segment operations, and we reported the $634,000 loss on the sale of XCEL Etch Tek and the $84,000 operating losses of XCEL Etch Tek as losses from discontinued operations. 34 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We have established and acquired international subsidiaries that prepare their balance sheets in the relevant foreign currency. In order to be included in our consolidated financial statements, these balance sheets are converted, at the then current exchange rate, into United States dollars, and the statements of operations are converted using weighted average exchange rates for the applicable period. Accordingly, fluctuations of the foreign currencies relative to the United States dollar could have an effect on our consolidated financial statements. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. However, because historically the majority of our currency exposure has related to financial statement translation rather than to particular transactions, we do not intend to enter into, nor have we historically entered into, forward currency contracts or hedging arrangements in an effort to mitigate our currency exposure. 35 BUSINESS CORPORATE OVERVIEW We are a Delaware corporation that was formed July 14, 1989 under the name CXR Corp. to hold the shares of two of our three present direct wholly-owned operating subsidiaries, CXR Telcom Corporation, a Delaware corporation formed in 1984 and based in the United States, and CXR, S.A., a company organized under the laws of France in 1973 and based in France. These two subsidiaries manufacture, assemble and distribute transmission and network access products and telecommunications test instruments. We amended our certificate of incorporation to change our name to CXR Corporation in October 1989 and then to MicroTel International, Inc. in March 1995. On March 26, 1997 we acquired our third present direct wholly-owned operating subsidiary, XIT Corporation. XIT Corporation was a private, closely-held New Jersey corporation that was formed in 1983 and had been operating in the United States, England and Japan as a designer, manufacturer and marketer of information display and input products and printed circuit boards for the international telecommunications, medical, industrial, military and aerospace markets. Our acquisition of XIT Corporation occurred in the form of a merger of a newly formed and wholly-owned subsidiary of our company with and into XIT Corporation. The merger involved an exchange by the former shareholders of XIT Corporation of all of the outstanding shares of XIT Corporation for newly issued shares of MicroTel International, Inc. representing a majority ownership interest in MicroTel International, Inc. Because the merger resulted in a change in control of MicroTel International, Inc., the merger was accounted for as a reverse acquisition, and historical financial information of XIT Corporation is used as the historical financial information of MicroTel International, Inc. We previously organized our operations in three business segments: -- Instrumentation and Test Equipment; -- Components and Subsystem Assemblies; and -- Circuits. In an effort to focus our attention and working capital on our telecommunications test instruments and our transmission and network access products, we sold substantially all of the assets of XCEL Arnold Circuits, Inc. in April 1998 and sold substantially all of the assets of HyComp, Inc., a manufacturer of hybrid circuits, in April 1999. In October 2000, we decided to discontinue our circuits segment. On November 28, 2000, we sold XCEL Etch Tek, which was our only remaining material circuit board business and was a division of XIT Corporation. We intend to retain our Monrovia, California circuit board manufacturing facility as a captive supplier of circuit boards to XIT Corporation's Digitran Division. Consequently, through our three direct wholly-owned operating subsidiaries, XIT Corporation, CXR Telcom Corporation and CXR, S.A., and through the divisions and subsidiaries of our subsidiaries, we presently design, manufacture, assemble, and market products and services in the following two business segments: 36 Telecommunications -- Telecommunications Test Instruments (analog and digital test instruments used in the installation, maintenance, management and optimization of public and private communication networks) -- Transmission and Network Access Products (range of products for accessing public and private networks for the transmission of data, voice and video) Electronic Components (digital switches and electronic power supplies) Our sales are primarily in North America, Europe and Asia. Although a majority of our sales in 1999 were to customers in the telecommunications industry, we also have significant sales to industrial, medical, aerospace and military customers. Our objective in our telecommunication test instrument and transmission business is to become a leader in quality, cost effective solutions to meet the requirements of telecommunications customers. We believe that we can achieve this objective through customer-oriented product development, superior product solutions, and excellence in local market service and support. Our objective in our electronic components business is to maintain our current market-leading position as the supplier of choice for harsh environment switch and custom power supplies and to use revenues from this segment to fund growth in our test instruments and transmission and network access products segment. INDUSTRY OVERVIEW TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS PRODUCTS Over the past decade, telecommunications and data communications networks have undergone major growth and have become a critical part of the global business and economic infrastructure. Many factors have contributed to this growth, including: -- a surge in demand for both analog and high-speed Internet access and data transmission service; among other uses, high-speed access enables consumers to access bandwidth intensive content and services, such as highly graphical web sites and audio, video and software downloads, and enables businesses to implement e-commerce strategies, to access the Internet for a variety of purposes and to provide employees with telecommuting capabilities; -- the enactment of the Telecommunications Act of 1996, which has allowed competitive local exchange carriers in the United States to compete with incumbent local exchange carriers, including the regional Bell operating companies, or RBOCs, for local carrier services; and -- an apparent worldwide trend toward deregulation of the communications industry, which may enable a large number of new communications service providers to enter the market. Responding to the growing demand for communications services and increased competitive pressures, telecommunications companies and other businesses that rely heavily on information technology are devoting significant resources to the purchase of transmission instruments, such as high-speed modems, through which data and voice information may be transmitted, and test equipment, with which to test, deploy, manage and optimize their communications networks, equipment and services. 37 Communications networks historically were based on a limited number of technologies, many of which were designed by a single vendor. Consequently, service providers did not require a wide array of instruments or systems to test and manage their performance. With the deployment of new types of communications equipment, such as broadband, cable and wireless technologies, and the emergence of multi-vendor environments, the process of deploying, testing and managing communications networks has become increasingly complex. To support the rapidly changing needs of telecommunications companies and information technology dependent businesses, we believe that telecommunications test instruments, transmission and network access products must offer high levels of functional integration, automation and flexibility to operate across a variety of network protocols, technologies and architectures. Because the competition for subscribers for high-speed bandwidth access is intense, the quality and reliability of network service has become critical to telecommunications companies due to the expense, loss of customers and negative publicity resulting from poor service. Quality and reliability of network service are also important to information technology dependent businesses that rely on the Internet or intranets for a variety of purposes. Technicians who use service verification equipment in the field or in central or branch offices allow businesses to verify and repair service problems effectively and, thus, increase the quality and reliability of their networks. We believe that as broadband services are deployed further and as competition for telecommunications subscribers and e-commerce customers proliferates, telecommunications companies and other information technology reliant businesses will increasingly depend on new and improved transmission and integrated access devices and advanced field and central or branch office testing and monitoring solutions. Also, we believe that as multimedia companies and information technology dependent companies emerge and expand, there will be an increased demand for our turnkey solutions that include network design, installation and maintenance. ELECTRONIC COMPONENTS Electronic components are the building blocks for the high technology applications that feed the information hungry society that is driving today's world economy. The electronic components industry comprises three basic segments, which are active components, passive components and electromechanical components. We compete in the active and electromechanical segments of this industry. These segments can be further segmented by industry into telecommunications, medical, aerospace, military, commercial, industrial and other environments, each of which places constraints defining performance and permitted use of differing grades of components. We are active only in the industry segments that are characterized by low volume, high margin and long lead times, namely the aerospace, military, medical and telecommunications segments. To support the myriad industrial, commercial and government entities and agencies that rely on digital switches and electronic power supplies, we believe that our electronic components must offer high levels of reliability and in many cases must be tailored to the size, appearance, functionality and pricing needs of each particular customer. The military market, which is a predominant market for our electronic components, makes use of sophisticated electronic subsystems in diverse applications that involve both original equipment and retrofit of existing equipment. In their 1999 annual forecast of the worldwide defense electronics market, the Electronic Industry Association, or EIA, predicted an increase in military electronics spending over the next ten years, while predicting a decline in total defense spending over the same period. The EIA also predicted in that same forecast that beginning in 1998, annual military spending on electronics and 38 information systems would increase by 13% year on year, over the next ten years. The same report estimated that the United States military market, which is a key market for our electronic components business, represents an annual $51.5 billion of spending on electronics and information systems. The market segments are clearly defined, and all are experiencing high growth which is forecast to continue. This has lead to an ever-increasing demand for our electronic components to be delivered in harsh environments, necessitating custom solutions to meet both mechanical and electrical constraints. The Digitran Division of our subsidiary XIT Corporation, which was acquired by XIT Corporation from Becton Dickinson in 1985, has been manufacturing digital switches since the division was formed in the 1960s. XCEL Power Systems Ltd., a subsidiary of our subsidiary XCEL Corporation Ltd., has been manufacturing electronic power supplies since 1989. OUR SOLUTION We develop, manufacture and market a broad range of test instruments used by the manufacturers of communications equipment and the operators of public and private telecommunications networks for the installation, maintenance and optimization of advanced communications networks. We develop, manufacture and market various transmission and network access devices used by businesses to efficiently transmit data, voice and video information to destinations within and outside of their respective networks. In addition, we provide customers with turnkey solutions that include network design, installation and maintenance and often incorporate our own networking products with products that we purchase from third-party vendors. We also manufacture and sell electronic components such as digital switches for aerospace and military use and custom electronic power supplies used primarily by aerospace, military and telecommunications customers. Our extensive industry knowledge and understanding of our customers' environments, together with our hardware, software and firmware engineering skills and the broad capabilities of our transmission and network access products, test instrumentation products and our sophisticated electronic components, enable us to provide the following features and benefits to our customers: HANDHELD DESIGN OF FIELD TEST EQUIPMENT. We design many of our test equipment products to be used in the field. Most of our digital and analog products weigh less than four pounds and offer handheld convenience. The compact, lightweight design of these products enable field technicians to access problems and verify line operation quickly. RAPID AND EFFICIENT DIGITAL SERVICES DEPLOYMENT. Our test equipment products allow field and office technicians to test lines rapidly and efficiently to ensure that they are properly connected to the central office and that they can support a specific type and speed of service. In a single device, our products can be used to pre-qualify facilities for services, identify the source of problems and verify the proper operation of newly installed service before handing service over to customers. IMPROVED NETWORK QUALITY AND RELIABILITY. Field and office technicians use our test equipment products to diagnose and locate a variety of problems and degradations in telecommunications service. For example, our Sentinel product allows extensive diagnosis and analysis of T-1 lines, which allows service providers to identify and repair problems and to restore service efficiently. As a result, our test equipment products support our customers' need to provide high quality and reliable service. BROAD RANGE OF TRANSMISSION AND NETWORK ACCESS PRODUCTS FOR A WIDE RANGE OF APPLICATIONS. We have developed a broad range of industrial grade transmission products that are capable of connecting to a wide range of remote monitoring devices and equipment. Many of these products are 39 designed to operate in extended temperatures and harsh environments and generally exceed the surge protection standards of the industry and are adaptive to wide ranges of AC or DC power inputs. The design of many of our data transmission products enables them to either interface or complement one another. The versatility of this concept has enabled us to offer numerous different product combinations to our customers. These variations include customized selection of data speeds, data interfaces, power inputs, operating temperatures, data formats and power consumption. In addition, our desktop and rack mount transmission product lines allow us to serve both central site data communications needs and remote access and transmission sites on both the enterprise-wide and single location level. COMPREHENSIVE CONNECTIVITY. Our telecommunications test instruments, transmission and network access products are the result of significant product research and engineering and are designed to connect to a broad range of operation configurations and to connect over a wide range of prevailing transmission conditions. Our products incorporate a wide range of standard international connectivity protocols as well as proprietary protocols. CUSTOMER-DRIVEN FEATURES. Many of our digital switches and each of our power supplies is highly tailored to our customers' needs. We manufacture digital switches for insertion into new equipment as well as for retrofit into existing equipment. Our engineers continually interact with our customers during the design process to ensure that our electronic components are the best available solution for them. For example, based on conversations with our customers, we delivered a compact multiple output power supply to allow BAE Systems to produce a single-heads up display suitable for fitting on a large range of commercial and military aircraft. CUSTOMER RELATIONS. Our electronic components business currently enjoys a preferred supplier status with several key accounts, which means that we work in close association with the customer to develop custom products specifically addressing their needs. Our electronic components also are considered qualified products with several key accounts, which means that our products are designed into equipment specifications of some of our customers for the duration of their production of the equipment. LONG-TERM RELATIONSHIPS. Market procurement methods encourage long-term relationships between electronic components suppliers and customers, with customers committing to a single source of supply, because of the high cost involved in qualifying a product or its alternative for use. A large proportion of XCEL Power Systems Ltd.'s products are qualified products that have been involved in many hours of flight trials. OUR STRATEGY Our objective is to become a leading provider of telecommunications test instruments, transmission and network access products for a broad range of applications within the global telecommunications industry, in addition to maintaining our market-leading position for our electronic switch and power supply products in the aerospace, military and telecommunications markets. The following are the key elements of our strategy to achieve these objectives: CONTINUE TO FOCUS ON TRANSMISSION AND NETWORK ACCESS PRODUCTS AND TEST INSTRUMENT MARKETS. We will continue to focus and expand our efforts in the telecommunications market and develop new products and enhancements to meet or exceed the evolving requirements of both central office and field applications of our technologies. The telecommunications segment constitutes the core of our business and the focus of our growth strategy. 40 CONTINUE TO MARKET ELECTRONIC COMPONENTS. We plan to continue to market our electronic components products to their established market niches while identifying opportunities to broaden our customer base for our power supply products. CONTINUE TO INVEST IN RESEARCH AND DEVELOPMENT TO ADDRESS HIGH GROWTH MARKET OPPORTUNITIES. We plan to continue investing in markets and technologies that we believe offer substantial growth prospects. For example, we intend to expand our line of universal test equipment products that enable customers to perform digital and analog tests with a single piece of equipment. We believe that the expertise we have developed in creating our existing products will permit us to enhance these products, develop new products and respond to emerging technologies in a cost-effective and timely manner. LEVERAGE EXISTING CUSTOMER BASE. We believe that many of our existing customers will continue to purchase transmission and network access products and test instrument products and services. We intend to aggressively market new and enhanced products and services to our existing customers. We also believe that our existing customer base represents an important source of references and referrals for new customers. PURSUE FOLLOW-ON SALES OPPORTUNITIES. We plan to continue to increase the functionality of our telecommunications products, enabling products to be upgraded by the downloading of software or the addition of hardware to an existing unit, allowing customers to protect their investment in test equipment and generating follow-on sales opportunities as we develop new modules in the future. We plan to continue to approach our existing digital switch customers to determine whether they need additional switches that we do not already manufacture for them. DEVELOP AND EXPAND STRATEGIC RELATIONSHIPS. We plan to continue to develop our strategic relationships with transmission and test instrument vendors in order to enhance our product development activities and leverage shared technologies and marketing efforts to build recognition of our brands. In particular, in Europe, we intend to continue to expand our relationships with offshore vendors as a reseller of their products to enhance our position and reputation as a provider of a comprehensive line of test equipment products. PURSUE STRATEGIC ACQUISITIONS. The telecommunications test instruments, transmission and network access products markets are large and highly fragmented. We plan to extend our market position by acquiring or investing in complementary businesses or technologies on a selected basis. We believe that acquisitions and joint ventures, such as our acquisition of our CXR HALCYON 700 series of telecommunications test sets in 1997 and our acquisition of T-Com central office telecommunications test sets in 2000, provide an efficient way of expanding our business, product offerings and access to different customers and market niches. PURSUE TECHNOLOGY TRANSFER AND LICENSING. We plan to continue our established practice of purchasing or licensing core technologies where this reduces time and cost to market, such as the base platform for our remote access server products purchased from Hayes Corporation. DEVELOP CUSTOMER-FOCUSED SOLUTIONS. We design, develop, and manufacture many products and provide services that are tailored to the specific needs of our customers with an emphasis on ease of use. We intend to continue to adapt our core telecommunications technologies to deliver focused products that improve our customers' ability to test and manage increasingly large and complex networks and that are easily used by field technicians and central office personnel. 41 EXTEND OUR GLOBAL PRESENCE. Our customers' needs evolve through industry expansion and consolidation as well as with the deployment of new technologies and services. To support our customers more effectively, we intend to augment our sales, marketing and customer support organizations. In particular, we plan to extend the capabilities of our professional services and customer support operations to provide higher levels of consultative services, enhanced application engineering services and access to a wider array of instrument, systems, software and services. PRODUCTS AND SERVICES Our products and services are divided into two main business segments: Telecommunications -- Telecommunications Test Instruments (analog and digital test instruments used in the installation, maintenance, management and optimization of public and private communication networks) -- Transmission and Network Access Products (range of products for accessing public and private networks for the transmission of data, voice and video) Electronic Components (digital switches and electronic power supplies) During the years ended December 31, 1999, 1998 and 1997, our total sales were $25,913,000, $30,100,000 and $27,251,000, respectively, and the percentages of total sales contributed by each product group within our two main business segments were as follows:
YEAR ENDED DECEMBER 31, SEGMENT AND PRODUCT TYPE 1999 1998 1997 ------------------------ ---- ---- ---- Telecommunications Test Instruments 27.88% 26.37% 18.55% Transmission and Network Access Products 27.88% 29.79% 37.39% Electronic Components Digital Switches 21.65% 19.31% 13.56% Electronic Power Supplies 18.55% 14.13% 15.59% Other Products and Services 4.04% 10.41% 14.91%
42 OUR TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS PRODUCTS BUSINESS Our telecommunications business comprises telecommunications test equipment and transmission and network access products. During the nine months ended September 30, 2000 and 1999, the sale of telecommunications products, equipment and related services accounted for approximately 55% and 58% of our total revenues, respectively. These equipment and products, many of which are described below, are configured in a variety of models designed to perform analog and digital measurements or to transmit data at speeds varying from low-speed voice grade transmission to high-speed broadband Internet access, including: -- Traditional telephone services, such as modems and plain old telephone service, or POTS -- Competitive local exchange carriers, or CLECs -- Bite error rate test, or BERT -- Dial tone multi-frequency, or DTMF -- Transmission impairment measurement, or TIMS -- Central office and private business exchange, or CO/PBX, services, where the central office houses the local exchange equipment that routes calls to and from customers, and to Internet service providers and long-distance carriers -- Digital data services, or DDS, including the USA and worldwide standards described below: I.USA standards, including: -- ISDN, which is an enhanced digital network that offers more bandwidth and faster speed than the traditional telephone network -- Caller identification or caller-ID services -- Digital subscriber line technology, or DSL, which transmits data up to 50 times faster than a conventional dial-up modem using existing copper telephone wires -- Multi-rate symmetric DSL, or MSDSL, which allows the transmission of data over longer distances than single-rate technologies by adjusting automatically or manually the transmission speed -- T-1, which is a standard for digital transmission in North America used by large businesses for broadband access -- FT-1, or fractional T-1, which uses only a selected number of channels from a T-1 -- T-3, which is the transmission rate of 44 megabytes per second, or 44 Mbps, with 672 channels -- Digital signal level 0, or DS0, which is 64 kilobytes per second, or 64 kbps, with one channel of a T-1, E-1, E-3 or T-3 -- Digital signal level 1, or DS1, which is the T-1 transmission rate of 1.54 Mbps, with 24 channels -- Digital signal level 3, or DS3, which is the T-3 transmission rate of 44 Mbps, with 672 channels -- Router, or an intelligent device used to connect local and remote networks -- Terminal adapter, which is situated between telephones or other devices and an ISDN line and allows multiple voice/data to share an ISDN line -- Transmission control protocol/Internet protocol, or TCP/IP II. Worldwide standards, including: -- E-1, which is the European standard for international digital transmission used by large businesses for broadband access, with 2.108 Mbps, with 30 channels -- FE-1, or fractional E-1, which uses only a selected number of channels from an E-1 -- E-3, which is the European standard for T-3, with 34.368 Mbps and 480 channels 43 TELECOMMUNICATIONS TEST INSTRUMENTS Our primary field test instruments are our CXR HALCYON 700 series of products, which we believe provide performance and value in integrated installation, maintenance and testing of telecommunications services. These test instruments are modular, rugged, lightweight, hand-held products used predominantly by telephone and Internet companies to pre-qualify facilities for services, verify proper operation of newly installed services and diagnose problems. Original equipment manufacturers also use service verification equipment to test simulated networks during equipment development and to verify the successful production of equipment. We acquired our CXR HALCYON 700 series of telecommunications test sets in 1997 with the goal of gradually replacing our CXR 5200 series of telecommunications test sets that are larger, heavier and not computer compatible. The unique modular nature of our CXR HALCYON 700 series test equipment provides an easy configuration and upgrade path for testing of the specific services offered by the various national and international service providers. Recent key performance enhancements to this product family address the trend toward conversion of analog service installations to high-speed digital access lines. Some of these key features include: -- ability to conduct the 23-tone test, which is an automated single key-stroke test that performs the equivalent of over 12 individual test sequences; -- load-coil analysis, which identifies the presence of voice coils that prevent high-speed digital access; -- installation and testing of DS3, which is a very high-speed digital transmission service that is equivalent to 28 T-1 circuits; and -- voice analysis and testing of individual T-1 channels. We believe that these enhancements will allow further penetration of CXR HALCYON 700 series test equipment into the large telecommunications services market. Some of the key test equipment products we offer are described below:
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS HALCYON 704A-400 series -- handheld transmission and signaling wideband test set for ISDN, HDSL, DDS and ADSL facility testing -- optimized for use in installation and maintenance of analog voice and data services -- provides users with single-button test execution, which allows quick circuit diagnosis and repair without extensive training HALCYON 704A-456 -- universal data test set -- handheld wideband test set for installation and maintenance of analog voice and data and digital data circuits including Switched 56K -- expands upon the features of the 704A-400 to add DDS BRI/ISDN and DS1/T-1/FT-1 test functions HALCYON 756A -- handheld integrated test set for installation and maintenance of digital data circuits, including DDS, Switched 56K, 2-wire Datapath, ISDN, T-1 and FT-1 -- provides users with intuitive user interface allowing quick circuit diagnosis and repair without extensive training
44
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS HALCYON 764A -- handheld integrated test set for installation and maintenance of T-1 facilities -- can be used for T-1 and FT-1 access and testing -- T-1 monitor testing occurs automatically upon plugging in the test set and returns information such as framing, line coding, test pattern, customer data detected and errors, if any -- T-1 BERT testing can be accomplished in automatic mode, which automatically frames and detects pattern if present and displays an all clear message or the type and count of errors, or in the manual mode, which allows the technician to do a simple set up where the technician dictates the variety of test patterns and measurements used CXR 110A/111A -- combination test line that provides a remote DTMF controlled transmission impairment tone source that enables rapid data impairment testing of subscriber data loops without technician assistance at the central office -- one-way transmissions tests can be made using any transmission test set with the required functional capability, such as HALCYON 704A CXR 156B -- this far-end responder is a microprocessor-based mini-responder used to terminate test calls for automatic testing of PBX connecting trunks -- designed for desk or bench-top use -- provides automatic, totally unattended two-way transmission testing of voice grade circuits -- includes self-test routines to check calibration of the responder during each test sequence, which avoids the need for frequent maintenance
TRANSMISSION AND NETWORK ACCESS PRODUCTS Our subsidiaries, CXR Telcom Corporation and CXR, S.A., develop, market and sell a broad line of transmission and network access products that are manufactured in France by CXR, S.A. and sold under the name "CXR Anderson Jacobson." These products include high-quality integrated access devices such as modems, ISDN terminal adapters, ISDN concentrators, remote access servers and networking systems. Modems ------ Our customers use our high-quality professional grade modems worldwide for networking and for central office telecommunications applications such as voicemail and billing systems and secure communications. These modems are sold as stand-alone devices for remote sites or as rack-mountable versions for central sites. Our modems are feature rich and generally offer more capabilities and better performance than competing products, especially when operating over poor quality lines. This characteristic alone has made our modems the modems of choice for voicemail applications throughout the United States. Our modems are also available in more rugged versions for industrial applications such as telemetry and remote monitoring in harsh environments. ISDN Terminal Adapters ---------------------- Together with modems, we offer a line of ISDN terminal adapters, which are the digital equivalent of analog modems. These terminal adapters are used in a broad range of applications, including point-of-sale and videoconferencing, and are available in standalone as well as rack-mountable versions. 45 ISDN Concentrators ------------------ We also manufacture and offer a line of ISDN intelligent concentrators called CB2000. These products, which were designed primarily for the European market, allow for better use of ISDN resources. The following are descriptions of a few of our more prominent modems, ISDN terminal adapters and ISDN concentrators:
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS POWER MODEMS A family of products that allow asynchronous and synchronous transmission over dial-up or leased lines; asynchronous transmission is a very high speed transfer mode that allows telephone companies to mix formerly incompatible signals, such as voice, video and data. -- in dial-up applications, a unique line qualification mechanism assesses the quality of the line and automatically redials before entering the transmission mode when a poor line in detected, which avoids having to transmit in a degraded mode and leads to money savings in long transmission sessions -- available in standalone units or as rack mountable cards to be inserted into our Smart Rack -- industrial versions designed for harsh environments are available with features such as extra line protection, metallic enclosures, extended temperature ranges and high humidity protection MD 2000 A multi-rate MSDSL modem that has the ability to manually or automatically adjust line transmission speed to provide the optimum performance for a particular pair of copper wires. -- operates over a single twisted pair of copper wires, which allows telecommunications companies to take advantage of the large installed base of copper twisted pairs that has been deployed around the world over many years and upon private copper wire infrastructures that exist for networking purposes in locations such as universities, hospitals, military bases, power plants and industrial complexes -- allows data transmission over a single copper pair at E-1 speed over a distance of up to 8.0 miles -- available as both a standalone unit and as a rack-mountable card CB2000 The primary function of this unit is to split one or two primary rate interface links, or PRIs, into multiple basic rate interfaces, or BRIs. -- this allows substantial cost savings by allowing more effective use of available ISDN resources without the limitations of conventional voice PBX -- this allows for migration from BRI to PRI when the number of ports needs to be increased while preserving the user's investment in existing BRI-based terminal equipment -- this unit can be used in a wide variety of situations where multiple BRI and PRI access is required, such as: - videoconferencing, where the unit can be used to aggregate bandwidth of multiple BRI lines to provide the necessary bandwidth, and to connect the videoconferencing system to the ISDN network through a PRI access while still providing connectivity to other ISDN devices, or to connect two or more videoconferencing systems together within the same building or campus without going through the ISDN public network - ISDN network simulation, which can be used in places such as
46
PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS showrooms, exhibition and technical training centers to eliminate the need to have access to, and pay for access to, the ISDN public network for telephone or data calls - remote access servers, which usually use multiple BRIs, often need a method for migration from multiple BRIs to a single PRI as traffic and the number of users expands ISDN TERMINAL ADAPTERS These devices are the ISDN equivalent of a modem. -- these devices connect non-ISDN devices to the ISDN via a network termination unit, or NT1, which converts the "U" interface from the telephone company into a 4-wire S/T interface -- allow users to access the data rates of the digital network -- available as both a standalone unit and as a rack-mountable card ROUTERS A router provides connection between the primary rate ISDN and local area networks. -- dynamically route incoming and outgoing data packets to the appropriate destination -- available as both a standalone unit and as a rack-mountable card to supplement the functions of our Smart Rack system
Remote Access Servers --------------------- In addition to the products described above, we market a line of remote access servers targeted toward Internet service providers and corporate users. In a corporate environment, these products are used to connect remote users to the corporate local area network, commonly called the LAN, via the telephone network or via the ISDN network using analog modems or ISDN terminal adapters. Remote access server systems range from 8 to 64 ports, with built-in security and full remote manageability. Networking Systems ------------------ We also provide several lines of products used to build telecommunication networks to provide efficient transmission of data, voice and video for organizations with multiple physical locations. These products are all purchased from third-party vendors under original equipment manufacturer or distributorship agreements. These network products are sold to customers in a turnkey solution that includes network design, installation and maintenance and often incorporates our own products. These product lines are divided into three main categories: -- multiplexers that are used to transport voice, data and video over point-to-point lease lines or frame relay networks; -- ISDN routers, which are used to connect remote offices to central corporate offices; and -- terminal servers and remote access servers, which are used to connect local and remote users to the corporate LAN. Smart Rack ---------- Our modem cards and our ISDN terminal adapter cards generally are available in standalone versions or in versions that can be mounted in our Smart Rack, our universal card cage that provides remote management through a menu-driven user interface. Each part of the framework, or chassis, of the Smart Rack has slots to house up to 16 cards (or up to 4 cards in a smaller installation) plus one optional management card. Each slot can be used to insert any member of our transmission products family, such 47 as analog modems, ISDN terminal adapters, ISDN digital modems and new high-speed MSDSL modems. The optional management card that can be inserted into each chassis can be used to configure any card in the chassis and can provide additional features, including alarm reporting, tracking of configurations, running of diagnostic routines and generation of statistics. Up to eight chassis can be linked together to form a fully-managed node with 128 slots. Our Smart Rack arrangement allows each chassis to be used to its full capacity while reducing floor space needed to house complex systems. OUR ELECTRONIC COMPONENTS BUSINESS Our electronic components segment includes digital switches and electronic power supplies. During the nine month periods ended September 30, 2000 and 1999, this segment accounted for approximately 41% and 38%, respectively, of our net sales. DIGITAL SWITCHES XIT Corporation's Digitran Division manufactures, assembles and sells digital switch products serving aerospace, military, communications, medical, industrial and commercial applications. Thumbwheel, push button and lever actuated modules, together with assemblies comprised of multiple modules, are manufactured in 16 different model families. The Digitran Division also offers a wide variety of custom keypads and digital switches for unique applications. Our digital switches may be ordered with different combinations of a variety of features and options, including: -- 8, 10, 11, 12, 16 or a special number of dial positions; -- special markings and dial characters; -- fully sealed, dust sealed or panel (gasket) sealed switch chambers to increase resistance to the elements in hostile environments, such as dust, sand, oils, salt spray, high humidity and temperature and explosive atmospheres; -- available with radio frequency interference shielding; -- rear mount (flush) or front mount switches that are sold with the needed installation hardware, or snap in mount switches that do not require installation hardware; -- provision for mounting components on output terminals on special personal computer boards; -- wire wrap terminals, pin terminals or special terminations; and -- night vision compatibility. ELECTRONIC POWER SUPPLIES XCEL Power Systems Ltd., based in Ashford, Kent, England, produces a range of high and low voltage, high specification, high reliability custom power conversion products designed for hostile environments and supplied to an international customer base, predominantly in the civil and military aerospace, military vehicle and telecommunications markets. Power conversion units supplied by XCEL Power Systems Ltd. range from 10VA to 1.5 KVA power ratings, low voltage (1V) to high voltage (20KV+), and convert alternating current, or AC, to direct current, or DC, convert DC to AC and convert DC to DC. Units can be manufactured to satisfy input requirements determined by military, civil aerospace, telecommunications or industrial businesses, 48 and sophisticated built-in test equipment, or BITE, and control circuitry often is included. Operating environments for our units are diverse and range from fighter aircraft to roadside cabinets. BACKLOG Our business is not generally seasonal, with the exception that telecommunications test instruments, transmission and network access products purchases by telecommunications customers tend to be lower than average during the first quarter of each year because capital equipment budgets typically are not approved until late in the first quarter. At September 30, 2000 and 1999, our backlog of firm, unshipped orders was approximately $11.1 million and $7.4 million, respectively. Our September 30, 2000 backlog is related approximately 80% to our electronic components business, which tends to provide us with long lead times for our manufacturing processes due to the custom nature of the products, and 20% to our telecommunications business, the majority of which portion relates to our data transmission and network access products. Of these backlog orders, we anticipate fulfilling approximately 21% of our electronic components orders and 60% of our telecommunications orders within the current fiscal year. However, we cannot assure you that we will be successful in fulfilling these orders in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog. WARRANTIES Generally, our electronic components carry a one-year limited parts and labor warranty and our telecommunications products carry a two-year limited parts and labor warranty. Typically our telecommunications products may be returned within 30 days of purchase if a new order is received, and the new order will be credited with 80% of the selling price of the returned item. Products returned under warranty typically are tested and repaired or replaced at our option. Historically, product returns have not had a material impact on our operations or financial condition. However, we cannot assure you that this will continue to be the case or that disputes over components or other materials or workmanship will not arise in the future. CUSTOMERS TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS PRODUCTS We market our telecommunications test instruments and transmission and network access products primarily to telecommunications service providers, communications equipment manufacturers and end users. Telecommunications service providers offer telecommunications, wireless and, increasingly, data communication services to end users, enterprises or other service providers. Typically, communications service providers use a variety of network equipment and software to originate, transport and terminate communications sessions. Communications service providers rely on our products and services to configure, test and manage network elements and the traffic that runs across them. Also, our products help to ensure smooth operation of the network and increase the reliability of services to customers. The major communications service providers to whom we market our telecommunications test instruments and transmission and network access products and services include inter-exchange carriers, incumbent local exchange carriers, competitive local exchange carriers, internet service providers, integrated communications providers, cable service providers, international post, telephone and telegraph companies, banks, brokerage firms, government agencies and other service providers. Some of the more prominent customers, among many others, to whom we market our telecommunications test instruments 49 and transmission and network access products include the Federal Aviation Administration, all RBOCs and some CLECs, domestically, and France Telecom and the French Post Office, in Europe. Communications equipment manufacturers design, develop, install and maintain voice, data and video communications equipment. Network equipment manufacturers such as Carrier Access Corporation rely on our test equipment products to verify the proper functioning of their products during final assembly and testing. Increasingly, because communications service providers are choosing to outsource installation and maintenance functions to the equipment manufacturers themselves, equipment manufacturers are using our instruments, systems and software to assess the performance of their products during installation and maintenance of a customer's network. We also sell our telecommunications test instruments and transmission and network access products and services to industrial and military customers such as the French Army. None of our telecommunications test instruments, transmission or network access products customers represented more than ten percent of our revenues during 1999. ELECTRONIC COMPONENTS We sell our components primarily to original equipment manufacturers in the electronics industry, including manufacturers of aerospace and military systems, communications equipment, medical devices, industrial instruments and test equipment. Purchasers of our digital switches include BAE Systems, Lockheed Martin Corporation, Raytheon Company, The Boeing Company, Litton Industries Inc., Hewlett-Packard Company and Rockwell International Inc. Purchasers of our electronic power supplies include BAE Systems, Sagem, Marconi, Teldix, Alsthom, GEC and Ferranti. None of our electronic components customers represented more than 10 percent of our total revenues during 1999 or the nine months ended September 30, 2000. SALES, MARKETING AND CUSTOMER SUPPORT TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS PRODUCTS Our sales and marketing staff consists primarily of engineers and technical professionals. They undergo extensive training and ongoing professional development and education. We believe that the skill level of our sales and marketing staff has been instrumental in building longstanding customer relationships. In addition, our frequent dialogue with our customers provides us with valuable input on systems and features they desire in future products. We believe that our consultative sales approach and our product and market knowledge differentiate our sales force from those of our competitors. Our local sales forces are highly knowledgeable of their respective markets, customer operations and strategies and regulatory environments. In addition, our representatives' familiarity with local languages and customs enables them to build close relationships with our customers. We provide repair and training services to enable our customers to improve performance of their networks. We also offer on-line support services to supplement our on-site application engineering support. Customers can also access information regarding our products remotely through our domestic, European and Japanese technical assistance center. We sell many of our telecommunications test instruments and transmission and network access products to large telecommunications service providers. These prospective customers generally commit significant resources to an evaluation of our and our competitors' products and require each vendor to 50 expend substantial time, effort and money educating the prospective customer about the value of the vendor's solutions. Consequently, sales to this type of customer generally require an extensive sales effort throughout the prospective customer's organization and final approval by an executive officer or other senior level employee. The result is lengthy sales and approval cycles, which make sales forecasting difficult. In addition, even after a large telecommunications service provider has approved our product for purchase, their future purchases are uncertain because while we do enter into long-term supply agreements with those parties, these agreements do not require specific levels of purchases. Delays associated with potential customers' internal approval and contracting procedures, procurement practices, testing and acceptance processes are common and may cause potential sales to be delayed or foregone. As a result of these and related factors, the sales cycle of new products for large customers typically ranges from six to twelve months. ELECTRONIC COMPONENTS We market and sell our electronic components through XIT Corporation's Digitran Division, based in Rancho Cucamonga, California, XCEL Corporation Ltd., a wholly-owned subsidiary of XIT Corporation based in England, XCEL Power Systems, Ltd., a wholly-owned subsidiary of XCEL Corporation Ltd. based in England, and XCEL Japan, Ltd., a wholly-owned subsidiary of XIT Corporation based in Japan. In some European countries and the Pacific Rim, these products are sold through a combination of direct sales and through third-party distributors. As of September 30, 2000, we employed in our electronic components business approximately eight direct sales personnel. We sell our electronic components primarily to original equipment manufacturers in the electronics industry, including manufacturers of aerospace and military systems, communications equipment, medical devices, industrial instruments and test equipment. Our efforts to market our electronic components generally are limited in scope. XCEL Japan Ltd. resells the switch and keypad products of the Digitran Division and other third-party United States-sourced components primarily into Japan and also into other highly industrialized Asian countries. Other marketing of our electronic components is primarily through referrals from our existing customers, with sales either direct or via a small number of selected representatives. We rely on long-term orders and repeat business from our existing customers. We also approach our existing customers and their competitors to discuss opportunities for us to provide them with additional types of switches they may need. Also, Digitran Division's reputation spanning over 40 years in the electronic components industry and the fact that major original equipment manufacturers have designed many of our switches into their product specifications has frequently resulted in customers seeking us out to manufacture for them unique and standard digital switches. COMPETITION TELECOMMUNICATIONS TEST INSTRUMENTS, TRANSMISSION AND NETWORK ACCESS PRODUCTS The market for our telecommunications test instruments, transmission and network access products and services is fragmented and intensely competitive, both inside and outside the United States, and is subject to rapid technological change, evolving industry standards and regulatory developments. We believe that the principal competitive factors affecting our telecommunications test instruments, transmission and network access products business include: -- quality and breadth of product offerings; 51 -- adaptability to evolving technologies and standards; -- ability to address and adapt to individual customer requirements; -- speed of new product introductions to market; -- depth and breadth of customer relationships; -- price and financing terms; -- research and design capabilities; -- strength of distribution channels; -- ability to attract and retain qualified management and technical personnel; -- ease of installation, integration and use of products; -- system reliability and performance; and -- compliance with government and industry standards. Our principal competitors for our telecommunications test instruments, transmission and network access products include Patton Electronics Corporation, Adtran, Digital Engineering. Ltd. and GDC for transmission and network access products and TTC Corporation (a subsidiary of Dynatech Corporation), Ameritech Corporation, Fluke and Sunrise Telecom, Inc. for test instruments. Many of our competitors have greater sales, marketing, technological, research and financial resources than we do. Although we believe we generally compete favorably with respect to the above factors, existing or new competitors with significant market presence and financial resources may reduce our market share. ELECTRONIC COMPONENTS The market for our components is highly fragmented and composed of a diverse group of original equipment manufacturers, including Celab Ltd. and Interpoint/Grenson for power supplies and EECO Switch Division, Transico Inc., C&K Components, Inc., Greyhill Inc., Omron Electronics and Janco Inc. for digital switches. We believe that the principal competitive factors affecting our components business include: -- capability and quality of product offerings; -- status as qualified products; -- reliable delivery; -- depth and breadth of customer relationships; -- ability to attract and retain qualified management and technical personnel; and -- compliance with government and industry standards. We have developed the necessary expertise and reputation for quality and have made substantial investments in machinery and equipment tooling, and this expertise and these investments act as barriers to entry for other potential competitors, making us a sole source supplier for approximately 30% to 50% of the digital switches that we sell. MANUFACTURING, ASSEMBLY AND QUALITY ASSURANCE Our telecommunications test instruments, transmission and network access products generally are assembled from outsourced components, with final assembly, configuration and quality testing performed in house. Manufacturing of our electronic components, including injection molding, fabrication, machining, printed circuit board manufacturing and assembly, and quality testing is done in house due to the specialized nature and small and varied batch sizes involved. Although many of our electronic components incorporate standard designs and specifications, products are built to customer order. This 52 approach, which avoids the need to maintain a finished goods inventory, is possible because long lead times for delivery are often available. Typically, our electronic components segment produces products in 1 to 300 piece batches, with a ten- to thirty-week lead time. The lead time is predominately to source sub-component piece parts such as electronic components, mechanical components and services. Typical build time is six to eight weeks from receipt of external components. We operate four manufacturing and assembly facilities worldwide. Three of these facilities are certified as ISO 9002-compliant. We have consolidated all of our transmission and modem manufacturing for our North American and European markets at our French manufacturing facility at CXR, S.A. We manufacture all of our test equipment products at the Fremont, California facility of CXR Telcom Corporation. We manufacture all of our digital switches in our Rancho Cucamonga, California facility. We manufacture our electronic power supplies in Ashford, Kent, England. The purchased components we use to build our products are generally available from a number of suppliers. We rely on a number of limited-source suppliers for specific components and parts. We do not have long-term supply agreements with these vendors. In general, we make advance purchases of some components to ensure an adequate supply, particularly for products that require lead times of up to nine months to manufacture. If we were required to locate new suppliers or additional sources of supply, we could experience a disruption in our operations or incur additional costs in procuring required materials. We intend to increase the use of outsource manufacturing for our telecommunications products. We believe that outsourcing will lower our manufacturing costs, in particular our labor costs, provide us with more flexibility to scale our operations to meet changing demand, and allow us to focus our engineering resources on new product development and product enhancements. PRODUCT DEVELOPMENT AND ENGINEERING We believe that our continued success depends on our ability to anticipate and respond to changes in the electronics hardware industry and anticipate and satisfy our customers' preferences and requirements. Accordingly, we continually review and evaluate technological and regulatory changes affecting the electronics hardware industry and seek to offer products and capabilities that solve customers' operational challenges and improve their efficiency. Accordingly, for the years ended December 31, 1999, 1998 and 1997, our engineering and product development costs were approximately $1.84 million, $2.02 million and $1.80 million, respectively. The decline in these expenses in 1999 as compared to 1998 was primarily due to the termination of engineering activities at our Fremont, California facility and the consolidation of engineering activities at our St. Charles, Illinois facility. Our product development costs in 1999, 1998 and 1997 were related primarily to development of new telecommunications test equipment, trunk testing system products and data communications equipment. Current research expenditures are directed principally toward enhancements to the current test instrument product line and development of increased bandwidth, or faster speed, transmission products. These expenditures are intended to improve market share and gross profit margins, although we cannot assure you that we will achieve such improvements. We strive to take advantage of the latest computer aided engineering and engineering design automation workstation tools to design, simulate and test advanced product features or product enhancements. Our use of these tools helps us to speed product development while maintaining high standards of quality and reliability for our products. Our use of these tools also allows us to efficiently 53 offer custom designs for original equipment manufacturer customers whose needs require the integration of our electronic components with their own products. INTELLECTUAL PROPERTY We regard our software, hardware and manufacturing processes as proprietary and rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We seek to protect our 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 our proprietary rights to the same extent as do the laws of the United States. Our research and development and manufacturing process typically involves the use and development of a variety of forms of intellectual property and proprietary technology. In addition, we incorporate technology and software that we license from third party sources into our products. These licenses generally involve a one-time fee and no time limit. We believe that alternative technologies for this licensed technology are available both domestically and internationally. We may receive in the future notices from holders of patents that raise issues as to possible infringement by our products. As the number of test equipment products and transmission instruments increases and the functionality of these products further overlaps, we believe that we may become subject to allegations of infringement given the nature of the telecommunications and information technology industries and the high incidence of these kinds of claims. Questions of infringement and the validity of patents in the fields of telecommunications and information technology involve highly technical and subjective analyses. These kinds of proceedings are time consuming and expensive to defend or resolve, result in substantial diversion of management resources, cause product shipment delays or could force us to enter into royalty or license agreements rather than dispute the merits of the proceeding initiated against us. GOVERNMENT REGULATION AND INDUSTRY STANDARDS AND PROTOCOLS We design our products to comply with a significant number of industry standards and regulations, some of which are evolving as new technologies are deployed. In the United States, our products must comply with various regulations defined by the United States Federal Communications Commission, or FCC, and Underwriters Laboratories as well as industry standards established by Telcordia Technologies, Inc., formerly Bellcore, and the American National Standards Institute. Internationally, our products must comply with standards established by the European Committee for Electrotechnical Standardization, the European Committee for Standardization, the European Telecommunications Standards Institute, telecommunications authorities in various countries as well as with recommendations of the International Telecommunications Union. The failure of our products to comply, or delays in compliance, with the various existing and evolving standards could negatively impact our ability to sell our products. Our product lines are subject to statutes governing safety and environmental protection. We believe that we are in substantial compliance with these statutes and are not aware of any proposed or pending safety or environmental rule or regulation which, if adopted, would have a material impact on our business or financial condition. EMPLOYEES As of September 30, 2000, we employed a total of 251 persons in our various divisions and subsidiaries. Of these persons, approximately 37 were engaged in administration, 36 were engaged in 54 sales and marketing, 27 were engaged in engineering and 151 were engaged in production operations. Of these persons, 126 were employed in the United States, 72 were employed in England, 49 were employed in France and 4 were employed in Japan. None of our employees are represented by labor unions, and there have not been any work stoppages at any of our facilities. We believe that our relationship with our employees is good. FACILITIES As of December 8, 2000, we leased or owned approximately 80,000 square feet of administrative, production, storage and shipping space. All of this space was leased other than the Abondant, France facility.
BUSINESS UNIT LOCATION FUNCTION ------------- -------- -------- MicroTel International, Inc. Rancho Cucamonga, Administrative (corporate headquarters) California XIT Corporation/Digitran Rancho Cucamonga, California Manufacturing (electronic components) Monrovia, California XCEL Power Systems, Ltd. Ashford, United Kingdom Administrative/ and XCEL Corporation Ltd. Wales, United Kingdom Manufacturing (electronic components) XCEL Japan, Ltd. Higashi-Gotanda Tokyo, Japan Sales (electronic components) CXR, S.A Paris, France Administration/Sales (telecommunications test instruments, transmission and network access products) CXR, S.A Abondant, France Manufacturing/Engineering (telecommunications test instruments, transmission and network access products) CXR Telcom Corporation Fremont, California Administrative/ (telecommunications test instruments, Manufacturing transmission and network access products) CXR Telcom Corporation St. Charles, Illinois Research, Development and (test instruments) Engineering/Customer Service
The lease for the Fremont, California facility expires in October 2002, with one five-year renewal option. We have subleased to an unrelated party approximately 12,000 square feet of this facility. The lease for the Paris, France facility expires in April 2007. The lease for the Monrovia, California facility expires in February 2002. The lease for the Concord, California facility expires April 30, 2001, with options to renew until April 2016. The lease for the Ashford, United Kingdom facility is a fifteen-year lease that expires in September 2011, subject to the rights of the landlord or us to terminate the lease after ten years. 55 In December 1996, XIT Corporation acquired a 50% interest in Capital Source Partners, a California general partnership that owned a 63,000 square-foot facility in Ontario, California. Our corporate headquarters and XIT Corporation and its Digitran Division operated from that facility from September 1990 through November 1999. To reduce our utility and monthly rental expenses, we relocated our headquarters to a 5,400 square foot office suite and relocated the Digitran Division's electronic components manufacturing operations to a 15,745 square foot manufacturing facility, which office suite and manufacturing facility are located within approximately one mile of each other in the City of Rancho Cucamonga, California. The lease on the manufacturing facility expires in November 2004, and the lease on the headquarters facility expires in October 2002. Concurrent with the relocation, XIT Corporation sold its interest in Capital Source Partners in exchange for assumption of our rent debt of $152,000, $75,000 in cash and forgiveness of certain other debt of approximately $17,000. The sale also included a provision to release us from our future lease obligations consisting of seven remaining years and approximately $3,000,000 of future lease payments regarding the property. As part of the mutual release, we relinquished our claim on a $51,000 deposit and a $115,000 note receivable from the lessor. We believe the listed facilities are adequate for our current business operations. LEGAL MATTERS We are not a party to any material pending legal proceedings. 56 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The names, ages and positions held by our directors and executive officers as of November 14, 2000 are as follows:
NAME AGE TITLES ---- --- ------ Carmine T. Oliva 58 Chairman of the Board, President, Chief Executive Officer and Director Graham Jefferies 43 Executive Vice President and Chief Operating Officer of our Telecommunications Group and Managing Director of various subsidiaries Randolph D. Foote 52 Senior Vice President and Chief Financial Officer Robert B. Runyon (1)(2) 75 Secretary and Director Laurence P. Finnegan, Jr. (1)(3) 63 Director
- ----------- (1) Member of the executive compensation and management development committee. (2) Member of the nominating committee. (3) Member of the audit committee. CARMINE T. OLIVA has been Chairman of the Board, President and Chief Executive Officer and a Class III director of our company since March 26, 1997 and of our subsidiary, XIT Corporation, since he founded XIT Corporation in 1983. Mr. Oliva is Chairman of the Board of XCEL Corporation Ltd since 1985, Chairman and Chief Executive Officer of CXR Telcom Corporation since March 1997 and Chairman of CXR S.A. since March 1997. From 1980 to 1983, Mr. Oliva was Senior Vice President and General Manager, ITT Asia Pacific Inc. Prior to holding that position, Mr. Oliva held a number of executive positions with ITT Corporation and its subsidiaries over an eleven-year period. Mr. Oliva attained the rank of Captain in the United States Army and is a veteran of the Vietnam War. Mr. Oliva earned a B.A. degree in Social Studies/Business from Seton Hall University in 1964 and an M.B.A. degree in Business from The Ohio State University in 1966. GRAHAM JEFFERIES was appointed Executive Vice President and Chief Operating Officer of our worldwide Telecommunications Group on October 21, 1999. Mr. Jefferies served as Executive Vice President of our company from April 1999 through October 1999. Mr. Jefferies has served as a director of CXR, S.A. since March 1997, as Managing Director of Belix Power Conversions Ltd. since our acquisition of Belix Power Conversions Ltd. in April 2000, as Managing Director of XCEL Power Systems, Ltd. since September 1996 and as Managing Director of XCEL Corporation. Ltd. since March 1992. Prior to joining us in 1992, he was Sales and Marketing Director of Jasmin Electronics PLC, a major United Kingdom software and systems provider, from 1987 to 1992. Mr. Jefferies held a variety of project management positions at GEC Marconi from 1978 to 1987. Mr. Jefferies earned a B.S. degree in Engineering from Leicester University in 1978, and has experience in mergers and acquisitions. Mr. Jefferies is a citizen and resident of the United Kingdom. RANDOLPH D. FOOTE was appointed as our Senior Vice President and Chief Financial Officer on October 4, 1999. Mr. Foote has been Vice President and Chief Financial Officer of CXR Telcom Corporation and XIT Corporation since March 2000 and has been Chief Financial Officer of CXR Anderson Jacobson Inc., a California corporation that is a subsidiary of CXR, S.A., since February 2000. Mr. Foote was the Corporate Controller of Unit Instruments, Inc., a publicly traded semiconductor 57 equipment manufacturer, from October 1995 to May 1999. From March 1985 to October 1995, Mr. Foote was the Director of Tax and Financial Reporting at Optical Radiation Corporation, a publicly traded company that designed and manufactured products using advanced optical technology. Prior to 1985, Mr. Foote held positions with Western Gear Corporation and Bucyrus Erie Company, which were both publicly traded companies. Mr. Foote earned a B.S. degree in Business Management from California State Polytechnic University, Pomona in 1973 and an M.B.A. degree in Tax/Business from Golden Gate University in 1979. ROBERT B. RUNYON was elected as a Class III director and appointed as our Secretary on March 26, 1997. He has been the owner and principal of Runyon and Associates, a human resources and business advisory firm, since December 1987. He has acted as President and Chief Executive Officer of Sub Hydro Dynamics Inc., a privately held marine services company based in Hilton Head, South Carolina, since September 1995. Prior to our merger with XIT Corporation, Mr. Runyon served XIT Corporation both as a director since August 1983 and as a consultant in the areas of strategy 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 Executive Vice President, Human Resources at the Great Atlantic & Pacific Tea Company from 1978 to 1980. Mr. Runyon earned a B.S. degree in Economics/Industrial Management from University of Pennsylvania in 1950. LAURENCE P. FINNEGAN, JR. was elected as a Class II director on March 26, 1997. In addition to being a director of XIT Corporation since 1985, Mr. Finnegan was XIT Corporation's Chief Financial Officer from 1994 to 1997. 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 August 1995, he has been a principal of GwynnAllen Partners, Bethlehem, Pennsylvania, an executive management consulting firm. Since December 1996, Mr. Finnegan has been President of GA Pipe, Inc., a manufacturing company based in Langhorne, Pennsylvania. Since September 1997, Mr. Finnegan has been Vice President Finance and Chief Financial Officer of QuestOne Decision Sciences, an efficiency consulting firm based in Pennsylvania. Mr. Finnegan earned a B.S. degree in Accounting from St. Joseph's University in 1961. Our bylaws provide that the board of directors shall consist of at least four directors. The board of directors is divided into three classes. The term of office of each class of directors is three years, with one class expiring each year at the annual meeting of stockholders. There are currently three directors, one of which is a Class II director whose term expires in 2001, and two of which are Class III directors whose term expires in 2002. Officers are appointed by, and serve at the discretion of, our board of directors. 58 COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth information concerning compensation paid to our Chief Executive Officer and each of our other executive officers who received an annual salary and bonus of more than $100,000 for services rendered to us during the years ended December 31, 1999, 1998 and 1997: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARD ------- ANNUAL COMPENSATION SECURITIES ------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY OPTIONS COMPENSATION(1) --------------------------- ---- ------ ----------- --------------- Carmine T. Oliva.................. 1999 $198,872 -- -- President and Chief Executive 1998 $198,872 -- -- Officer (2) 1997 $214,301 -- -- James P. Butler................... 1999 $122,769 -- -- Former Chief Financial Officer (3) 1998 $125,000 40,000 -- 1997 $ 44,377 75,000 -- Graham Jefferies.................. 1999 $114,192 60,000 $5,116 Executive Vice President and Chief 1998 $ 98,918 30,000 $5,567 Operating Officer of Telecommuni- 1997 $ 95,755 -- $6,527 cations Group (4) Randolph D. Foote................. 1999 $ 23,267 50,000 -- Senior Vice President, Chief 1998 -- -- -- Financial Officer (5) 1997 -- -- --
- --------------- (1) Consists of contributions to Mr. Jefferies' retirement plan. (2) Carmine T. Oliva became Chairman and Chief Executive Officer on March 26, 1997, upon Jack Talan's resignation concurrent with the merger of MicroTel International, Inc. with XIT. Mr. Oliva's salary does not include payments of $45,333 in 1997 of voluntarily deferred salary from years prior to 1997. (3) Mr. Butler resigned as our Chief Financial Officer on October 4, 1999. (4) Mr. Jefferies was appointed Executive Vice President and Chief Operating Officer of our worldwide Telecommunications Group on October 21, 1999. Mr. Jefferies is based in the United Kingdom and receives his remuneration in British pounds. The compensation amounts listed for Mr. Jefferies are shown in United States dollars, converted from British pounds using the average conversion rates in effect during the time periods of compensation. (5) Randolph D. Foote was appointed Senior Vice President and Chief Financial Officer on October 4, 1999, following receipt of notification of the resignation of our former Chief Financial Officer, James P. Butler. 59 OPTION GRANTS IN LAST FISCAL YEAR The following table provides information regarding option grants in the year ended December 31, 1999 to the named executive officers. We did not grant any stock appreciation rights in the year ended December 31, 1999.
PERCENT POTENTIAL OF TOTAL REALIZABLE VALUE OPTIONS AT ASSUMED ANNUAL NUMBER OF GRANTED RATES OF STOCK SECURITIES TO ALL PRICE UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR GRANT OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM(2) NAME DATE GRANTED YEAR ($/SHARE)(1) DATE 5% ($) 10% ($) ---- ---- ------- --------- ------------ ---- ---- ------- Carmine T. Oliva......... -- -- -- -- -- -- -- Randolph D. Foote........ 11/15/1999 50,000 11.6% 0.20 11/15/2009 6,289 15,937 Graham Jefferies......... 11/15/1999 60,000 14.0% 0.20 11/15/2006 7,547 19,125 James P. Butler(3)....... -- -- -- -- -- -- --
- --------------- (1) The option was granted at an exercise price equal to the closing price of a share of common stock on the grant date. (2) Pursuant to applicable regulations, these amounts represent certain assumed rates of appreciation only. Actual gain, if any, on stock option exercises are dependent on the future performance of the common stock and overall stock market conditions. The amounts reflected in this table may not necessarily be achieved. (3) Mr. Butler resigned as our Chief Financial Officer on October 4, 1999. OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table provides information regarding option exercises in the year ended December 31, 1999 by the named executive officers and the value of unexercised options held by the named executive officers as of December 31, 1999.
NUMBER OF SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT ACQUIRED DECEMBER 31, 1999 DECEMBER 31, 1999(1) ON VALUE ------------------- --------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- -------- -------- ----------- ------------- ----------- ------------- Carmine T. Oliva..... -- -- 130,633 -- -- -- Randolph D. Foote.... -- -- 25,000 25,000 5,938 5,938 Graham Jefferies..... -- -- 96,287 30,000 7,125 7,125 James P. Butler(2)... -- -- 115,000 -- -- --
- -------------- (1) The closing price of our common stock on December 31, 1999 on the OTC Bulletin Board was $.4375 per share. (2) Mr. Butler resigned as our Chief Financial Officer on October 4, 1999. 60 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS CARMINE T. OLIVA Pursuant to an employment agreement dated January 1, 1996, Carmine T. Oliva was employed as Chairman, President and Chief Executive Officer of XIT Corporation for a term of five years at an annual salary of $250,000. In July 1996, Mr. Oliva voluntarily agreed to abate a portion of his annual salary in connection with XIT Corporation's salary abatement program then in effect. On May 6, 1997, our board of directors voted to assume the obligations of XIT Corporation 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 our company on March 26, 1997. On October 15, 1997, we entered into a replacement agreement with Mr. Oliva on substantially the same terms and conditions as the prior agreement. The replacement agreement is subject to automatic renewal for three successive two-year terms commencing on October 15, 2002, unless, during the required notice periods (which run from August 15 to October 15 of the year preceding the year in which a two-year renewal period is to begin), either party gives written notice of its desire not to renew. The agreement provides that Mr. Oliva's salary was to continue at the abated amount of $198,865 per annum until such time as we have reported two consecutive profitable quarters during the term of the agreement or any renewals thereof, at which time his salary was to increase to its pre-abatement level of $250,000 per annum. Based on our unaudited quarterly financial statements, this increase to $250,000 occurred effective as of November 1, 2000. If the board of directors makes a substantial addition to or reduction of Mr. Oliva's duties, Mr. Oliva may resign upon written notice given within 30 days of the change in duties. Within 30 days after the effective date of a resignation under these circumstances, we will be obligated to pay to Mr. Oliva the value of three years of his annual salary. If we terminate Mr. Oliva for cause, our obligation to pay any further compensation, severance allowance, or other amounts payable under the agreement terminates on the date of such termination. If we terminate Mr. Oliva without cause (including by ceasing our operations due to bankruptcy or by our general inability to meet our obligations as they become due), we must provide him with 60 days' prior written notice. If the termination without cause occurs prior to the expiration of the initial term of the agreement on October 15, 2002, Mr. Oliva will be entitled to be paid his annual salary for two and one-half years following the termination. If the termination occurs during a renewal period, Mr. Oliva will be entitled to be paid his annual salary through the expiration of the particular renewal period, and to be paid all other amounts payable under the agreement. We may terminate the agreement upon 30 days' written notice in the event of a merger or reorganization in which our stockholders immediately prior to the merger or reorganization receive less than 50% of the outstanding voting shares of the successor corporation and in the event of a sale of all or substantially all of our assets or a sale, exchange or other disposition of two-thirds or more of our outstanding capital stock. If Mr. Oliva is terminated without cause within two years following a change of control, then: -- if the termination occurs prior to the expiration of the initial term of the agreement on October 15, 2002, Mr. Oliva will be entitled to be paid his annual salary and all other amounts payable under the agreement for two and one-half years following the termination, which amounts shall be payable at his election in a lump sum within 30 days 61 after the termination or in installments; -- if the termination occurs during a renewal period, Mr. Oliva will be entitled to be paid his annual salary through the expiration of the particular renewal period, and to be paid all other amounts payable under the agreement; -- Mr. Oliva will be entitled to receive the average of his annual executive bonuses awarded to him in the three years preceding his termination, over the same time span and under the same conditions as his annual salary; -- Mr. Oliva will be entitled to receive any executive bonus awarded but not yet paid; and -- Mr. Oliva will continue to receive coverage in all benefit programs in which he was participating on the date of his termination until the earlier of the end of the initial term or renewal term in which the termination occurred and the date he receives equivalent coverage and benefits under plans and programs of a subsequent employer. If Mr. Oliva dies during the term of the agreement, amounts payable under the agreement to or for the benefit of Mr. Oliva will continue to be payable to Mr. Oliva's designee or legal representatives for one year following his death. If Mr. Oliva is unable to substantially perform his duties under the agreement for an aggregate of 180 days in any 18-month period, we may terminate the agreement by ten days' prior written notice to Mr. Oliva following the 180th day of disability; provided, however, that we must continue to pay amounts payable under the agreement to or for the benefit of Mr. Oliva for two years following the effective date of the termination. If the agreement is terminated for any reason and unless otherwise agreed to by Mr. Oliva and us, then in addition to any other severance payments to which Mr. Oliva is entitled, we must continue to pay Mr. Oliva's annual salary until: -- all obligations incurred by Mr. Oliva on our behalf, including any lease obligations signed by Mr. Oliva related to the performance of his duties under the agreement, have been voided or fully assumed by us or our successor; -- all loan collateral pledged by Mr. Oliva has been returned to Mr. Oliva; and -- all personal property of Mr. Oliva has been returned to Mr. Oliva's principal place of residence at our expense. The agreement provides that we will furnish a life insurance policy on Mr. Oliva's life, in the amount of $1 million, payable to Mr. Oliva's estate in the event of his death during the term of the agreement. This benefit is in return for, and is intended to protect Mr. Oliva's estate from financial loss arising from any and all personal guarantees that Mr. Oliva provided in favor of us, as required by various corporate lenders. This benefit is also intended to enable Mr. Oliva's estate to exercise all warrants and options to purchase shares of our common stock. As a condition to his entry into the employment agreement, Mr. Oliva received a warrant to purchase up to 250,000 shares of our common stock at an exercise price of $3.45 per share, exercisable at any time prior to 5:00 p.m. New York City time on October 14, 2002. In February 2000, Mr. Oliva exchanged this warrant for a warrant to purchase up to 125,000 shares of common stock at an exercise price of $1.725 per share in an exchange offer made to all holders of warrants with exercise prices exceeding $1.00. GRAHAM JEFFERIES On May 1, 1998, we entered into an employment agreement with Mr. Jefferies for a term of two years at an initial annual salary of 67,000 British pounds (approximately $106,500 at the then current 62 exchange rates) that is subject to automatic renewal for two successive one-year terms commencing on May 1, 2000. Mr. Jefferies was to act as Managing Director of XCEL Corporation, Ltd. and to perform additional services as may be approved by our board of directors. If the board of directors makes a substantial addition to or reduction of Mr. Jefferies' duties, Mr. Jefferies may resign upon written notice given within 30 days of the change in duties. Within 30 days after the effective date of a resignation under these circumstances, we will be obligated to pay to Mr. Jefferies the value of one year of his annual salary. If we terminate Mr. Jefferies for cause, our obligation to pay any further compensation, severance allowance, or other amounts payable under the agreement terminates on the date of such termination. If we terminate Mr. Jefferies without cause (including by ceasing our operations due to bankruptcy or by our general inability to meet our obligations as they become due), we must provide him with 60 days' prior written notice. Mr. Jefferies will be entitled to be paid his annual salary through the expiration of the current renewal period, and to be paid all other amounts payable under the agreement. We may terminate the agreement upon 30 days' written notice in the event of a merger or reorganization in which our stockholders immediately prior to the merger or reorganization receive less than 50% of the outstanding voting shares of the successor corporation and in the event of a sale of all or substantially all of our assets or a sale, exchange or other disposition of two-thirds or more of our outstanding capital stock. If Mr. Jefferies is terminated without cause within two years following a change of control, then: -- Mr. Jefferies will be entitled to be paid his annual salary through the expiration of the current renewal period, and to be paid all other amounts payable under the agreement; -- Mr. Jefferies will be entitled to receive the average of his annual executive bonuses awarded to him in the three years preceding his termination, over the same time span and under the same conditions as his annual salary; -- Mr. Jefferies will be entitled to receive any executive bonus awarded but not yet paid; and -- Mr. Jefferies will continue to receive coverage in all benefit programs in which he was participating on the date of his termination until the earlier of the end of the current renewal term and the date he receives equivalent coverage and benefits under plans and programs of a subsequent employer. If Mr. Jefferies dies during the term of the agreement, amounts payable under the agreement to or for the benefit of Mr. Jefferies will continue to be payable to Mr. Jefferies' designee or legal representatives for one year following his death. If Mr. Jefferies is unable to substantially perform his duties under the agreement for an aggregate of 180 days in any 18-month period, we may terminate the agreement by ten days' prior written notice to Mr. Jefferies following the 180th day of disability; provided, however, that we must continue to pay amounts payable under the agreement to or for the benefit of Mr. Jefferies for one year following the effective date of the termination. BOARD COMMITTEES The board of directors currently has an audit committee, an executive compensation and management development committee and a nominating committee. The audit committee makes recommendations to our board of directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by our 63 independent auditors, reviews our financial statements for each interim period, and reviews and evaluates our internal audit and control functions. From January 1, 1999 through June 25, 1999, this committee consisted of David Barrett, a former director of our company, and Laurence Finnegan. Since June 26, 1999, this committee has consisted of Laurence Finnegan. The executive compensation and management development committee is responsible for establishing and administering our policies involving the compensation of all of our executive officers and establishing and recommending to our board of directors the terms and conditions of all employee and consultant compensation and benefit plans. From January 1, 1999 through June 25, 1999, this committee consisted of David Barrett, a former director of our company, and Robert B. Runyon. Since June 26, 1999, this committee has consisted of Robert B. Runyon and Laurence Finnegan. The nominating committee selects nominees for the board of directors. During 2000, the nominating committee has consisted of Robert B. Runyon. COMPENSATION OF DIRECTORS Each non-employee director is entitled to receive $1,000 per quarter as compensation for their services. We reimburse all directors for out-of-pocket expenses incurred in connection with attendance at board and committee meetings. We may periodically award options or warrants to our directors under our existing option and incentive plans and otherwise. Mr. Runyon acts as a consultant to our company in the areas of strategy development business and organization planning, human resources recruiting and development and administrative systems. During 1999, Mr. Runyon received approximately $1,670 in consulting fees and expenses. Also, additional consulting fees and expenses totaling $9,441 were accrued during 1999 but have not yet been paid. During 1999, we also paid premiums of $2,793 for life insurance on Mr. Runyon for the benefit of his spouse, $30 for life insurance on Mr. Runyon's spouse for the benefit of Mr. Runyon, and $3,534 for health insurance. On July 25, 2000, Mr. Runyon and Mr. Finnegan each received an option to purchase 100,000 shares of common stock at $0.50 per share under our 1997 Plan, which options vest in two equal semi-annual installments commencing on January 25, 2001 and expires on July 25, 2010. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the board of directors has a relationship that would constitute an interlocking relationship with executive officers and directors of another entity. STOCK OPTION PLANS We currently have four stock option plans: the 1993 Stock Option Plan, the Employee Stock and Stock Option Plan, the 1997 Stock Incentive Plan and the 2000 Stock Option Plan. These plans are administered by our executive compensation and management development committee, which currently consists of Robert Runyon and Laurence Finnegan, our two non-employee directors. The 1993 Stock Option Plan authorizes the issuance of incentive stock options and non-qualified stock options to our employees and independent contractors for the purchase of up to 300,000 shares of our common stock. The 1993 Stock Option Plan terminates on August 31, 2003. Our board does not intend to issue any additional options under the 1993 Stock Option Plan in the future. 64 The Employee Stock and Stock Option Plan authorizes the issuance of non-qualified stock options and restricted and unrestricted stock grants to our employees (including officers and directors who are employees) and consultants for up to an aggregate of 520,000 shares of common stock. The Employee Stock and Stock Option Plan terminates on July 1, 2004. Our board does not intend to issue any additional options or make any additional stock grants under the Employee Stock and Stock Option Plan. The 1997 Stock Incentive Plan authorizes the issuance of incentive stock options, stock appreciation rights or stock awards to our employees and directors for up to an aggregate of 1,600,000 shares of common stock, except that incentive stock options may not be granted to non-employee directors. Our board of directors' adoption of the 1997 Stock Incentive Plan was ratified by our stockholders at our 1998 annual meeting of stockholders. The 1997 Stock Incentive Plan terminates on June 15, 2007. As of November 14, 2000, options to purchase up to 1,441,596 shares of common stock were outstanding under the 1997 Stock Incentive Plan. Our 2000 Stock Option Plan was adopted by our board of directors in November 2000 and is subject to stockholder approval. We intend to submit the 2000 Stock Option Plan for stockholder approval at a special meeting of stockholders that is planned to be held in January 2001. The 2000 Stock Option Plan authorizes the issuance of incentive stock options and non-qualified options to our employees, officers, directors and consultants and to employees of companies that do business with us for the purchase of up to 2,000,000 shares of common stock. As of November 14, 2000, we had approximately 253 employees, officers and directors eligible to receive options under the 2000 Stock Option Plan, and no options had been issued under this plan. The following description of the terms of the 2000 Stock Option Plan is qualified in its entirety by reference to the full text of the 2000 Stock Option Plan, a copy of which is an exhibit to the registration statement of which this prospectus is a part. SHARES SUBJECT TO THE 2000 STOCK OPTION PLAN A total of 2,000,000 shares of our common stock are authorized for issuance under the 2000 Stock Option Plan. Any shares of common stock which are subject to an award but are not used because the terms and conditions of the award are not met, or any shares which are used by participants to pay all or part of the purchase price of any option, may again be used for awards under the 2000 Stock Option Plan. ADMINISTRATION It is the intent of the 2000 Stock Option Plan that it be administered in a manner such that option grants and exercises would be "exempt" under Rule 16b-3 of the Securities Exchange Act of 1934, as amended. The executive compensation and management development committee is empowered to select those eligible persons to whom options shall be granted under the 2000 Stock Option Plan; to determine the time or times at which each option shall be granted, whether options will be ISOs or NQOs, and the number of shares to be subject to each option; and to fix the time and manner in which each such option may be exercised, including the exercise price and option period, and other terms and conditions of such options, all subject to the terms and conditions of the 2000 Stock Option Plan. The committee has sole discretion to interpret and administer the 2000 Stock Option Plan, and its decisions regarding the 2000 Stock Option Plan are final, except that our board of directors can act in place of the committee as the administrator of the 2000 Stock Option Plan at any time or from time to time, in its discretion. 65 OPTION TERMS ISOs granted under the 2000 Stock Option Plan must have an exercise price of not less than 100% of the fair market value of a share of common stock on the date the ISO is granted and must be exercised, if at all, within ten years from the date of grant. In the case of an ISO granted to an optionee who owns more than 10% of the total voting securities of our company on the date of grant, such exercise price shall be not less than 110% of fair market value on the date of grant, and the option period may not exceed five years. NQOs granted under the 2000 Stock Option Plan must have an exercise price of not less than 85% of the fair market value of a share of common stock on the date the NQO is granted. Options may be exercised during a period of time fixed by the committee except that no option may be exercised more than ten years after the date of grant. In the discretion of the committee, payment of the purchase price for the shares of stock acquired through the exercise of an option may be made in cash, shares of our common stock or a combination of cash and shares of our common stock. AMENDMENT AND TERMINATION The 2000 Stock Option Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time and from time to time by our board of directors. However, our board of directors may not materially impair any outstanding options without the express consent of the optionee or materially increase the number of shares subject to the 2000 Stock Option Plan, materially increase the benefits to optionees under the 2000 Stock Option Plan, materially modify the requirements as to eligibility to participate in the 2000 Stock Option Plan or alter the method of determining the option exercise price without stockholder approval. No option may be granted under the 2000 Stock Option Plan after November 14, 2010. FEDERAL INCOME TAX CONSEQUENCES NQOs ---- Holders of NQOs do not realize income as a result of a grant of the Option, but normally realize compensation income upon exercise of an NQO to the extent that the fair market value of the shares of common stock on the date of exercise of the NQO exceeds the exercise price paid. We will be required to withhold taxes on ordinary income realized by an optionee upon the exercise of a NQO. In the case of an optionee subject to the "short-swing" profit recapture provisions of Section 16(b) of the Exchange Act, the optionee realizes income only upon the lapse of the six-month period under Section 16(b), unless the optionee elects to recognize income immediately upon exercise of his or her Option. ISOs ---- Holders of ISOs will not be considered to have received taxable income upon either the grant of the option or its exercise. Upon the sale or other taxable disposition of the shares, long-term capital gain will normally be recognized on the full amount of the difference between the amount realized and the option exercise price paid if no disposition of the shares has taken place within either two years from the date of grant of the option or one year from the date of transfer of the shares to the optionee upon exercise. If the shares are sold or otherwise disposed of before the end of the one-year or two-year periods, the holder of the ISO must include the gain realized as ordinary income to the extent of the lesser of the fair market value of the option stock minus the 66 option price, or the amount realized minus the option price. Any gain in excess of these amounts, presumably, will be treated as capital gain. We will be entitled to a tax deduction in regard to an ISO only to the extent the optionee has ordinary income upon the sale or other disposition of the option shares. Upon the exercise of an ISO, the amount by which the fair market value of the purchased shares at the time of exercise exceeds the option price will be an "item of tax preference" for purposes of computing the optionee's alternative minimum tax for the year of exercise. If the shares so acquired are disposed of prior to the expiration of the one-year or two-year periods described above, there should be no "item of tax preference" arising from the option exercise. POSSIBLE ANTI-TAKEOVER EFFECTS Although not intended as an anti-takeover measure by our board of directors, one of the possible effects of the 2000 Stock Option Plan could be to place additional shares, and to increase the percentage of the total number of shares outstanding, in the hands of the directors and officers of our company. Such persons may be viewed as part of, or friendly to, incumbent management and may, therefore, under certain circumstances be expected to make investment and voting decisions in response to a hostile takeover attempt that may serve to discourage or render more difficult the accomplishment of such attempt. In addition, options may, in the discretion of the committee, contain a provision providing for the acceleration of the exercisability of outstanding, but unexercisable, installments upon the first public announcement of a tender offer, merger, consolidation, sale of all or substantially all of our assets, or other attempted changes in the control of our company. In the opinion of our board of directors, such an acceleration provision merely ensures that optionees under the 2000 Stock Option Plan will be able to exercise their options as intended by the board of directors and stockholders prior to any such extraordinary corporate transaction which might serve to limit or restrict such right. Our board of directors is, however, presently unaware of any threat of hostile takeover involving our company. 67 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS SERIES A PREFERRED STOCK AND WARRANT TRANSACTIONS On December 23, 1999, Orbit II Partners, L.P., Samuel J. Oliva, Samuel G. Oliva and Carmine T. Oliva, or the Series A Purchasers, purchased an aggregate of 39.5 shares of Series A Preferred Stock and accompanying warrants to purchase up to an aggregate of 197,500 shares of common stock from two of the three original holders of shares of our Series A Preferred Stock, or the Series A Sellers, for an aggregate consideration of approximately $400,000 in cash. Orbit II Partners, L.P. is a Delaware limited partnership that as of November 20, 2000 beneficially owned more than five percent of our outstanding common stock. Carmine T. Oliva is our President, Chief Executive Officer and Chairman of the Board. Samuel J. Oliva and Samuel G. Oliva are the brother and son, respectively, of Carmine T. Oliva. When issued to the three original holders, or the Series A Original Holders, on June 29, 1998 and July 9, 1998 at a price of $10,000 per share, the shares of Series A Preferred Stock were convertible into common stock at the option of the Series A Original Holders at per share conversion prices of $0.9375 and $0.875, respectively, which prices were equal to $10,000 divided by the lesser of $1.26 and 100% of the arithmetic average of the three lowest closing bid prices over the respective previous 40 trading days. On November 3, 1998, the Series A Original Holders and our company agreed to modify the conversion price of the Series A Preferred Stock to a fixed factor so that for so long as our common stock continued to be listed on the Nasdaq SmallCap Market, each share of Series A Preferred Stock was to be convertible into 20,000 shares of common stock. The modified conversion price was calculated by dividing $10,000 by $0.50 per share of Series A Preferred Stock. The Series A Original Holders and our company also agreed on November 3, 1998 that the exercise price of the related warrants would be reduced from $1.25 per share to $0.75 per share. As of November 3, 1998, under the original conversion price formula each share of Series A Preferred Stock would have been convertible into approximately 24,615 shares of common stock at a per share conversion price of $0.40625, and the closing price of a share of our common stock on the Nasdaq SmallCap Market was $0.4375. We agreed to adjust the conversion price of the Series A Preferred Stock and the exercise price of the related warrants because the prices at which our common stock were trading had been declining at least since the shares of Series A Preferred Stock were issued, and we believed that setting a floor for the conversion price might help to minimize future dilution to our common stockholders. Following the delisting of our common stock from the Nasdaq SmallCap Market, the November 1998 modification to the conversion price of the Series A Preferred Stock was discontinued on August 15, 1999, and the conversion price was again to be equal to $10,000 divided by the lesser of $1.26 and 100% of the arithmetic average of the three lowest closing bid prices over the 40 trading days prior to conversion. As described above, on December 23, 1999, the Series A Purchasers purchased an aggregate of 39.5 shares of Series A Preferred Stock and the related warrants to purchase up to an aggregate of 197,500 shares of common stock from the Series A Sellers. In conjunction with the purchase and sale, the holders of the Series A Preferred Stock and our company agreed to modify the conversion price of the Series A Preferred Stock to a fixed factor so that each share of Series A Preferred Stock was to be convertible into 50,530 shares of common stock. This fixed factor was calculated by dividing $10,000 by approximately $0.1979 per share of Series A Preferred Stock. Also in conjunction with the purchase and sale, the holders of the Series A Preferred Stock and our company agreed that all of the outstanding warrants that had been issued to the Series A Original Holders in 1998, including both the warrants 68 that were transferred to the Series A Purchasers and the warrants that were retained by the Series A Sellers because they related to shares of Series A Preferred Stock that already had been converted by the Series A Sellers into shares of common stock, were amended to reduce the exercise price from $0.75 per share to $0.25 per share and to extend the expiration date from May 22, 2001 to December 22, 2002. On December 23, 1999, the closing price of a share of our common stock on the OTC Bulletin Board was $0.30, and each share of Series A Preferred Stock would have been convertible into approximately 52,632 shares of common stock at a per share conversion price of $0.19 if the December 1999 modification to the conversion price was not taken into account. The modifications to the exercise price of the warrants and the conversion price of the Series A Preferred Stock were intended to induce the sale of all of the Series A Sellers' unconverted shares of Series A Preferred Stock to the Series A Purchasers. We believed that this sale would benefit our company and its stockholders because the Series A Purchasers had indicated an interest in voluntarily holding the Series A Preferred Stock as a long-term investment rather than converting the Series A Preferred Stock into shares of common stock that would further dilute existing common stockholders and that could be sold in the public market at the low prices at which our shares of common stock were trading. In November 2000, we determined that because the modifications to the conversion price in November 1998 and December 1999 had not been submitted to and approved by our stockholders in accordance with the Delaware General Corporation Law, all conversions from November 1998 through July 1999 and in December 1999 should have been made at the original conversion rate of $10,000 divided by the lesser of $1.26 and 100% of the arithmetic average of the three lowest closing bid prices over the 40 trading days prior to the conversions. Under the original conversion terms, we would have issued approximately 250,000 additional shares of common stock for some conversions and approximately 90,000 less shares of common stock for other conversions. No modifications have been made to our consolidated financial statements to reflect the potential issuance of these additional shares of common stock because we are still in the process of working with the holders of the Series A Preferred Stock to reach a satisfactory resolution to this matter. We have submitted to our stockholders for approval at a special meeting to be held on January 16, 2001 an amendment to the certificate of designations, preferences and rights relating to the Series A Preferred Stock. If approved by the holders of our common stock and Series A Preferred Stock , the amendment will modify the conversion rate for conversions occurring after the amendment is filed with the Delaware Secretary of State so that each share of Series A Preferred Stock will be convertible into 50,530 shares of common stock, which is the same number of shares into which each shares of Series A Preferred Stock would now be convertible if the attempted modifications to the conversion prices had been approved by our stockholders in accordance with the Delaware General Corporation Law. WARRANT EXCHANGE OFFER Between February and April 2000, we made an offer to all holders of warrants to purchase shares of our common stock at exercise prices of $1.00 or more pursuant to which these holders could elect to surrender their outstanding warrants with exercise prices of $1.00 or more in exchange for the issuance to them of warrants to purchase a number of shares equal to one-half of the number of shares underlying the surrendered warrants at an exercise price of one-half of the exercise price of the surrendered warrants. The primary reason for the offer was to reduce the quantity of shares allocated to warrants so that we would have sufficient authorized stock for our needs until an increase in our authorized stock could be voted on by our stockholders. A total of 2,769,201 warrants with exercise prices ranging from $1.21 to $3.79 were surrendered in exchange for 1,384,602 warrants with exercise prices ranging from $0.605 to 69 $1.895. The majority of warrants exchanged were held by persons or entities who were not employees or directors of our company or its subsidiaries. However, exchanges were made with the following related parties:
Shares Exercise Shares Exercise Underlying Price of Underlying Price of Warrants Warrants Warrants Warrants Warrant Holder Surrendered Surrendered Received Received -------------- ----------- ----------- -------- --------- Carmine T. Oliva, Chairman of the 250,000 $3.45 125,000 $1.73 Board, President and Chief Executive 362,870 $3.44 181,435 $1.72 Officer 5,878 $1.21 2,939 $0.61 3,096 $3.79 1,548 $1.90 33,674 $3.79 16,837 $1.90 6,659 $3.79 3,330 $1.90 43,544 $2.58 21,772 $1.29 108,861 $1.38 54,431 $0.69 29,030 $1.89 14,515 $0.95 21,772 $1.89 10,886 $0.95 Carmine T. Oliva and Georgeann Oliva, 11,103 $3.79 5,552 $1.90 Chairman of the Board, President and 3,629 $1.89 1,815 $0.95 Chief Executive Officer and his spouse Laurence P. Finnegan, 17,418 $2.58 8,709 $1.29 Director 7,257 $1.89 3,629 $0.95 5,443 $1.89 2,722 $1.89 Robert B. Runyon, 2,903 $2.58 1,452 $1.29 Director and Secretary 55,400 $2.58 27,700 $1.29 9,677 $2.58 4,839 $1.29 14,515 $1.89 7,258 $0.95 6,169 $1.89 3,085 $0.95 483 $1.29 242 $1.29 Samuel J. Oliva, 14,515 $1.89 7,258 $0.95 Brother of Carmine T. Oliva 30,481 $1.89 15,241 $0.95 3,919 $1.21 1,960 $0.61 5,008 $1.89 2,504 $0.95 11,103 $3.79 5,552 $1.90 3,629 $1.89 1,815 $0.95 Rose Oliva, 4,354 $1.89 2,177 $0.95 Mother of Carmine T. Oliva Ronald & Betty Jane Oliva, 11,102 $3.79 5,551 $1.90 Brother and sister-in-law of Carmine 3,628 $1.89 1,814 $0.95 T Oliva David Barrett, 14,515 $2.58 7,258 $1.29 Former Director 13,789 $1.89 6,895 $0.95 5,443 $1.89 2,722 $0.95
70 The exchange did not result in a modification of the expiration dates or any other terms of the warrants other than the numbers of shares and exercise prices. All of the warrants received in exchange for the surrendered warrants have expired except for the first warrant listed for Carmine T. Oliva, which warrant expires on October 14, 2002. OTHER TRANSACTIONS We are or have been a party to employment and consulting arrangements with related parties, as more particularly described above under the headings "Employment Contracts and Termination of Employment and Change-in-Control Arrangements" and "Compensation of Directors." In June 2000, we issued 5,000 shares of common stock to Carmine T. Oliva, 10,000 shares of common stock to Samuel J. Oliva and 10,000 shares of common stock to Samuel G. Oliva in connection with their exercise of warrants with an exercise price of $0.25 per share. In August 2000, Carmine T. Oliva and his spouse, Georgeann, provided a limited personal guarantee and a waiver of spouse equity rights in order to assist us in obtaining our credit facility with Wells Fargo Business Credit, Inc. Our board of directors believed it was advantageous for us to obtain a new credit line from a bank-related lending institution rather than from an independent asset lender such as our previous lender, Congress Financial Corporation. However, Wells Fargo Business Credit, Inc. was unwilling to provide us with the credit line unless Mr. Oliva provided the guarantee and Mrs. Oliva provided the waiver. In recognition of Mr. and Mrs. Oliva's agreement to risk their personal net worth to provide the guarantee and waiver despite significant risk based upon our prior history of losses, the executive compensation and management development committee of the board of directors awarded Mr. Oliva a special bonus of $30,000 which was paid over a three-month period. Wells Fargo Business Credit, Inc. has agreed to release the guarantee at the end of 2000 if we reach specific profitability goals. If, however, we do not reach those goals, the executive compensation and management development committee has authorized payment to Mr. Oliva of up to an additional $30,000 to be paid in twelve equal payments, twice per month, for so long as the guarantee remains in place or until March 31, 2001, whichever comes first. 71 PRINCIPAL AND SELLING SECURITY HOLDERS As of November 20, 2000, a total of 20,569,759 shares of our common stock were outstanding. The following table sets forth information as of November 20, 2000 regarding the beneficial ownership of our common stock both before and immediately after the offering by: -- each person known by us to own beneficially more than five percent, in the aggregate, of the outstanding shares of our common stock as of the date of the table; -- each selling security holder; -- each of our directors; -- each named executive officer in the Summary Compensation Table contained elsewhere in this prospectus; and -- all of our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and generally includes voting or investment power with respect to securities. Except as indicated in the footnotes to the table, we believe each selling security holder possesses sole voting and investment power with respect to all of the shares of common stock owned by such selling security holder, subject to community property laws where applicable. In computing the number of shares beneficially owned by a selling security holder and the percentage ownership of that selling security holder, shares of common stock subject to options or warrants held by that person that are currently exercisable or are exercisable within 60 days after the date of the table are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person or group. The shares of common stock being offered pursuant to this prospectus may be offered for sale from time to time during the period the registration statement of which this prospectus is a part remains effective, by or for the accounts of the selling security holders described in the table below. All of the shares being offered pursuant to this prospectus were issued or are issuable upon exercise of common stock purchase warrants that were acquired by the selling security holders from us in the following private placement transactions: -- Warrants to purchase up to 152,381 shares of common stock at an exercise price of $0.66 per share, which warrants were issued in December 1998 to one entity in exchange for an option to purchase from the entity an ownership interest in Digital Transmission Systems, Inc.; -- Warrants to purchase an aggregate of 722,500 shares of common stock, which warrants have an exercise price of $0.25 and were issued to three investors in connection with our July 1998 private placement of Series A Preferred Stock; -- 222,500 shares of common stock that we issued to three individuals and two entities upon exercise of warrants with exercise prices of $0.25, which warrants were issued in connection with our July 1998 private placement of Series A Preferred Stock; -- Warrants to purchase an aggregate of 250,000 shares of common stock at an exercise price of $1.25 per share, which warrants were issued to our placement agent in connection with our July 1998 private placement of Series A Preferred Stock; and -- Warrants to purchase an aggregate of 633,125 shares of common stock at exercise prices ranging from $0.63 to $2.50, which warrants were issued by us to one entity and nine individuals in private placement transactions for services rendered. We will not receive any of the proceeds from the sale of the shares of common stock offered by the selling security holders, but we will receive proceeds from the exercise for cash of warrants to purchase common stock to the extent that such common stock is included in the shares being offered pursuant to this prospectus. 72
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING (1) TITLE --------------------------- SHARES BEING --------------------------- NAME OF BENEFICIAL OWNER OF CLASS NUMBER % OF CLASS OFFERED NUMBER % OF CLASS ------------------------ -------- ------ ---------- ------- ------ ---------- Albanese Placedo Common 15,000 (2) * 15,000 (2) -- -- Amberbrook II Common 66,532 (3) * 8,798 (3) 57,734 * Bankers Trust, Trustee Jack Eckerd Corp. Pension Trust Common 44,355 (4) * 5,865 (4) 38,490 * James P. Butler (5) Common -- -- -- -- -- Chase Manhattan Bank N.A. - Trustee * IBM Retirement Plan Common 44,355 (6) * 5,865 (6) 38,490 * Chemical Bank Retirement Plan Common 88,711 (7) * 11,730 (7) 76,981 * C.P. & Co. Venture Partners, L.P. Common 22,180 (8) * 2,933 (8) 19,247 * Robert Crane Common 2,360 (9) * 312 (9) 2,048 * Crossroads Capital Limited Partnership Common 9,902 (10) * 9,902 (10) -- -- The Equitable Life Assurance Society of the United States Common 71,767 (11) * 9,490 (11) 62,277 * George Farndell Common 37,500 (12) * 37,500 (12) -- -- Laurence P. Finnegan, Jr. (13) Common 44,171 * -- 44,171 * Randolph D. Foote Common 55,000 (14) * -- 55,000 * Fortune Fund Limited Seeker III Common 810,695 (15) 3.89% 250,000 (16) 560,695 2.69% Series A Preferred 20 80.00% -- 20 80.00% Raymond Jacobson Common 42,000 (17) * 32,000 (17) 10,000 * Steven Jacobus Common 50,000 (18) * 50,000 (18) -- -- Graham Jefferies Common 129,563 (19) * -- 129,563 * Frank LaHaye Common 26,135 (20) * 3,457 (20) 22,678 * Landmark Equity Partners II, L.P. Common 44,355 (21) * 5,865 (21) 38,490 * Landmark Equity Partners V, L.P. Common 133,066 (22) * 17,595 (22) 115,471 * Landmark Venture Partners L.P. Common 88,711 (23) * 11,730 (23) 76,981 * Herb Lanzet Common 50,000 (24) * 50,000 (24) -- -- Gene Miller Common 26,135 (25) * 3,457 (25) 22,678 * Montgomery Securities Common 62,006 (26) * 8,199 (26) 53,807 * Charles Mugrdechian, Jr. Common 20,000 (27) * 20,000 (27) -- -- NY State Common Retirement Fund Common 88,711 (28) * 11,730 (28) 76,981 * Northern Trust Company as trustee for United System Master Trust Common 133,068 (29) * 17,596 (29) 115,472 * Carmine T. Oliva Common 1,585,806 (30) 7.53% 355,185 (31) 1,230,621 5.84% Series A Preferred 1 4.00% -- 1 4.00% Jason Oliva Common 133,515 (32) * 133,500 (32) 15 * Ronald Oliva Common 37,500 (33) * 37,500 (33) -- -- Samuel G. Oliva Common 151,002 (34) * 46,000 (35) 105,002 * Series A Preferred 2 8.00% -- 2 8.00% Samuel J. Oliva Common 105,928 (36) * 83,500 (37) 22,428 * Series A Preferred 2 8.00% -- 2 8.00% Orbit II Partners, L.P. Common 2,838,810 (38) 13.77% 215,625 (38) 2,623,185 12.73% Pacific Continental Securities Corporation Common 230,000 (39) 1.11% 230,000 (39) -- -- Portland General Holdings, Inc. Common 88,711 (40) * 11,730 (40) 76,981 * Rana General Holding, Ltd. Common 127,500 (41) * 127,500 (41) -- -- Resonance, Ltd. Common 365,000 (42) 1.74% 365,000 (42) -- -- Robert B. Runyon Common 238,155 (43) 1.15% -- 238,155 1.15% William Setteducato Common 125,000 (44) * 125,000 (44) -- -- Donald Skipwith Common 1,982 (45) * 262 (45) 1,720 * Xerox Corporation Common 44,355 (46) * 5,865 (46) 38,490 * All executive officers and directors Common 2,052,695 (47) 9.64% 10,000 (48) 2,042,695 9.59% as a group (6 persons) Series A Preferred 1 4.00% -- 1 4.00%
- ------------------------ * Less than 1.00% (1) Assumes all shares being offered are sold. (2) Represents shares of common stock underlying warrants. (3) Includes 8,798 shares of common stock underlying warrants. (4) Includes 5,865 shares of common stock underlying warrants. (5) Mr. Butler is our former Chief Financial Officer and is named as an executive officer in the Summary Compensation Table. (6) Includes 5,865 shares of common stock underlying warrants. (7) Includes 11,730 shares of common stock underlying warrants. (8) Includes 2,933 shares of common stock underlying warrants. (9) Includes 312 shares of common stock underlying warrants. (10) Represents shares of common stock underlying warrants. (11) Includes 9,490 shares of common stock underlying warrants. Beneficial owner is affiliated with the following NASD members: Sanford C. Bernstein & Co., LLC, Alliance Fund Distributors, Inc., Equitable Distributors, Inc. and AXA Advisors, LLC. (12) Represents shares of common stock underlying warrants. Mr. Farndell is a brother-in-law of Carmine T. Oliva. (13) Mr. Finnegan is a director of our company. (14) Includes 50,000 shares of common stock underlying options. Mr. Foote is the Senior Vice President and Chief Financial Officer of our company. (15) Includes 250,000 shares of common stock underlying warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 560,695 shares of common stock issuable upon conversion of Series A Preferred Stock. (16) Includes 250,000 shares of common stock underlying warrants, which shares are carried forward from Registration Statement No. 333-64695. (17) Includes 32,000 shares of common stock underlying warrants. (18) Includes 50,000 shares of common stock underlying warrants. (19) Includes 126,287 shares of common stock underlying options. Mr. Jefferies is the Executive Vice President and Chief Operating Officer of our Telecommunications Group. 73 (20) Includes 3,457 shares of common stock underlying warrants. (21) Includes 5,865 shares of common stock underlying warrants. (22) Includes 17,595 shares of common stock underlying warrants. (23) Includes 11,730 shares of common stock underlying warrants. (24) Includes 50,000 shares of common stock underlying warrants. (25) Includes 3,457 shares of common stock underlying warrants. (26) Includes 8,199 shares of common stock underlying warrants. (27) Includes 20,000 shares of common stock underlyling warrants, which shares are carried forward from Registration Statement No. 333-64695. (28) Includes 11,730 shares of common stock underlying warrants. (29) Includes 17,596 shares of common stock underlying warrants. (30) Includes 10,000 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 81,889 shares of common stock held individually by Mr. Oliva's spouse, 130,633 shares of common stock underlying options, 345,185 shares of common stock underlying warrants and 11,214 shares of common stock issuable upon conversion of Series A Preferred Stock. Mr. Oliva is a director and the Chairman of the Board, President and Chief Executive Officer of our company. The address for Mr. Oliva is 9485 Haven Avenue, Suite 100, Rancho Cucamonga, California 91730. (31) Includes 10,000 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. (32) Includes 133,500 shares of common stock underlying warrants. Jason Oliva is the son of Carmine T. Oliva. (33) Represents 37,500 shares of common stock underlying warrants. Ronald Oliva is the brother of Carmine T. Oliva. (34) Includes 10,000 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 72,287 shares of common stock underlying warrants, 36,287 shares of common stock underlying options, and 22,428 shares of common stock issuable upon conversion of Series A Preferred Stock. Samuel G. Oliva is the son of Carmine T. Oliva. (35) Includes 10,000 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 36,000 shares of common stock underlying warrants. (36) Includes 10,000 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 73,500 shares of common stock underlying warrants and 22,428 shares of common stock issuable upon conversion of Series A Preferred Stock. Samuel J. Oliva is the brother of Carmine T. Oliva. (37) Includes 10,000 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 73,500 shares of common stock underlying warrants. (38) Includes 172,500 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 43,125 shares of common stock underlying warrants. Alan S. MacKenzie, Jr., David N. Marino and Joel S. Kraut are: the managing partners of Orbit II Partners, L.P., a broker-dealer and member of the American Stock Exchange; the managing members of MKM Partners, LLC, an NASD-registered broker-dealer and member of the Pacific Stock Exchange; and general partners of OTAF Business Partners, a general partnership that owns over 10% of the outstanding membership interests in Blackwood Securities, LLC, an NASD member. The address for Orbit II Partners, L.P. is 2 Rector Street, 16th Floor, New York, New York 10006. (39) Represents 230,000 shares of common stock underlying warrants, which shares are carried forward from Registration Statement No. 333-64695. (40) Includes 11,730 shares of common stock underlying warrants. (41) Includes 20,000 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 107,500 shares of common stock underlying warrants, which shares are carried forward from Registration Statement No. 333-64695. (42) Represents 365,000 shares of common stock underlying warrants, which shares are carried forward from Registration Statement No. 333-64695. (43) Includes 58,060 shares of common stock underlying options. Mr. Runyon is a director and the Secretary of our company. (44) Represents 125,000 shares of common stock underlying warrants. (45) Includes 262 shares of common stock underlying warrants. (46) Includes 5,865 shares of common stock underlying warrants. (47) Includes 10,000 shares of common stock issued upon exercise of warrants, which shares are carried forward from Registration Statement No. 333-64695. Also includes 345,185 shares of common stock underlying warrants, 364,980 shares of common stock underlying options, 81,889 shares of common stock held individually by Mr. Oliva's wife and 11,214 shares of common stock issuable upon conversion of Series A Preferred Stock. (48) Includes 10,000 shares of common stock underlying warrants, which shares are carried forward from Registration Statement No. 333-64695. 74 PLAN OF DISTRIBUTION The selling security holders and any of their donees, pledgees, assignees and other successors-in-interest may, from time to time, sell any or all of their shares of our common stock being offered pursuant to this prospectus on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales, which may include block transactions, may be at fixed or negotiated prices. The selling security holders may use any one or more of the following methods when selling shares: -- ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; -- block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; -- purchases by a broker-dealer as principal and resale by the broker-dealer for its account; -- an exchange distribution in accordance with the rules of the applicable exchange; -- privately negotiated transactions; -- short sales or transactions to cover short sales; -- broker-dealers may agree with the selling security holders to sell a specified number of shares at a stipulated price per share; -- a combination of any of these methods of sale; or -- any other method permitted by applicable law The sale price to the public may be: -- the market price prevailing at the time of sale; -- a price related to such prevailing market price; -- at negotiated prices; or -- such other price as the selling security holder determines from time to time. The shares may also be sold pursuant to Rule 144 under the Securities Act, if available, rather than under this prospectus. The selling security holders shall have the sole and absolute discretion not to accept any purchase offer or make any sale of shares if they deem the purchase price to be unsatisfactory at any particular time. The selling security holders may also engage in short sales against the box, puts and calls and other transactions in securities of our company or derivatives of our company securities and may sell or deliver shares in connection with these trades. The selling security holders may pledge their shares to their brokers under the margin provisions of customer agreements. If a selling security holder defaults on a margin loan, the broker may, from time to time, offer and sell the pledged shares. 75 Broker-dealers engaged by the selling security holders may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling security holders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. The selling security holders do not expect these commissions and discounts to exceed what is customary in the types of transactions involved. The selling security holders and any broker-dealers or agents that are involved in selling the shares may be deemed to be "underwriters" within the meaning of the Securities Act in connection with these sales. In such event, any commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The selling security holders, alternatively, may sell all or any part of the shares offered in this prospectus through an underwriter. To our company's knowledge, no selling security holder has entered into any agreement with a prospective underwriter, and there is no assurance that any such agreement will be entered into. If a selling security holder enters into such an agreement or agreements, the relevant details will be set forth in a supplement or revisions to this prospectus. The selling security holders and any other persons participating in the sale or distribution of the shares offered pursuant to this prospectus will be subject to applicable provisions of the Securities Exchange Act of 1934 and the rules and regulations under such act, including, without limitation, Regulation M. These provisions may restrict certain activities of, and limit the timing of purchases and sales of any of the shares by, the selling security holders or any other such person. Furthermore, under Regulation M, persons engaged in a distribution of securities are prohibited from simultaneously engaging in market making and certain other activities with respect to such securities for a specified period of time prior to the commencement of such distributions, subject to specified exceptions or exemptions. All of these limitations may affect the marketability of the shares. This prospectus does not cover the sale or other transfer of the warrants held by the selling security holders or the issuance of shares of common stock to holders of warrants upon exercise. If a selling security holder transfers its warrants prior to exercise, the transferee of the warrants may not sell the shares of common stock issuable upon exercise of the warrants under the terms of this prospectus unless this prospectus is appropriately amended or supplemented by us. For the period a holder holds our warrants, the holder has the opportunity to profit from a rise in the market price of our common stock without assuming the risk of ownership of the shares of common stock issuable upon exercise of the warrants. The holders of the warrants may be expected to voluntarily exercise their warrants when the exercise price is less than the market price for our common stock. Further, the terms on which we could obtain additional capital during the period in which the warrants remain outstanding may be adversely affected. 76 DESCRIPTION OF CAPITAL STOCK GENERAL Our certificate of incorporation, as amended, authorizes the issuance of up to 25,000,000 shares of common stock, $.0033 par value per share, and 10,000,000 shares of preferred stock, $.01 par value per share, 250 of which has been designated Series A Preferred Stock, and 150,000 of which have been designated Series B Preferred Stock. As of November 20, 2000, there were 20,569,759 shares of common stock issued and outstanding, 25 shares of Series A Preferred Stock issued and outstanding, and 150,000 shares of Series B Preferred Stock issued and outstanding. COMMON STOCK All outstanding shares of common stock are, and the common stock to be issued upon exercise of warrants and resold by the selling security holders in this offering will be, fully paid and nonassessable. The following summarizes the rights of holders of our common stock: -- each holder of common stock is entitled to one vote per share on all matters to be voted upon generally by the stockholders; -- subject to preferences that may apply to shares of preferred stock outstanding, the holders of common stock are entitled to receive such lawful dividends as may be declared by our board of directors, see "Dividend Policy"; -- upon our liquidation, dissolution or winding up, the holders of shares of common stock are entitled to receive a pro rata portion of all our assets remaining for distribution after satisfaction of all our liabilities and the payment of any liquidation preference of any outstanding preferred stock; -- there are no redemption or sinking fund provisions applicable to our common stock; and -- there are no preemptive or conversion rights applicable to our common stock. PREFERRED STOCK Our board of directors is authorized to issue from time to time, without stockholder authorization, in one or more designated series, any or all of our authorized but unissued shares of preferred stock with any dividend, redemption, conversion and exchange provision as may be provided in that particular series. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuance of a new series of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of entrenching our board of directors and making it more difficult for a third-party to acquire, or discourage a third-party from acquiring, a majority of our outstanding voting stock. We have no present plans to issue any shares of or to designate any series of preferred stock. The following are summaries of the terms of the Series A Preferred Stock and the Series B Preferred Stock, and are qualified in their entirety by reference to our certificate of incorporation, as amended, which is filed as an exhibit to the registration statement of which this prospectus is a part. 77 SERIES A PREFERRED STOCK DIVIDEND RIGHTS The holders of our Series A Preferred Stock are not entitled to receive dividends. LIQUIDATION PREFERENCE Holders of our Series A Preferred Stock will receive, prior and in preference to any distribution of any of our assets to the holders of our Series B Preferred Stock and the holders of our common stock by reason of their share ownership, $10,000 per share. MANDATORY AND OPTIONAL REDEMPTION On May 22, 2003, we must redeem all shares of Series A Preferred Stock then outstanding by payment in cash of the redemption price of $11,500 per share (which price equals 115% of the liquidation preference for the Series A Preferred Stock). Prior to that date, we may redeem outstanding and unconverted shares of Series A Preferred Stock at the redemption price by giving 20 days' prior written notice to the holders of shares of Series A Preferred Stock to be redeemed. If less than all of the shares of Series A Preferred Stock are to be optionally redeemed, the particular shares to be redeemed shall be selected by lot or by such other equitable manner determined by our board of directors. We may not, however, redeem shares of Series A Preferred Stock if there is an insufficient number of authorized and reserved shares of common stock for this purpose, or to the extent we receive a conversion notice for the shares of Series A Preferred Stock prior to the redemption date. If we fail to pay the redemption price after calling any shares of Series A Preferred Stock for optional redemption, we will have no further option to redeem shares of Series A Preferred Stock. CONVERSION RIGHTS Subject to adjustments for stock dividends, stock splits, share combinations, recapitalizations and the like, each share of Series A Preferred Stock may be converted into shares of our common stock at a conversion price equal to $10,000 divided by the lesser of $1.26 and 100% of the arithmetic average of the three lowest closing bid prices over the 40 trading days immediately prior to the date of conversion. At any time or from time to time after the 90th day following the issuance of shares of Series A Preferred Stock, a holder may elect to convert those shares by giving notice to us of the holder's election to do so prior to the close of business on the business day immediately prior to the date of conversion of the shares. However, no more than 20% of the aggregate number of shares of Series A Preferred Stock owned by any single holder may be converted in any 30-day period. VOTING RIGHTS The certificate of designation relating to the Series A Preferred Stock requires the affirmative vote of at least a majority of the Series A Preferred Stock then outstanding before we can take certain actions which would adversely affect the rights of these stockholders. To the extent that Delaware law requires the vote of the holders of shares of Series A Preferred Stock, voting separately as a class, approval of at least a majority of the outstanding shares of Series A Preferred Stock will constitute approval. To the extent that Delaware law requires a vote of the holders of Series A Preferred Stock, voting together with the holders of common stock, each share of Series A Preferred Stock will be entitled to a number of votes equal to the number of shares of common stock into which it is then convertible, using the record date for the taking of the vote as the date of determination. 78 REACQUIRED SHARES Any shares of Series A Preferred Stock converted, redeemed, purchased or otherwise acquired by us shall be retired and cancelled and shall become authorized but unissued shares of Series A Preferred Stock that may be reissued by us subject to the conditions and restrictions contained in the certificate of designation relating to the Series A Preferred Stock. SERIES B PREFERRED STOCK DIVIDEND RIGHTS The holders of our Series B Preferred Stock are not entitled to receive dividends. LIQUIDATION PREFERENCE Our certificate of designation relating to our Series B Preferred Stock provides that the holders of our Series B Preferred Stock will receive, subject to prior preference and distribution to holders of Series A Preferred Stock, but prior and in preference to any distribution of any of our assets to the holders of our common stock by reason of their share ownership, $6.40 per share. OPTIONAL REDEMPTION We may redeem outstanding and unconverted shares of Series B Preferred Stock for cash at a price per share equal to $7.36 (which price equals 115% of the liquidation preference for the Series B Preferred Stock), by giving 20 days' prior written notice to the holders of Series B Preferred Stock to be redeemed. If less than all of the shares of Series B Preferred Stock are to be optionally redeemed, the particular shares to be redeemed shall be selected by lot or by such other equitable manner determined by our board of directors. We may not, however, redeem shares of Series B Preferred Stock if there is an insufficient number of authorized and reserved shares of common stock for this purpose, to the extent the Series B Preferred Stock is subject to a lock-up, or to the extent we receive a conversion notice for the shares of Series B Preferred Stock prior to the redemption date. If we fail to pay the redemption price after calling any shares of Series B Preferred Stock for optional redemption, we will have no further option to redeem shares of Series B Preferred Stock. CONVERSION RIGHTS Subject to adjustments for stock dividends, stock splits, share combinations, recapitalizations and the like, each share of Series B Preferred Stock may be converted into 10 shares of our common stock at the option of the holder by giving notice to us of the holder's election to do so prior to the close of business on the business day immediately prior to the redemption date, if any, of the shares, and on or after the following dates: -- On or after March 20, 2001 - a holder may convert up to 1/3 of its shares of Series B Preferred Stock, subject, however, to the limitation that all holders of Series B Preferred Stock may not convert more than 50,000 shares of Series B Preferred Stock in the aggregate at this time. -- On or after September 20, 2001 - a holder may convert up to 2/3 of its shares of Series B Preferred Stock, subject, however, to the limitation that all holders of Series B Preferred Stock may not convert more than 100,000 shares of Series B Preferred Stock in the aggregate at this time. 79 -- On or after March 20, 2002 - a holder may convert all of its shares of Series B Preferred Stock. VOTING RIGHTS The certificate of designation relating to the Series B Preferred Stock requires the affirmative vote of at least a majority of the Series B Preferred Stock then outstanding before we can take certain actions which would adversely affect the rights of these stockholders. To the extent that Delaware law requires the vote of the holders of shares of Series B Preferred Stock, voting separately as a class, approval of at least a majority of the outstanding shares of Series B Preferred Stock will constitute approval. To the extent that Delaware law requires a vote of the holders of Series B Preferred Stock, voting together with the holders of common stock, each share of Series B Preferred Stock will be entitled to a number of votes equal to the number of shares of common stock into which it is then convertible, using the record date for the taking of the vote as the date of determination. If the authorized number of shares of our common stock is not sufficient as of March 20, 2001 to permit the conversion of the Series B Preferred Stock, then each share of Series B Preferred Stock then outstanding shall be entitled to the number of votes that would provide the aggregate number of shares of Series B Preferred Stock then outstanding with voting rights equal to 10% of the then outstanding shares of our common stock for any matter upon which our stockholders are entitled to vote. REACQUIRED SHARES Any shares of Series B Preferred Stock converted, redeemed, purchased or otherwise acquired by us shall be retired and cancelled and shall become authorized but unissued shares of Series B Preferred Stock that may be reissued by us subject to the conditions and restrictions contained in the certificate of designation relating to the Series B Preferred Stock. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW We are subject to Section 203 of the Delaware General Corporation Law, which restricts certain transactions and business combinations between a corporation and an "interested stockholder" owning 15% or more of the corporation's outstanding voting stock for a period of three years from the date the stockholder becomes an interested stockholder. Subject to certain exceptions, unless the transaction is approved by our board of directors and the holders of at least 66% of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder), Section 203 prohibits significant business transactions such as a merger with, disposition of assets to, or receipt of disproportionate financial benefits by the interested stockholder, or any other transaction that would increase the interested stockholder's proportionate ownership of any class or series of the corporation's stock. The statutory ban does not apply if, upon consummation of the transaction in which any person becomes an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock of the corporation (excluding shares held by persons who are both directors and officers or by certain stock plans). TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Computershare Investor Services. Its telephone number is (303) 986-5400. 80 LEGAL MATTERS The validity of the shares of common stock offered under this prospectus will be passed upon by Rutan & Tucker, LLP, Costa Mesa, California. EXPERTS The consolidated financial statements and schedule included in this prospectus and in the registration statement of which this prospectus is a part have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their report (which contains an explanatory paragraph regarding our ability to continue as a going concern), appearing elsewhere in this prospectus and in the registration statement of which this prospectus is a part, and are incorporated in this prospectus in reliance upon such report given upon the authority of BDO Seidman, LLP as experts in auditing and accounting. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act, and the rules and regulations promulgated under the Securities Act, with respect to the common stock offered under this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. While material elements of the contracts and documents referenced in this prospectus are contained in this prospectus, statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the full text of such contract or other document which is filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. For further information with respect to us and the common stock offered under this prospectus, reference is made to the registration statement and its exhibits and schedules. The registration statement, including its exhibits and schedules, may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Securities and Exchange Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 50 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such documents may be obtained from the Securities and Exchange Commission at its principal office in Washington, D.C. upon the payment of the charges prescribed by the Securities and Exchange Commission. The Securities and Exchange Commission maintains a web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. The Securities and Exchange Commission's address on the world wide web is http://www.sec.gov. 81 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page ---- FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 Report of Independent Certified Public Accountants.......................................................... F-2 Consolidated Balance Sheets as of December 31, 1999 and 1998................................................ F-3 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 1999, 1998 and 1997 ....................................................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997 .......................................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 .................. F-6 Notes to Consolidated Financial Statements.................................................................. F-8 FINANCIAL STATEMENT SCHEDULE Consolidated Schedule II Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998 and 1997........................................................................ F-36 FINANCIAL STATEMENTS AS OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 Consolidated Condensed Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999........................................................................................ F-37 Consolidated Condensed Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2000 and l999 (unaudited)................................................ F-38 Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2000 and l999 (unaudited).................................................................. F-39 Notes to Consolidated Condensed Financial Statements (unaudited)............................................ F-40 FINANCIAL STATEMENTS OF T-COM, LLC AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1999 AND RELATED UNAUDITED PRO FORMA INFORMATION Report of Independent Certified Public Accountants.......................................................... F-49 Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)........................................ F-50 Statements of Operations for the year ended December 31, 1999 and the six months ended June 30, 2000 (unaudited) and 1999 (unaudited)..................................................... F-51 Statements of Members' Deficit for the years ended December 31, 1999 and June 30, 2000 (unaudited).......... F-52 Statements of Cash Flows for the year ended December 31, 1999 and the six months ended June 30, 2000 (unaudited) and 1999 (unaudited)..................................................... F-53 Notes to Financial Statements............................................................................... F-54 Unaudited Pro Forma Condensed Combined Financial Information................................................ F-65
F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors MicroTel International, Inc. We have audited the accompanying consolidated balance sheets of MicroTel International, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations and comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. We have also audited the information for each of the years in the three-year period ended December 31, 1999 in the financial statement schedule listed in the accompanying index. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement 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 financial statement 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 financial statement 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 financial statement 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, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule referred to above presents fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 16 to the consolidated financial statements, the Company has suffered recurring losses from operations and is in default of a certain covenant of its domestic credit facility agreement, the effects of which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 16. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /S/ BDO Seidman, LLP Orange County, California March 3, 2000, except as to the penultimate paragraph of Note 9 which is as of November 17, 2000 F-2 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 1998 ---- ---- ASSETS (NOTES 7 AND 8) Current assets: Cash and cash equivalents $ 480 $ 450 Accounts receivable, net of allowance for doubtful accounts of $180 and $250 6,168 6,504 Current portion of notes receivable (Notes 3 and 6) -- 291 Inventories (Note 4) 4,047 5,982 Prepaid and other current assets 427 770 Net assets of discontinued operations (Note 17) 112 -- ------------------- ------------------- Total current assets 11,234 13,997 Property, plant and equipment, net (Note 765 885 Goodwill, net of accumulated amortization of $433 and $239 (Notes 2 and 3) 1,507 1,701 Notes receivable, less current portion (Note 3) -- 533 Investment in affiliates (Notes 3 and 6) 1,240 150 Other assets 722 1,367 ------------------- ------------------- $ 15,468 $ 18,633 =================== =================== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable (Note 7) $ 1,781 $ 2,253 Current portion of long-term debt (Note 8) 1,056 529 Accounts payable 4,453 3,515 Accrued expenses 2,864 3,227 Net liabilities of discontinued operations (Note 17) -- 366 ------------------- ------------------- Total current liabilities 10,154 9,890 Long-term debt, less current portion (Note 8) 143 783 Other liabilities 782 962 ------------------- ------------------- Total liabilities 11,079 11,635 Convertible redeemable preferred stock, $10,000 unit value. Authorized 250 shares; issued and outstanding 59.5 shares in 1999 and 161 shares in 1998 (aggregate liquidation preference of $595 588 1,516 and $1,610, respectively) (Note 9) Commitment and contingencies (Notes 10, 14 and 16) Subsequent event (Notes 3 and 17) Stockholders' equity (Notes 2, 3, 9, 10 and 14): Preferred stock, $0.01 par value. Authorized 10,000,000 shares; no shares issued and outstanding -- -- Common stock, $.0033 par value. Authorized 25,000,000 shares; issued and outstanding 18,152,000 and 12,622,000 shares 60 42 Additional paid-in capital 23,726 20,463 Accumulated deficit (19,759) (15,122) Accumulated other comprehensive income (loss) (226) 99 ------------------- ------------------- Total stockholders' equity 3,801 5,482 ------------------- ------------------- $ 15,468 $ 18,633 =================== ===================
See accompanying notes to consolidated financial statements. F-3 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999 1998 1997 ---- ---- ---- Net sales (Note 15) $ 25,913 $ 30,100 $ 27,251 Cost of sales 17,066 17,353 18,069 ----------------- ---------------- ------------------ Gross profit 8,847 12,747 9,182 Operating expenses: Selling, general and administrative 10,132 10,202 8,608 Engineering and product development 1,841 2,202 1,797 Write-down of goodwill (Note 11) -- -- 5,693 ----------------- ---------------- ------------------ Income (loss) from operations (3,126) 343 (6,916) Other income (expense): Interest expense (297) (507) (550) Gain (loss) on sale of subsidiary/investment, net (Notes 3 and 6) (90) -- -- Other, net (Note 3) 194 (136) (77) ----------------- ---------------- ------------------ Loss from continuing operations before income taxes (3,319) (300) (7,543) Income taxes (Note 12) 128 101 97 ----------------- ---------------- ------------------ Loss from continuing operations (3,447) (401) (7,640) ----------------- ---------------- ------------------ Discontinued operations (Note 17): Loss from discontinued operations (1,146) (1,364) (2,053) Gain (loss) on disposal of discontinued operations, including provision for phase out period of $0 (3) 580 -- ----------------- ---------------- ------------------ (1,149) (784) (2,053) ----------------- ---------------- ------------------ Net loss $ (4,596) $ (1,185) $ (9,693) ----------------- ---------------- ------------------ Other comprehensive income (loss): Foreign currency translation adjustment (325) 206 (260) ----------------- ---------------- ------------------ Total comprehensive income (loss) $ (4,921) $ (979) $ (9,953) ================= ================ ================== Basic and diluted loss per share from continuing operations $ (.21) $ (.03) $ (.76) Basic and diluted loss per share from discontinued operations (.07) (.07) (.20) ----------------- ---------------- ------------------ Basic and diluted loss per share (Note 13) $ (.28) $ (.10) $ (.96) ================= ================ ==================
See accompanying notes to consolidated financial statements. F-4 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
Accumulated Common Stock Additional Other ------------------- Paid-in Accumulated Comprehensive Shares Amount Capital Deficit Income (Loss) Total ------ ------ ------- ------- ------------- ----- Balance at December 31, 1996 6,064 $ 20 $ 8,998 $ (4,124) 153 $ 5,047 Stock issued in connection with reverse acquisition (Note 2) 3,186 10 5,235 -- -- 5,245 Stock issued in connection with private placement (Note 10) 2,000 7 4,251 -- -- 4,258 Stock issued in connection with acquisition (Note 3) 500 2 1,123 -- -- 1,125 Stock issued for debt conversion (Note 10) 55 -- 44 -- -- 44 Stock issued upon exercise of stock options 30 -- 97 -- -- 97 Stock issued in connection with settlement of dispute (Note 10) 80 -- 190 -- -- 190 Stock issued as compensation and under stock purchase plan 11 -- 22 -- -- 22 Foreign currency translation adjustment -- -- -- -- (260) (260) Accretion of preferred stock -- -- -- (60) -- (60) Net loss -- -- -- (9,693) -- (9,693) ------------ ------------ ------------- ------------ ------------ ------------- Balance at December 31, 1997 11,926 39 19,960 (13,877) (107) 6,015 Stock issued upon conversion of preferred stock (Note 9) 770 3 364 -- -- 367 Repurchase of stock issued in connection with settlement of dispute (Note 10) (80) -- (168) -- -- (168) Stock issued under stock purchase plan 7 -- 7 -- -- 7 Warrants issued in connection with issuance of preferred stock (Note 9) -- -- 163 -- -- 163 Warrants issued for services -- -- 85 -- -- 85 Repricing of warrants issued in connection with issuance of preferred stock (Note 9) -- -- 52 -- -- 52 Foreign currency translation adjustment -- -- -- -- 206 206 Accretion of preferred stock -- -- -- (60) -- (60) Net loss -- -- -- (1,185) -- (1,185) ------------ ------------ ------------- ------------ ------------ ------------- Balance at December 31, 1998 12,622 42 20,463 (15,122) 99 5,482 Stock issued upon conversion of preferred stock (Note 9) 2,659 9 960 -- -- 969 Stock issued in connection with acquisition (Note 3) 1,000 3 997 -- -- 1,000 Stock issued as compensation 1,716 6 1,077 -- -- 1,083 Stock and warrants issued in connection with settlement of dispute (Note 14) 150 -- 73 -- -- 73 Stock issued under stock purchase plan 5 -- 2 -- -- 2 Warrants issued for services -- -- 63 -- -- 63 Repricing of warrants issued in connection with issuance of preferred stock (Note 9) -- -- 91 -- -- 91 Foreign currency translation adjustment -- -- -- -- (325) (325) Accretion of preferred -- -- -- (41) -- (41) stock Net loss -- -- -- (4,596) -- (4,596) ------------ ------------ ------------- ------------ ------------ ------------- Balance at December 31, 1999 18,152 $ 60 $ 23,726 $(19,759) $ (226) $ 3,801 ============ ============ ============= ============ ============ =============
See accompanying notes to consolidated financial statements. F-5 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,596) $ (1,185) $ (9,693) Net loss from discontinued operations (1,149) (784) (2,053) --------------- --------------- ----------------- Net loss from continuing operations (3,447) (401) (7,640) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 241 247 253 Amortization of intangible assets 540 449 358 Provision for doubtful accounts 29 79 234 Provision for inventory obsolescence 1,138 494 3,134 Write-down of goodwill -- -- 5,693 Provision for impairment of investment 419 -- -- Equity in earnings of unconsolidated investments (653) (24) 21 Gain (loss) on the sale of subsidiary/investment 90 -- -- Stock and warrants issued for services 1,146 85 22 Repricing of warrants 91 52 -- Changes in operating assets and liabilities: Accounts receivable 554 (1,452) (1,017) Inventories 797 (948) (1,248) Prepaids and other assets 445 (106) 172 Accounts payable 938 (180) (287) Accrued expenses and other liabilities (300) (375) (519) --------------- --------------- ----------------- Net cash provided by (used in) continuing operations 2,028 (2,080) (824) Net cash used in discontinued operations (1,293) (560) (1,489) --------------- --------------- ----------------- Cash provided by (used in) operating activities 735 (2,640) (2,313) --------------- --------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (121) (169) (124) Cash received on sale of subsidiary/investment 118 -- -- Cash acquired in acquisition/merger -- -- 273 Cash collected on notes receivable 9 451 125 --------------- --------------- ----------------- Cash provided by investing activities 6 282 274 --------------- --------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) of notes payable (472) 212 (154) Proceeds from long-term debt 84 1,542 298 Repayments of long-term debt -- (2,307) (1,283) Preferred stock dividends paid -- -- (140) Proceeds from sale of preferred stock -- 2,000 -- Payment of preferred stock and debt issuance costs -- (423) -- Proceeds from sale of common stock 2 7 4,258 --------------- --------------- ----------------- Cash provided by (used in) financing activities (386) 1,031 2,979 --------------- --------------- ----------------- Effect of exchange rate changes on cash (325) 206 57 --------------- --------------- ----------------- Net increase (decrease) in cash and cash equivalents 30 (1,121) 997 Cash and cash equivalents at beginning of year 450 1,571 574 --------------- --------------- ----------------- Cash and cash equivalents at end of year $ 480 $ 450 $ 1,571 =============== =============== =================
See accompanying notes to consolidated financial statements. F-6 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
1999 1998 1997 ---- ---- ---- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 443 $ 652 $ 827 ============================================================ Income taxes $ 124 $ 138 $ 58 ============================================================ SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Note receivable received upon sale of subsidiary $ -- $ 650 $ -- ============================================================ Warrants issued in connection with issuance of preferred stock $ -- $ 163 $ -- ============================================================ Common stock issued upon conversion of preferred stock $ 969 $ 367 $ -- ============================================================ Accretion of preferred stock $ 41 $ 60 $ 60 ============================================================ Issuance of common stock and warrants in connection with settlement of dispute $ 73 $ -- $ 190 ============================================================ Repurchase of common stock issued in connection with settlement of dispute in exchange for Payable $ -- $ 168 $ -- ============================================================ Issuance of common stock in connection with acquisitions $ 1,000 $ -- $ 6,370 ============================================================ Issuance of common stock upon exercise of stock options $ -- $ -- $ 97 ============================================================ Issuance of common stock upon conversion of debt to equity $ -- $ -- $ 44 ============================================================
See accompanying notes to consolidated financial statements. F-7 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS MicroTel International, Inc. (the "Company") operates through three wholly-owned subsidiaries: CXR Telcom Corporation, CXR, S.A. and 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, power supplies and various printed circuits. The Company conducts its operations out of various facilities in the U. S., France, England and Japan and organizes itself in two product line segments: Telecommunications and Components. In October 2000 the Company decided to discontinue its circuits segment operations (see Note 17). Accordingly, all current and prior financial information related to the circuits segment operations have been presented as discontinued operations in the accompanying consolidated financial statements. BASIS OF PRESENTATION 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 stockholders 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 is not assumed to be the acquirer and the financial statements of the combined entity are those of the accounting acquirer (XIT), including any comparative prior year financial statements presented by the combined entity after the business combination. Consequently, the consolidated financial statements include the accounts of XIT and its wholly and majority-owned subsidiaries, and beginning March 26, 1997, include the Company and its other subsidiaries, CXR Telcom Corporation and CXR, S.A. (the "Former Company"). In connection with the reverse acquisition, the Company assumed the number of authorized common shares of 25,000,000 and $.0033 par value per share of the Former Company. Furthermore, the former stockholders of XIT were issued approximately 6,199,000 shares of common stock, which resulted in a common share exchange ratio of 1.451478. Accordingly, all references to the number of shares and to the per share information in the accompanying consolidated financial statements have been adjusted to reflect these changes on a retroactive basis. The Company's minority investment in the common stock of Digital Transmission Systems, Inc. (Note 3) and its 50% investment in a real estate partnership (Note 6) are accounted for using the equity method. All significant intercompany balances and transactions have been eliminated in consolidation. REVENUE RECOGNITION Revenues are recorded when products are shipped if shipped FOB shipping point or when received by the customer if shipped FOB destination. F-8 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements and is effective for all quarters of fiscal years beginning after December 15, 1999. The Company believes that its current revenue recognition policies comply with SAB 101. AVAILABLE-FOR-SALE SECURITIES The Company accounts for investments in accordance with Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." This statement addresses the accounting and reporting for investments in equity securities which have readily determinable fair values and all investments in debt securities. The Company did not have any available-for-sale securities as of December 31, 1999 or 1998 but will account for its investment in Wi-Lan (Note 3) as available-for-sale. Under SFAS 115, marketable equity securities are classified as available for sale and reported at fair value, with changes in the unrealized holding gain or loss included in stockholders' equity. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of all highly liquid investments with an original maturity of three months or less when purchased. 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 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 and is amortized on a straight-line basis over its estimated useful life. In evaluating goodwill, the Company determines whether there has been an impairment and the amount thereof, if any, by comparing the undiscounted future operating income of the acquired business with the carrying value of the goodwill. During 1997, the Company wrote-down the value of goodwill by approximately $5.7 million and reduced the estimated useful lives from 15 - 20 years to 10 years (see Note 11). F-9 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SOFTWARE DEVELOPMENT COSTS Software development costs, including purchased technology, are capitalized beginning when technological feasibility has been established or when purchased from third parties and continues 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. The carrying value of capitalized software development costs aggregates $66,000 and $412,000 (net of accumulated amortization of $763,000 and $417,000) at December 31, 1999 and 1998, respectively, and is included in other assets in the accompanying consolidated balance sheets. Amortization relating to the capitalized software of $346,000, $169,000 and $248,000 was charged to cost of sales during 1999, 1998 and 1997, respectively. The Company reviews the carrying value of its capitalized software development costs for possible impairment at the end of each fiscal quarter by comparing the unamortized capitalized software development costs to the net realizable value of that asset. The Company has not recorded any significant impairment loss related to capitalized software costs during 1999, 1998 or 1997. DEBT ISSUANCE COSTS The costs related to the issuance of debt and the redeemable preferred stock are capitalized and amortized over the life of the instrument. LONG-LIVED ASSETS The Company reviews the carrying amount of its long-lived assets and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets 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 undiscounted 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. PRODUCT WARRANTIES Estimated warranty costs are recognized at the time of the sale. The Company's electronic components carry a one-year limited parts and labor warranty and the Company's telecommunications products carry a two-year limited parts and labor warranty. The Company's telecommunications products may be returned within 30 days of purchase if a new order is received, and the new order will be credited with 80% of the selling price of the returned item. Products returned under warranty typically are tested and repaired or replaced at the Company's option. Historically, the Company has not experienced significant warranty costs or returns. INCOME TAXES The Company uses the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred income F-10 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS taxes are recognized based on the differences between financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the year and the change during the year in deferred tax assets and liabilities. STOCK-BASED COMPENSATION The Company applies APB Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock-based compensation plans. Accordingly, no compensation cost is recognized for its employee stock option plans, unless the exercise price of options granted is less than fair market value on the date of grant. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." EARNINGS (LOSS) PER SHARE Earnings (loss) per share is calculated according to Statement of Financial Accounting Standards No. 128, "Earnings per Share." Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of shares outstanding during the year. Diluted earnings (loss) per share reflects the potential dilution of securities that could share in the earnings of an entity. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" 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. This statement 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 December 31, 1999 and 1998, the fair value of all financial instruments approximated carrying value. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes the carrying amounts of its notes payable and long-term debt approximate fair value because the interest rates on these instruments are subject to change with, or approximate, market interest rates. USE OF ESTIMATES 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 reporting period. Actual results could differ from those estimates. F-11 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONCENTRATION OF CREDIT RISK Financial instruments, which potentially expose the Company to concentration of credit risk, consist primarily of cash and accounts receivable. The Company places its cash with high quality financial institutions. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation. The Company's accounts receivable results from sales to a broad customer base. The Company extends credit to its customers based upon an evaluation of the customer's financial condition and credit history and generally does not require collateral. Credit losses are provided for in the financial statements and consistently have been within management's expectations. FOREIGN CURRENCY TRANSLATION The accounts of foreign subsidiaries have been translated using the local currency as the functional currency. Accordingly, foreign currency denominated assets and liabilities have been translated to U.S. dollars at the current rate of exchange on the balance sheet date. The effects of translation are recorded as a separate component of stockholders' equity in accumulated other comprehensive income (loss). Exchange gains and losses arising from transactions denominated in foreign currencies are translated at average exchange rates and included in operations. Such amounts are not material to the accompanying consolidated financial statements. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 established new rules for the reporting and display of comprehensive income (loss) and its components in a full set of general-purpose financial statements. All prior period data presented have been restated to conform to the provisions of SFAS 130. REPORTABLE SEGMENTS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires public business enterprises to report certain information about operating segments in complete sets of financial statements and in condensed financial statements of interim periods issued to shareholders. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. All prior period data presented has been restated to conform to the provisions of SFAS 131. The Company has determined that it operates in two reportable segments: Telecommunications and Components. F-12 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RECLASSIFICATIONS Certain reclassifications have been made to the prior year financial statements to be consistent with the 1999 presentation. (2) MERGER WITH XIT CORPORATION On March 26, 1997, privately held XIT merged with a wholly-owned, newly formed subsidiary of the Company, with XIT as the surviving subsidiary. Pursuant to the transaction, the former stockholders 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 at the date of the merger collectively had the right to acquire an additional 2,153,000 shares of common stock. Collectively, the former XIT stockholders owned, or had 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 described in Note 1, the merger has been accounted for as a purchase of the Company by XIT. Accordingly, the purchase price, consisting of the value of the common stock outstanding of the Company at the date of the merger of $5,011,000 plus the direct costs of the acquisition of $730,000, and the acquired assets and liabilities of MicroTel were recorded at their estimated fair values at the date of the merger. The excess of $4,998,000 of the purchase price over the fair value of the net assets acquired was recorded as goodwill and thereafter was amortized on a straight-line basis over 15 years. In September 1997, the Company wrote-down the goodwill associated with the merger to $998,000. Thereafter, the remaining goodwill is being amortized on a straight-line basis over ten years (see Note 11). The following represents the unaudited pro forma results of operations as if the merger had occurred at the beginning of the year ended December 31, 1997.
1997 ---- Net sales $ 30,247,000 ================ Net loss $ (12,097,000) ================ Basic and diluted loss per share $ (1.12) ================
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 respective period presented or of results which may occur in the future. (3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES CRITICAL COMMUNICATIONS On October 17, 1997, the Company's CXR Telcom subsidiary acquired all the capital stock of Critical Communications Incorporated ("Critical") of St. Charles, Illinois in exchange for 500,000 shares of the Company's common stock. Founded in 1991, Critical is a provider of sophisticated, state-of-the-art, portable telephone test instruments used by both long-distance carriers and local telephone service F-13 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS providers as well as by corporate and government telecommunications end users. The acquisition of Critical has been accounted for as a purchase, and accordingly, the results of operations of Critical since the date of the acquisition are included in the Company's consolidated statements of operations. The 500,000 shares of common stock were valued at $1,125,000 based on the fair value of the common stock on the acquisition date. The Company acquired $9,000 in cash in the acquisition and the cost in excess of net assets acquired was $1,123,000 which is being amortized on a straight-line basis over ten years. The pro forma effect of this acquisition was not material to the results of operations for 1997. HYCOMP 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. In May 1996, the Company acquired additional common shares 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. As the result of the exercise of certain HyComp stock options in 1997, the Company's ownership of the common shares outstanding of HyComp was reduced to 88.5%. 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 accompanying consolidated financial statements as minority interest, and includes amounts applicable to HyComp's preferred stock of $6,000 at December 31, 1998 and 1997. Dividends on the preferred stock are cumulative at 8% per year, and minority interest at December 31, 1998 and 1997 includes cumulative dividends in arrears of $8,000. On March 31, 1999, the Company sold substantially all of the assets and liabilities of its HyComp, Inc. subsidiary in exchange for $750,000 in cash and a royalty on 1999 revenues generated from HyComp's existing customer base in excess of a specified amount. The transaction resulted in a gain of $331,000. See Note 17. In October 1999, the Company sold its interest in the outstanding common and preferred stock of HyComp in exchange for $118,000. A gain in the same amount was recorded in 1999 as HyComp, subsequent to the asset sale noted above, was essentially a shell company with no significant assets or liabilities. XCEL ARNOLD CIRCUITS On January 9, 1998, the Company entered into a definitive agreement to sell certain of the assets of its XCEL Arnold Circuits, Inc. subsidiary ("XACI"), a manufacturer of multi-layer bare printed circuit boards. On April 9, 1998, the Company completed the sale and received $1,350,000 in cash and a note receivable aggregating $650,000, which was payable over three years. The sale resulted in a gain of $580,000. The balance due under the note receivable was $650,000 at December 31, 1998 of which F-14 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $144,000 is included in current portion of notes receivable in the accompanying 1998 consolidated balance sheet. See Note 17. During 1999, the buyer of XACI defaulted under the terms of the note receivable. The Company offset the balance outstanding pursuant to a note payable due to the buyer (Note 7) against the note receivable and then wrote-off the net unpaid balance of $452,000. Such amount has been included in the net gain (loss) on disposal of discontinued operations in the accompanying 1999 consolidated statement of operations. DIGITAL TRANSMISSION SYSTEMS On January 31, 1999, the Company exercised an option to purchase 1,738,159 shares or 41% of the outstanding common stock of Digital Transmission Systems, Inc. ("DTS") from a private company in exchange for 1,000,000 shares of common stock of the Company. The Company's shares exchanged were valued at $1,000,000 based on the fair value of the common stock on the transaction date, excluding $33,000 of transaction-related costs. This option was granted to the Company on December 31, 1998 in exchange for warrants (with a fair value of approximately $55,000) to purchase 152,381 shares of the Company's common stock at $0.66 per share for five years. DTS was founded in 1990 and is a publicly traded company with its headquarters near Atlanta, Georgia. It designs, manufactures and markets electronic products used to build, access and monitor high-speed telecommunications networks worldwide. DTS's primary customers include domestic and international wireless service providers, telephone service providers and private wireless network users. During 1999, the Company accounted for its investment in DTS using the equity method of accounting and recognized $626,000 of income from its 41% interest in DTS. This amount is included in the net amount of other income in the accompanying 1999 statement of operations. Summarized financial data for DTS is as follows:
December 31, 1999 June 30, 1999 (unaudited) (audited) ----------- --------- Current assets $ 1,472,000 $ 2,321,000 Noncurrent assets 1,401,000 1,486,000 ----------- ----------- Total assets $ 2,873,000 $ 3,807,000 =========== =========== Current liabilities $ 2,431,000 $ 4,108,000 Noncurrent liabilities 2,127,000 2,127,000 ----------- ----------- Total liabilities $ 4,558,000 $ 6,235,000 =========== =========== For the year ended For the year ended December 31, 1999 June 30, 1999 (unaudited) (audited) ----------- --------- Net sales $ 7,256,000 $ 7,538,000 ============ ============ Net income $ 213,000 $ (424,000) ============ =============
On January 7, 2000, the Company sold all of its interest in the common stock in DTS to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a publicly traded company on the Toronto Exchange. The Wi-LAN F-15 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS common stock had a market value of $720,000 on the date of the transaction. Accordingly, as of December 31, 1999, the Company wrote-down the carrying value of its investment in the common stock of DTS to the value of the consideration received in January 2000. The write-down of $419,000 is included in other income (expense) in the accompanying statement of operations for the year ended December 31, 1999. The Company is restricted from selling the Wi-LAN stock until July 7, 2000 due to Toronto exchange rules that restrict sales of stock obtained in an acquisition related transaction. The 28,340 shares of Wi-LAN represents less than 1% of the total outstanding shares of Wi-LAN common stock as of the date of acquisition. The Company will account for these shares as available-for-sale securities. (4) INVENTORIES Inventories are summarized as follows:
1999 1998 ---- ---- Raw materials $ 1,619,000 $ 2,571,000 Work-in-process 1,174,000 2,286,000 Finished goods 1,254,000 1,125,000 ------------------- ------------------- $ 4,047,000 $ 5,982,000 =================== ===================
(5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
1999 1998 ---- ---- Land and buildings $ 306,000 $ 348,000 Machinery, equipment and fixtures 2,803,000 391,000 Leasehold improvements 444,000 416,000 ------------------- ------------------- 3,553,000 1,155,000 Accumulated depreciation and amortization (2,788,000) (270,000) ------------------- ------------------- $ 765,000 $ 885,000 =================== ===================
(6) INVESTMENT IN PARTNERSHIP On December 19, 1996, the Company's XIT subsidiary invested $100,000 and 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 in, Ontario, California. The Company occupied 63,000 square feet of this facility as a corporate headquarters and as an administrative and factory facility for XIT's Digitran Division under a long-term lease from the partnership. Immediately following the formation of the partnership, XIT obtained a loan from a bank for $750,000 (Note 8), and in turn, loaned such funds to the partnership under a note receivable with the same terms and conditions. Such funds were utilized to reduce the existing debt secured by the real estate. XIT's original investment in the partnership is adjusted for the income (loss) attributable to XIT's portion of the F-16 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS partnership's results of operations. The investment in the partnership of $150,000 was included in investment in affiliates in the accompanying 1998 consolidated balance sheet. The balance due under the note receivable was $124,000 at December 31, 1998 and was included in current portion of notes receivable in the accompanying 1998 consolidated balance sheet. In August 1999, the Company sold its interest in the partnership and the note receivable to an unrelated party in exchange for $75,000. In connection with this agreement, all associated liabilities were assumed by the purchaser and all of the Company's unpaid rent in the amount of approximately $152,000 was forgiven. Additionally, the Company's obligation under the long-term lease was terminated. In connection with the sale of its investment in partnership, the Company recognized a loss of $90,000. (7) NOTES PAYABLE A summary of notes payable is as follows:
1999 1998 ---- ---- Line of credit with a commercial lender $ 1,688,000 $ 1,359,000 Foreign subsidiary line of credit with a bank -- 77,000 Foreign subsidiary line of credit with a bank 93,000 317,000 Other notes payable -- 500,000 -------------- ----------------- $ 1,781,000 $ 2,253,000 =============== =================
On July 8, 1998, the Company entered into a $10.5 million credit facility (the "Domestic Facility") with a commercial lender for a term of two years which provided: (i) a term loan of approximately $1.5 million; (ii) a revolving line of credit of up to $8 million based upon assets available from either existing or future-acquired operations; and (iii) a capital equipment expenditure credit line of up to $1 million. This credit facility replaced the existing credit facilities of the Company's domestic operating companies that were paid in full at the closing. Borrowings for continuing operations under the revolving line of credit provision of the Domestic Facility totaled $1,688,000 and $1,359,000 at December 31, 1999 and 1998, respectively. The credit line is collateralized by substantially all assets of the Company's domestic subsidiaries, bears interest at the lender's prime rate (8.5% at December 31, 1999) plus 1% and is payable on demand. No additional borrowings were available under the line at December 31, 1999. No borrowings were outstanding under the $1 million of the capital equipment expenditure credit line at December 31, 1999 or 1998. The lines of credit expire on June 23, 2000. In July 1999, the Company entered into an amendment of the Domestic Facility related to an additional advance of $350,000. Under the terms of the Amendment, the additional advance was repaid F-17 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS prior to September 30, 1999. In addition, such Amendment required the Company to paydown $350,000 of the Domestic Facility's term loan upon the sale of the property owned by Capital Source Partners. Such sale of property and a resulting paydown was not completed (see Note 6). The Company obtained a waiver of such default as of December 31, 1999 and made the required $350,000 paydown upon the closing of the sale of the DTS shares (see Note 3) in January 2000. The Domestic Facility agreement requires compliance with certain other covenants and conditions. The Company was in compliance with all such covenants as of December 31, 1999, except for the adjusted net worth covenant. The Domestic Facility also restricts payment of any dividends. The Company's French subsidiary has a bank line of credit with $0 and $77,000 outstanding at December 31, 1999 and 1998, respectively. Borrowings under the related agreement bear interest at 4.2% to 4.6% at December 31, 1999 and are based on eligible accounts receivable. Approximately $380,000 of borrowings were available under the line at December 31, 1999. The Company's UK subsidiary has a bank line of credit with $93,000 and $317,000 outstanding at December 31, 1999 and 1998, respectively. Borrowings under the related agreement bear interest at the bank's base rate (5.5% at December 31, 1999) plus 2.5% and are based on eligible accounts receivable. Approximately $350,000 of additional borrowings were available under the line at December 31, 1999. The Company borrowed $250,000 from a third party on a short-term basis on December 31, 1998. This loan bore interest at 10% and was repaid in 1999. In addition, the Company had an outstanding note with a balance of $250,000 at December 31, 1998 in connection with the sale of its XCEL Arnold Circuits, Inc. subsidiary (Note 3). This loan bore no interest and was payable on demand. During 1999, the balance of the outstanding note payable was offset against the note receivable received in connection with the sale of XCEL Arnold Circuits (Note 3). The note payable and note receivable related to XCEL Arnold Circuits were entered into with an individual who beneficially owned approximately 5% of the Company's common stock. (8) LONG-TERM DEBT A summary of long-term debt follows:
1999 1998 ---- ---- Term notes payable to commercial lender (a) $ 588,000 $ 633,000 Term note payable to bank (b) -- 135,000 Term notes payable to foreign banks (c) 108,000 101,000 Capitalized lease obligations (d) 236,000 350,000 Other promissory notes 267,000 93,000 -------- -------- 1,199,000 1,312,000 Current portion (1,056,000) (529,000) ------------ ---------- $ 143,000 $ 783,000 ============== ===============
(a) Three term notes payable to a commercial lender bearing interest at the lender's prime rate (8.5% at December 31, 1999) plus 1.25%. The notes are collateralized by machinery and equipment and are payable in total monthly principal installments (aggregating $28,000 at F-18 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999), plus interest through final maturity dates in fiscal 2003. As a result of the Company's non-compliance with the adjusted net worth covenant of the Domestic Facility (Note 7), the Company has classified the entire balance of these term notes as a current liability at December 31, 1999. (b) Term note payable to a bank which bore interest at the lender's prime rate plus 1.25%. The note was repaid during 1999. (c) The Company has agreements with several foreign banks which include term borrowings which mature at various dates through 2001. Interest rates on the borrowings bear interest at rates ranging from 2.0% to 2.8% and are payable in monthly installments. Included in the other term notes is a $101,000 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 respective subsidiary. (d) Capital lease agreements are calculated using interest rates appropriate at the inception of the lease and range from 12% to 22%. Lease liabilities are amortized over the lease term using the effective interest method. The leases all contain bargain purchase options and expire through 2002. Principal maturities related to long-term debt as of December 31, 1999 are as follows:
YEAR ENDING DECEMBER 31, AMOUNT 2000 $ 1,056,000 2001 135,000 2002 8,000 --------------------- $ 1,199,000 =====================
(9) REDEEMABLE PREFERRED STOCK SERIES A AND SERIES B REDEEMABLE PREFERRED STOCK In connection with the Arnold Circuits, Inc. acquisition in 1995, 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 was entitled to a cumulative cash dividend of $120 and $160 per year, respectively, commencing in June 1996. The Series A and B shares had a liquidation preference of and were 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. 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 was being accreted by periodic charges to retained earnings over the original life of the issue. The Series A and Series B redeemable preferred stock was retired as part of the sale of the XCEL Arnold Circuits subsidiary in March 1998 (see Note 3). F-19 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table reflects the Series A and Series B redeemable preferred stock activity:
SERIES A REDEEMABLE SERIES B REDEEMABLE PREFERRED STOCK PREFERRED STOCK -------------------------------- ------------------------------- Number Number of Shares Amount of Shares Amount -------------- -------------- --------------- ------------ Balance at December 31, 1996................... 1,000 $ 340,000 1,000 $ 454,000 Accretion of preferred stock................... -- 26,000 -- 34,000 Preferred stock dividends paid................. -- (60,000) -- (80,000) -------- --------- -------- --------- Balance at December 31, 1997................... 1,000 306,000 1,000 408,000 Accretion of preferred stock................... -- 7,000 -- 7,000 Cancellation of stock upon sale of subsidiary................................. (1,000) (313,000) (1,000) (415,000) ------- --------- ------- ---------- Balance at December 31, 1998 and 1999 -- $ -- -- $ -- ======== ========== ========= ==========
CONVERTIBLE REDEEMABLE PREFERRED STOCK In June 1998, the Company sold 50 shares of convertible preferred stock (the "New Preferred Shares") at $10,000 per share to one institutional investor. In July 1998, the Company sold an additional 150 New Preferred Shares at the same per share price to two other institutional investors. Included with the sale of such New Preferred Shares were a total of one million warrants to purchase the Company's common stock exercisable at $1.25 per share and expiring May 22, 2001. The Company has ascribed an estimated fair value to these warrants (based upon a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 28%; risk-free interest rate of 5.1%; and an expected life of 3 years) aggregating $163,000 and accordingly has reduced the convertible redeemable preferred stock balance as of the date of issuance. The Company received net proceeds totaling approximately $1,843,000 after deduction of commissions and transaction-related expenses. The New Preferred Shares are convertible into common stock of the Company at the option of the holder thereof at any time after the ninetieth (90th) day of issuance thereof at the conversion price per share of New Preferred Shares equal to $10,000 divided by the lesser of (x) $1.26 and (y) One Hundred Percent (100%) of the arithmetic average of the three lowest closing bid prices over the forty (40) trading days prior to the exercise date of any such conversion. No more than 20% of the aggregate number of New Preferred Shares originally purchased and owned by any single entity may be converted in any thirty (30) day period after the ninetieth (90th) day from issuance. In the event of any liquidation, dissolution or winding up of the Company, the holders of shares of New Preferred Shares are entitled to receive, prior and in preference to any distribution of any assets of the Company to the holders of the Company's common stock, an amount per share equal to $10,000 for each outstanding New Preferred Share. Any unconverted New Preferred Shares may be redeemed at the option of the Company for cash at a per share price equal to $11,500 per New Preferred Share and any New Preferred Shares which remain outstanding as of May 22, 2003 are subject to mandatory redemption by the Company at the same per-share redemption price. The excess of the redeemable value over the carrying value is being accreted by periodic charges to retained earnings over the original life of the issue. F-20 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In November 1998, the holders of the New Preferred Shares agreed to modify the conversion rate to $10,000 divided by $0.50 in exchange for a reduction in the exercise price of the Warrants to $0.75 per share. In connection with the repricing of the warrants, the Company recognized $52,000 of non-cash expense in 1998. This expense represents the excess of the fair value of the warrants after repricing over the fair value of the warrants immediately before the repricing. The estimated fair values of the old and revised warrants was calculated using a Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility of 58%; a risk free interest rate of 5%; and an expected life of 2.7 years. In August 1999, the agreement previously reached with the holders of the New Preferred Shares which limited the conversion rate of such stock to $0.50 per common share so long as the Company's common stock continued to be listed on Nasdaq was terminated as a result of the delisting (Note 10). The conversion rate for the New Preferred Shares reverted to the terms of the original subscription agreement which provided that conversion would occur at the lower of $1.26 per common share or the arithmetic average of the three lowest closing bid prices during the forty (40) days immediately prior to conversion. In December 1999, two institutional investors sold all of their outstanding New Preferred Shares and the prorated portion of warrants applicable to the then outstanding New Preferred Shares. The purchasers of such New Preferred Shares and prorated warrants included an executive officer of the Company and certain related parties. Also in December 1999, the holders of the 59.5 outstanding shares of the New Preferred Shares agreed to modify the conversion ratio to a fixed factor whereby each share of the New Preferred Shares is convertible into 50,530 shares of common stock (the fair value of the underlying shares of common stock) in exchange for a reduction in the exercise price of the warrants to $.25 per share and an extension of the expiration date of the warrants to December 2002. In connection with the repricing of the warrants, the Company recognized $91,000 of non-cash expense in 1999. This expense represents the excess of the fair value of the warrants after repricing over the value of the warrants immediately before the repricing. The estimated fair values of the old and revised warrants was calculated using a Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility of 81%; a risk free interest rate of 6%; and an expected life of 1.5 and 3 years, respectively. In November 2000, the Company determined that because the modifications to the conversion rate in November 1998 and December 1999 had not been submitted to and approved by the Company's shareholders in accordance with the Delaware General Corporation Law, all conversions from November 1998 through July 1999 and in December 1999 should have been made at the original conversion rate of $10,000 divided by the lesser of (x) $1.26 and (y) one hundred percent (100%) of the arithmetic average of the three lowest closing bid prices over the forty trading days prior to the exercise date of any such conversion. Under the original conversion terms, the Company would have issued approximately 250,000 additional common shares for certain conversions and issued approximately 90,000 excess common shares for other conversions. No modifications have been made to the accompanying consolidated financial statements to reflect the potential issuance of these additional shares because the Company is still in the process of working with the holders of the New Preferred Shares to reach a satisfactory resolution to this matter. The Company has submitted to the shareholders for approval at a special meeting to be held on January 16, 2001 an amendment to the certificate of designations, preferences and rights relating to the New Preferred Shares. If approved, the amendment will modify the conversion rate for conversions occurring after such amendment is filed with the Delaware Secretary of State so that each of the New F-21 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Preferred Shares will be convertible into 50,530 shares of common stock, which is the same number of shares into which each of the New Preferred Shares would now be convertible if the attempted modifications to the conversion rate had been approved by the Company's shareholders in accordance with the Delaware General Corporation Law. The following table reflects the convertible redeemable preferred stock activity:
NUMBER OF SHARES AMOUNT Balance at December 31, 1997 - - Preferred stock issued 200 1,837,000 Conversion to common stock (39) (367,000) Accretion of preferred stock - 46,000 ----------- ----------- Balance at December 31, 1998 161 1,516,000 Conversion to common stock (101.5) (969,000) Accretion of preferred stock - 41,000 ----------- ----------- Balance at December 31, 1999 59.5 $ 588,000 =========== ===========
(10) STOCKHOLDERS' EQUITY In April 1997, the Company sold 2,000,000 investment units at $2.50 per unit. The units consist of one share of common stock and one quarter of a warrant to purchase one share of common stock. The warrants have an exercise price of $3.45. The proceeds to the Company were $4,258,000 (net of $600,000 of commissions and $142,000 for other expenses). In connection with this transaction, 200,000 warrants were issued to the placement agents at an exercise price of $2.66. STOCK OPTIONS AND WARRANTS The Company has the ability to issue options to purchase its common stock under the following arrangements: - 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. - 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. - The MicroTel International, Inc. 1997 Stock Incentive Plan (the "1997 Plan") provides that options granted may be either qualified or nonqualified stock options and are required to be granted at fair market value on the date of grant. Subject to termination of employment, options may expire up to ten years from the date of grant and are nontransferable other than in the event of death, disability or certain other transfers that the committee of the Board of Directors F-22 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS administering the 1997 Plan may permit. Up to 1,600,000 stock options may be granted under the 1997 Plan. All outstanding options of former optionholders under the XIT 1987 Employee Stock Option Plan were converted to options under the 1997 Plan as of the date of the merger between the Company and XIT at the exchange rate of 1.451478 (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 date 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. The following table shows activity in the outstanding options for the years ended December 31, 1999, 1998 and 1997:
WEIGHTED AVERAGE 1999 EXERCISE 1998 1997 SHARES PRICE SHARES SHARES Outstanding at beginning of year 2,047,000 $ 2.13 1,999,000 842,000 Granted 430,000 0.20 200,000 96,000 XIT/MicroTel merger -- -- -- 1,146,000 Exercised -- -- -- (30,000) Canceled (897,000) 2.39 (152,000) (55,000) ---------------- ----------------- --------------- ----------------- Outstanding at end of year 1,580,000 $ 1.46 2,047,000 1,999,000 ================ ================= =============== =================
The following table summarizes information with respect to stock options at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- --------------------------------- WEIGHTED AVERAGE NUMBER REMAINING NUMBER RANGE OF OUTSTANDING CONTRACTUAL WEIGHTED EXERCISABLE WEIGHTED EXERCISE DECEMBER 31, LIFE AVERAGE DECEMBER 31, AVERAGE PRICE 1999 (YEARS) PRICE 1999 PRICE ----- ---- ------- ----- ---- ----- $.20 to $1.00 430,000 9.9 $0.20 215,000 $0.20 $1.01 to $2.00 964,000 6.1 $1.71 964,000 $1.71 $2.01 to $3.00 56,000 6.2 $2.71 56,000 $2.71 $3.01 to $4.00 130,000 4.4 $3.16 130,000 $3.16 ------------------ ------------------- $.20 to $4.00 1,580,000 7.0 $1.46 1,365,000 $1.65 ================== ===================
F-23 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Options exercisable as of December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 ---- ---- ---- Exercisable 1,365,000 1,892,000 1,843,000 Weighted Average Exercise Price $ 1.65 $ 2.26 $ 2.32
Weighted average exercise prices for 1999 are calculated at prices effective as of December 31, 1999. The fair value of options granted during 1999 was $63,000, at a weighted average value of $0.15 per share. Exercise prices for options outstanding as of December 31, 1999 generally ranged from $0.20 to $3.45 per share and the weighted average remaining contractual life for these options was 7 years. The fair value of options granted during the years ended December 31, 1998 and 1997 were $112,000 and $132,000, at weighted average prices of $0.56 and $1.37 per share, respectively. 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 1999, 1998 and 1997 has been estimated based on a modified Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 85% in 1999, 25% to 57% in 1998 and 73% in 1997, based on historical results; risk-free interest rate of 5.1% to 6.0%; and average expected lives of approximately seven to ten years. The following table sets forth the net loss, net loss available for common stockholders and loss per share amounts for the periods presented as if the Company had elected the fair value method of accounting for stock options.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 1997 ---- ---- ---- NET LOSS As reported $ (4,596) $ (1,185) $ (9,693) Pro forma $ (4,628) $ (1,297) $ (9,825) NET LOSS AVAILABLE FOR COMMON STOCKHOLDERS As reported $ (4,637) $ (1,245) $ (9,753) Pro forma $ (4,669) $ (1,357) $ (9,885) BASIC AND DILUTED LOSS PER SHARE As reported $ (.28) $ (.10) $ (.96) Pro forma $ (.28) $ (.11) $ (.98)
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 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 F-24 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS incremental compensation is amortized over the related vesting period, or expensed immediately if fully vested. The above calculations include the effects of all grants in the years presented. Because options often vest over several years and additional awards are made each year, the results shown above may not be representative of the effects on net income (loss) in future years. 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, December 31, 1996 1,198,000 $ 1.21 to 3.79 $ 3,431,000 Warrant - MicroTel merger 122,000 2.50 305,000 Warrants issued 1,170,000 2.13 to 3.45 3,410,000 -------------------- ------------------ ---------------------- Balance outstanding, December 31, 1997 2,490,000 1.21 to 3.79 7,146,000 Warrants issued 2,802,000 0.66 to 1.25 2,838,000 Warrants cancelled (1,000,000) 1.25 (1,250,000) -------------------- ------------------ ---------------------- Balance outstanding, December 31, 1998 4,292,000 0.66 to 3.79 8,734,000 Warrants issued 2,865,000 0.25 to 1.38 2,199,000 Warrants expired/cancelled (1,925,000) 0.60 to 2.50 (2,015,000) -------------------- ------------------ ---------------------- Balance outstanding at December 31, 1999 5,232,000 $ 0.25 to 3.79 $ 8,918,000 ==================== ================== ======================
During 1999, the Company issued 1,716,000 shares of common stock as compensation for various services rendered. The fair value of such expense (based upon the market price of the common stock on the date of issuance) was approximately $1,077,000. Of the shares issued, 555,641 shares valued at $365,000 were issued to employees (non-officers) of the Company as a bonus. During 1998, the Company issued warrants to purchase 552,381 shares of the Company's common stock at exercise prices ranging from $0.6563 to $1.26 per share for various consulting services. The estimated fair values of the warrants was calculated using a Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility ranging from 24-59%; a risk-free interest rate of 5%; and expected lives of 1.5 to 5 years. The Company has an Employee Stock Purchase Plan at its CXR subsidiary allowing eligible subsidiary employees to purchase shares of the Company's common stock at 85% of market value. During 1999, 1998 and 1997, 5,000, 7,000 and 6,000 shares, respectively, had been issued pursuant to the plan with 27,000 shares reserved for future issuance. As of December 31, 1999, the Company has 18,152,000 shares of common stock outstanding and potentially 9,846,000 shares of common stock issuable pursuant to the exercise of outstanding stock options and warrants and conversion of convertible redeemable preferred stock. In accordance with its certificate of incorporation, the Company is authorized to issue 25,000,000 shares of common stock. Accordingly, the Company may be unable to issue the common shares pursuant to its outstanding stock options, warrants and convertible redeemable preferred stock until such time as the Company's articles of incorporation are amended or until the terms of the related stock options, warrants and/or convertible redeemable preferred stock are modified. F-25 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DEBT TO EQUITY CONVERSION In March 1997, the Company converted $44,000 in various promissory notes to 55,000 shares of common stock. SETTLEMENT OF DISPUTE During 1997, the Company entered into an amendment to an agreement with a former officer in settlement of a claim made by such officer for certain amounts purportedly owed to him by the Company. In connection with the amended agreement, the Company issued the former officer 80,000 shares of its common stock valued at $190,000, the fair market value of the common stock on the date of issuance. In November 1998, the Company entered into a further amended agreement pursuant to which the former officer returned the 80,000 shares previously issued in exchange for the Company's agreement to pay $168,000 over the next two years. The Company cancelled the returned shares. NASDAQ DELISTING In May 1999, the listing of the Company's common stock on the Nasdaq SmallCap Market ("Nasdaq") was discontinued and thereafter, the Company's common stock has been traded on the OTC Bulletin Board. (11) NON-RECURRING CHARGES; IMPAIRMENT OF GOODWILL The Company assesses the recoverability of its goodwill whenever adverse events or changes in circumstances or business climate indicate that expected future cash flows (undiscounted and without interest charges) for individual business units may not be sufficient to support recorded goodwill. During the third quarter ended September 30, 1997 the Company, due to declines in profit margins and continuing operating losses, wrote-off the carrying value of goodwill originating with certain acquisitions. The Company also wrote-down the carrying value of goodwill originating from the reverse acquisition with XIT (see Note 2) to its net realizable value. These write-downs totaled $5,693,000 and were charged to operations. F-26 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) INCOME TAXES The Company files a consolidated U.S. federal income tax return. This return includes all domestic companies 80% or more owned by the Company. State tax returns are filed on a consolidated, combined or separate basis depending on the applicable laws relating to the Company and its domestic subsidiaries. Income (loss) from continuing operations before income taxes was taxed under the following jurisdictions:
1999 1998 1997 ---- ---- ---- Domestic $ (2,805,000) $(306,000) $ (7,668,000) Foreign (514,000) 6,000 125,000 --------------------- --------------------- ---------------------- Total $ (3,319,000) $ (300,000) $ (7,543,000) ===================== ===================== ====================== Income tax expense consists of the following: 1999 1998 1997 ---- ---- ---- Current: Federal $ -- $ -- $ -- State 30,000 8,000 17,000 Foreign 98,000 93,000 80,000 --------------------- --------------------- ---------------------- $ 128,000 $ 101,000 $ 97,000 ===================== ===================== ======================
Income tax expense (benefit) differs from the amount obtained by applying the statutory federal income tax rate of 34% to loss from continuing operations before income taxes as follows:
1999 1998 1997 ---- ---- ---- Tax at U.S. federal statutory rate $(1,128,000) $ (102,000) $(2,565,000) State taxes, net of federal income tax benefit 30,000 8,000 17,000 Foreign income taxes 98,000 93,000 80,000 Write-down of goodwill -- -- 1,936,000 Losses with no current benefit 1,058,000 4,000 398,000 Permanent differences 157,000 70,000 98,000 Other -- -- 74,000 -------------------------------------------------- $ 128,000 $ 101,000 $ 97,000 ==================================================
F-27 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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:
1999 1998 ---- ---- Deferred tax assets: Allowance for doubtful accounts $ 37,000 90,000 Inventory reserves and uniform capitalization 254,000 387,000 Other accrued liabilities 140,000 279,000 Deferred compensation 326,000 537,000 Research credit carryforwards 256,000 256,000 Alternative Minimum Tax credit carryforwards 134,000 134,000 Net operating loss carryforwards 17,436,000 15,423,000 ---------------------------- Total deferred tax assets 18,583,000 17,106,000 Valuation allowance for deferred tax assets (18,335,000) (16,591,000) ---------------------------- Net deferred tax assets 248,000 515,000 ---------------------------- Deferred tax liabilities: Depreciation (166,000) (515,000) Gain on sale of investment (82,000) -- ---------------------------- Total deferred tax liabilities (248,000) (515,000) ---------------------------- Net deferred taxes $ -- $ -- ============================
As of December 31, 1999, the Company has a federal net operating loss carryforward of approximately $50,000,000 which expires at various dates between 2001 and 2019 and a state net operating loss carryforward of approximately $5,000,000 which expires at various dates through 2004. As a result of the merger with XIT (Note 2), the Company experienced a more than 50% ownership change for federal income tax purposes. As a result, an annual limitation will be placed upon the Company's ability to realize the benefit of its net operating loss and credit carryforwards. The amount of this annual limitation, as well as the impact of the application of other possible limitations under the consolidated return regulations, has not been definitively determined at this time. Management believes sufficient uncertainty exists regarding the realizability of the deferred tax asset items and that a valuation allowance, equal to the net deferred tax asset amount, is required. F-28 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) LOSS PER SHARE The following table illustrates the computation of basic and diluted loss per share:
1999 1998 1997 ---- ---- ---- NUMERATOR: Net loss $(4,596,000) $(1,185,000) $(9,693,000) Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 41,000 60,000 60,000 ------------ ------------ ------------ Income available for common stockholders $(4,637,000) $(1,245,000) $(9,753,000) ============ ============ ============ DENOMINATOR: Weighted average number of common shares outstanding during the year 16,638,000 11,952,000 10,137,000 ------------ ------------ ------------ Basic and diluted loss per share $ (.28) $ (.10) $ (.96) ============ ============ ============
The computation of diluted loss per share excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was antidilutive due to losses incurred by the Company. See summary of outstanding stock options and warrants in Note 10. (14) COMMITMENTS AND CONTINGENCIES LEASES The Company conducts most of its operations from leased facilities under operating leases which expire at various dates through 2003. 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 1999, 1998 and 1997, was $1,711,000, $2,091,000 and $2,477,000, respectively. The future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year are as follows:
Year Ending December 31, Amount ------------------------ ------------------ 2000 $ 1,215,000 2001 897,000 2002 626,000 2003 122,000 2004 84,000 ------------------ $ 2,944,000 ==================
F-29 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LITIGATION The Company and its subsidiaries are, from time to time, involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows. SCHEINFELD v. MICROTEL INTERNATIONAL, INC. 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 40,000 shares of common stock purchased by Mr. Scheinfeld. 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, in the absence of registrations, the Company could not issue unrestricted shares, 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, and the Company has subsequently answered, denying the material allegations of the complaint. During the third quarter of 1999, the Company entered into a settlement agreement with David Scheinfeld. The Company agreed to pay $75,000 payable in an initial payment of $6,250 and eleven monthly payments of $6,250 thereafter without interest. The unpaid amount due as of December 31, 1999, aggregating $50,000, is presented in other promissory notes (Note 8). DANIEL DROR & ELK INTERNATIONAL, INC. v. MICROTEL INTERNATIONAL, INC. In November 1996, the Company entered into an agreement (the "Agreement") with the former Chairman of the Company, which involved certain mutual obligations. In December 1997, the former Chairman defaulted on the repayment of the first installment of a debt obligation which was an obligation set forth in the Agreement. Also in December 1997, the former Chairman of the Company, filed suit in the District Court for Galveston County, Texas alleging the Company had breached an alleged oral modification of the Agreement. In January 1998, the Company answered the complaint denying the allegation and litigation commenced in Texas. In April 1998, the Company brought an action in California against the former Chairman for breach of the Agreement and sought recovery of all stock, warrants and debt due the Company. The Company obtained a judgement against the former Chairman in this litigation. In December 1997, Elk International Corporation Limited ("Elk"), a stockholder of the Company, brought an action in Texas against the Company's current Chairman and an unrelated party, alleging certain misrepresentations during the merger discussions between XIT and the Company. In February F-30 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1999, Elk filed suit against the Company, the current Chairman and the Company's general counsel in connection with a stop transfer placed by the Company on certain common shares held by Elk. In March 1999, the parties entered into a settlement agreement which terminated all of the aforementioned actions. The agreement calls for the Company to issue to Elk, Dror and other parties $60,000 and 150,000 shares of the Company's common stock with a fair market value of approximately $56,000 (based on the closing market price of the common stock on the settlement date). In addition, the Company issued 1,000,000 warrants to purchase the Company's common stock at an exercise price of $1.37 per share for two years in exchange for the returning 750,000 options and returning 90,000 warrants all to purchase the Company's common stock at an exercise price of $2.50 per share for 2.8 years. The fair value of the warrants granted over the options and warrants returned on the date of the settlement was approximately $17,000. The estimated fair values of the old and new options or warrants were calculated using a Black-Scholes pricing model with the following assumptions: no dividend yield, expected volatility of 81%; a risk-free interest rate of 5%; and expected lives of 2.8 and 2 years, respectively. The Company accrued for this settlement in the accompanying 1998 consolidated financial statements. EMPLOYEE BENEFIT PLANS Though September 30, 1998, the Company sponsored several defined contribution plans ("401(k) Plans") covering the majority of its U.S. domestic employees. Effective October 1, 1998, these plans were terminated and a new plan was instituted covering the same employees. Participants may make voluntary pretax contributions to such plans up to the limit as permitted by law. Annual contributions to any plan by the Company is discretionary. The Company made contributions of $31,000, $22,000 and $43,000 to the 401(k) Plans for the calendar years ended December 31, 1999, 1998 and 1997, respectively. (15) SEGMENT AND MAJOR CUSTOMER INFORMATION The Company has two reportable segments: Telecommunications and Components. The Telecommunications segment operates principally in the U.S. and European markets and designs, manufactures and distributes telecommunications test instruments and voice and data transmission and networking equipment. The Components segment operates in the U.S., European and Asian markets and designs, manufactures and markets information technology products, including input and display components, subsystem assemblies, and power supplies. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. F-31 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's reportable segments are comprised of operating entities offering the same or similar products to similar customers. Each segment is managed separately because each business has different customers, design and manufacturing and marketing strategies. Selected financial data for each of the Company's operating segments is shown below.
1999 1998 1997 ---- ---- ---- SALES FROM EXTERNAL CUSTOMERS: Telecommunications $15,666,000 $17,532,000 $15,054,000 Components 10,247,000 12,568,000 12,197,000 ----------------- -------------------- -------------------- $25,913,000 $30,100,000 $27,251,000 ================= ==================== ==================== INTERSEGMENT SALES: Telecommunications $ -- $ 17,000 $ 133,000 Components 279,000 635,000 957,000 ----------------- -------------------- -------------------- $ 279,000 $ 652,000 $ 1,090,000 ================= ==================== ==================== INTEREST EXPENSE: Telecommunications $ 110,000 $ 79,000 $ 109,000 Components 75,000 323,000 396,000 ----------------- -------------------- -------------------- $ 185,000 $ 402,000 $ 505,000 ================= ==================== ==================== DEPRECIATION AND AMORTIZATION: Telecommunications $ 490,000 $ 265,000 $ 164,000 Components 101,000 241,000 284,000 ----------------- -------------------- -------------------- $ 591,000 $ 506,000 $ 448,000 ================= ==================== ==================== SEGMENT PROFITS (LOSSES): Telecommunications $(1,376,000) $ 367,000 $ 536,000 Components 1,341,000 2,473,000 794,000 ----------------- -------------------- -------------------- $ (35,000) $ 2,840,000 $ 1,330,000 ================= ==================== ==================== SEGMENT ASSETS: Telecommunications $ 7,960,000 $10,234,000 $ 9,691,000 Components 5,213,000 7,193,000 6,946,000 ----------------- -------------------- -------------------- $13,173,000 $17,427,000 $16,637,000 ================= ==================== ====================
F-32 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a reconciliation of the reportable segment revenues, profit or loss and assets to the Company's consolidated totals.
1999 1998 1997 ---- ---- ---- NET SALES Total sales for reportable segments $26,192,000 $30,752,000 $28,341,000 Elimination of intersegment sales (279,000) (652,000) (1,090,000) ------------------ ------------------ ------------------ Total consolidated revenues $25,913,000 $30,100,000 $27,251,000 ================== ================== ================== PROFIT (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES Total profit (loss) for reportable segments $ (35,000) $ 2,840,000 $ 1,330,000 Write-down of goodwill -- -- (5,693,000) Unallocated amounts: General corporate expenses (3,284,000) (3,140,000) (3,180,000) ------------------ ------------------ ------------------ Consolidated loss from continuing operations before income taxes $(3,319,000) $ (300,000) $(7,543,000) ================== ================== ================== ASSETS Total assets for reportable segments $13,173,000 $17,427,000 $16,637,000 Other assets 2,295,000 1,206,000 1,587,000 ------------------ ------------------ ------------------ Total consolidated assets $15,468,000 $18,633,000 $18,224,000 ================== ================== ================== INTEREST EXPENSE Interest expense for reportable segments $ 185,000 $ 402,000 $ 505,000 Other interest expense 112,000 105,000 45,000 ------------------ ------------------ ------------------ Total interest expense $ 297,000 $ 507,000 $ 550,000 ================== ================== ================== DEPRECIATION AND AMORTIZATION Depreciation and amortization expense for reportable segments $ 591,000 $ 506,000 $ 448,000 Other depreciation and amortization expense 190,000 190,000 163,000 ------------------ ------------------- ------------------ Total depreciation and amortization $ 781,000 $ 696,000 $ 611,000 ================== =================== ==================
F-33 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the Company's net sales, operating income (loss) and identifiable assets by geographical area follows:
1999 1998 1997 ---- ---- ---- Net sales: United States $ 9,490,000 $12,804,000 $12,251,000 Japan 658,000 706,000 857,000 France 10,958,000 11,118,000 8,450,000 United Kingdom 4,807,000 5,472,000 5,693,000 ------------------ ------------------- ------------------ $25,913,000 $30,100,000 $27,251,000 ================== =================== ================== Long-lived assets: United States $ 1,905,000 $ 2,602,000 $ 2,626,000 Japan 16,000 13,000 12,000 France 257,000 458,000 807,000 United Kingdom 190,000 133,000 296,000 ------------------ ------------------- ------------------ $ 2,368,000 $ 3,206,000 $ 3,741,000 ================== =================== ==================
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. Net sales by geographic area have been determined based upon the country from which the product was shipped. The Company had sales to one customer which accounted for approximately 14% of net sales in 1997. No one customer accounted for more than 10% of net sales in 1998 or 1999. (16) GOING CONCERN The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the years ended December 31, 1999, 1998 and 1997, the Company experienced significant operating losses. Additionally, the Company is in default of the Domestic Credit Facility agreement (Note 7) as the Company is not in compliance with an adjusted net worth covenant contained therein. These factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's foreign subsidiaries in the United Kingdom, France and Japan have separate borrowing arrangements. Although management has been successful in obtaining working capital to fund operations to date, there can be no assurance that the Company will be able to generate additional capital in the future. During 1999, the Company took certain actions in an effort to become profitable and improve cash flow from operations in the future. As a result of the current and future anticipated operating losses at the Company's HyComp subsidiary, the Company sold substantially all the assets of this subsidiary in the first quarter of 1999. Additionally, during the second half of 1999, the Company embarked on a cost reduction program, which included a significant reduction in personnel at the Company's domestic subsidiaries and the relocation and downsizing of the corporate headquarters and certain subsidiaries' manufacturing and office facilities. Furthermore, the Company terminated its lease obligation related to its corporate F-34 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS headquarters and one manufacturing facility in connection with the sale of its investment in a partnership (Note 6) and also subleased a portion of another subsidiary's facility. In addition, subsequent to year end, the Company sold its investment in the common stock of Digital Transmission Systems, Inc. for which the Company received cash proceeds of $520,000 and common shares of a foreign publicly-traded company, with a then current market value of approximately $720,000 (Note 3). The Company is implementing a corporate finance program designed to improve its working capital structure by considering certain alternatives to its existing domestic credit facilities. The Company is actively searching for alternative financing to replace the current domestic credit facility. Although no replacement lender has been selected, the Company has identified several prospective lenders, one of whom has submitted a proposal to the Company. The finance program also involves the potential private placement of certain debt or equity securities. Additionally, management is exploring the potential to further leverage its common stock held in Wi-LAN, Inc. (Note 3) which has a fair market value of approximately $1,600,000 as of February 29, 2000. The Company's domestic credit facilities lender has provided an additional $400,000 of borrowing capacity against this asset. In addition, the Company is in negotiations with a foreign financial institution to leverage the Company's existing United Kingdom subsidiary to provide additional working capital for operations and acquisitions. Finally, management has developed and continues to implement plans to reduce existing cost structures, improve operating efficiencies, and strengthen the Company's operating infrastructure. (17) DISCONTINUED OPERATIONS In October 2000, the Company decided to discontinue its circuits segment operations. At that time, the circuits segment operations consisted of XCEL Etch Tek, a wholly-owned subsidiary. During 1998 and 1999, the Company sold substantially all of the assets of two other circuits operations, HyComp and XCEL Arnold Circuits (see Note 3). Accordingly, all current and prior financial information related to the circuits segment operations (XCEL Etch Tek, HyComp and XCEL Arnold) have been presented as discontinued operations in the accompanying consolidated financial statements. The net assets and liabilities relating to the circuits segment have been included in net assets (liabilities) of discontinued operations in the accompanying consolidated balance sheet, including the following debt obligations which relate to the discontinued segment which were repaid from the proceeds of the related sale (in thousands):
1999 1998 ---- ---- Line of credit with a commercial lender (Note 7) $ 326 $1,126 Term notes payable with commercial lender (Note 7) 366 893 ------ ------- $ 692 $2,019 ====== =======
The Company anticipates the sale of substantially all of the assets of XCEL Etch Tek in November 2000 for consideration of $260,000 in cash, a $50,000 note and the assumption of $75,000 in liabilities. The sale is expected to result in a loss of approximately $476,000. As of December 31, 1999, the Company has not accrued for the loss on sale nor the loss of approximately $158,000 related to the operations of XCEL Etch Tek from October 2, 2000 through November 22, 2000 (the anticipated sale date). F-35 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Additions Balance at Charged to Deductions Beginning of Costs and Write-offs of Balance at Description Year Expenses Accounts End of Year - ----------- ---- -------- -------- ----------- Allowance for doubtful accounts: Year ended December 31, 1999 $ 250,000 29,000 (99,000) 180,000 Year ended December 31, 1998 225,000 79,000 (54,000) 250,000 Year ended December 31, 1997 51,000 234,000 (60,000) 225,000 ================ ================ ================ ================
F-36 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
September 30, December 31, ASSETS 2000 1999 ---------------- ------------ Cash and cash equivalents $ 694 $ 480 Accounts receivable, net 5,804 6,168 Inventories 6,198 4,047 Net assets of discontinued operations -- 112 Other current assets 1,116 427 ---------------- ------------ Total current assets 13,812 11,234 Property, plant and equipment-net 867 765 Goodwill, net 3,186 1,507 Investment in unconsolidated affiliates -- 1,240 Other assets 625 722 ---------------- ------------ $ 18,490 $ 15,468 ================ ============ LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Notes payable $ 2,556 $ 1,781 Current portion of long-term debt 732 1,056 Accounts payable 4,822 4,453 Accrued expenses 2,806 2,864 Net liabilities of discontinued operations 179 -- ---------------- ------------ Total current liabilities 11,095 10,154 Long-term debt, less current portion 1,186 143 Other liabilities 623 782 ---------------- ------------ Total liabilities 12,904 11,079 Convertible redeemable preferred stock, $10,000 unit value. Authorized 250 shares; issued and outstanding 25 shares and 59.5 shares (aggregate liquidation preference of $250 and $595, respectively) 276 588 Stockholders' equity: Preferred Stock, $0.01 par value. Authorized 10,000,000 shares Convertible Series B preferred stock, $0.01 par value, 150,000 and 0 issued and outstanding (aggregate liquidation preference of $960 and $0, respectively) 938 -- Common stock, $0.0033 par value. Authorized 25,000,000 shares; issued and outstanding 20,570,000 and 18,152,000 68 60 Additional paid-in capital 24,379 23,726 Accumulated deficit (19,414) (19,759) Accumulated other comprehensive loss (661) (226) ---------------- ------------ Total stockholders' equity 5,310 3,801 ---------------- ------------ $ 18,490 $ 15,468 ================ ============
See accompanying notes to consolidated condensed financial statements. F-37 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
Three months ended Nine months ended September 30, September 30, -------------------- -------------------- 2000 1999 2000 1999 --------- --------- -------- --------- (in thousands, except per share amounts) Net sales $ 6,871 $ 6,448 $ 19,559 $ 19,444 Cost of sales 3,080 4,203 10,645 12,269 -------- --------- -------- --------- Gross profit 3,791 2,245 8,914 7,175 Operating expenses: Selling, general and administrative 2,467 2,385 6,923 8,494 Engineering and product development 277 459 772 1,462 -------- --------- -------- --------- Income (loss) from operations 1,047 (599) 1,219 (2,781) Other income (expense): Interest expense (110) (80) (263) (209) Equity in earnings of unconsolidated affiliates -- 28 -- 755 Other 177 (79) 381 (45) -------- --------- -------- --------- Income (loss) from continuing operations before income taxes 1,114 (730) 1,337 (2,280) Income tax expense 2 12 13 25 -------- --------- -------- --------- Income (loss) from continuing operations 1,112 (742) 1,324 (2,305) -------- --------- -------- --------- Discontinued operations: Loss from operations of discontinued segment (84) (292) (276) (949) Gain (loss) on disposal of discontinued segment, including provision for phase out period of $158 in 2000 periods (634) -- (634) 331 -------- --------- -------- --------- (718) (292) (910) (618) -------- --------- -------- --------- Net income (loss) 394 (1,034) 414 (2,923) Other comprehensive income (loss): Foreign currency translation adjustment (218) 244 (435) (180) -------- --------- -------- --------- Total comprehensive income (loss) $ 176 $ (790) $ (21) $ (3,103) ======== ========= ======== ========= Earnings (loss) per share: Continuing operations: Basic $ 0.05 $ (0.04) $ 0.07 $ (0.14) ======== ========= ======== ========= Diluted $ 0.05 $ (0.04) $ 0.06 $ (0.14) ======== ========= ======== ========= Discontinued operations: Basic $ (0.03) $ (0.02) $ (0.05) $ (0.04) ======== ========= ======== ========= Diluted $ (0.03) $ (0.02) $ (0.04) $ (0.04) ======== ========= ======== ========= Net income (loss): Basic $ 0.02 $ (0.06) $ 0.02 $ (0.18) ======== ========= ======== ========= Diluted $ 0.02 $ (0.06) $ 0.02 $ (0.18) ======== ========= ======== =========
See accompanying notes to consolidated condensed financial statements. F-38 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 2000 1999 --------- -------- (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 414 (2,923) Net loss from discontinued operations (910) (618) --------- -------- Net income (loss) from continuing operations 1,324 (2,305) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Depreciation and amortization 230 275 Amortization of intangibles 282 243 Write-off of note receivable -- 753 Gain on the sale of fixed assets (43) -- Gain on sale of Wi-LAN, Inc. stock (197) -- Equity in earnings of unconsolidated entities -- (735) Stock and warrants issued as compensation 130 1,220 Other noncash items 648 967 Changes in operating assets and liabilities: Accounts receivable 1,179 294 Inventories (987) 344 Other assets (60) 262 Accounts payable and accrued expenses (2,668) (278) --------- -------- Net cash provided by (used in) continuing operations (162) 1,040 Net cash used in discontinued operations (457) (461) --------- -------- Cash provided by (used in) operating activities (619) 579 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (15) (130) Proceeds from sale of fixed assets 43 -- Proceeds from sale of DTS stock 520 -- Proceeds from sale of Wi-LAN, Inc. stock 918 -- Investment in Belix Ltd. companies (592) -- Acquisition of T-Com, LLC assets (83) -- Cash received from note receivable -- 9 --------- -------- Cash provided by (used in) investing activities 791 (121) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds (repayments) of notes payable and long-term debt 301 (687) Proceeds from exercise warrants and employee stock options 88 -- Proceeds from sale of common stock -- 2 --------- -------- Cash provided by (used in) financing activities 389 (685) --------- -------- Effect of exchange rate changes on cash (348) (180) --------- -------- Net increase (decrease) in cash and cash equivalents 213 (407) --------- -------- Cash and cash equivalents at beginning of period 481 582 --------- -------- Cash and cash equivalents at end of period $ 694 $ 175 ========= ========
See accompanying notes to consolidated condensed financial statements. F-39 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the nine months for: Interest $ 245 $ 219 ====== ====== Income taxes $ 13 $ 108 ====== ====== SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTMENT AND FINANCING ACTIVITIES: Common stock issued upon conversion of preferred stock $ 381 $ 924 ====== ====== Accretion of preferred stock $ 69 $ 69 ====== ====== Issuance of common stock and warrants in connection with acquisitions $1,000 $1,000 ====== ======
See accompanying notes to consolidated condensed financial statements. F-40 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MicroTel International, Inc. is an international telecommunications electronics company comprised of three wholly-owned subsidiaries - CXR Telcom Corporation in Fremont, California, CXR, S.A. in Paris, France and XIT Corporation in Rancho Cucamonga, California. CXR Telcom Corporation and CXR, S.A. design, manufacture and market electronic telecommunications test instruments, wireless and wireline voice, data and video transmission and network access equipment. XIT Corporation designs, manufactures and markets information technology products, including input and display components, subsystem assemblies and power supplies. The Company operates out of facilities in the United States, France, England and Japan. The Company is organized into two segments - Telecommunications and Electronic Components. Through the sale of various subsidiaries in 1998 and 1999, the Company has divested a majority of its circuits operations. In October 2000 the Company decided to discontinue its circuits segment operations. At that time the circuits segment operations consisted of XCEL Etch Tek, a wholly owned subsidiary. XCEL Etch Tek was offered for sale, see note 6. Accordingly, all current and prior financial information related to the circuits segment operations have been presented as discontinued operations in the accompanying consolidated condensed financial statements. 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 financial position as of September 30, 2000 and the results of operations and cash flows for the related interim periods ended September 30, 2000 and 1999. However, these results are not necessarily indicative of results for any other interim period or for the year. It is suggested that the accompanying consolidated condensed financial statements be read in conjunction with the Company's Consolidated Financial Statements included in its 1999 annual report on Form 10-K. F-41 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (2) EARNINGS (LOSS) PER SHARE The following table illustrates the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):
Three months ended Nine months ended September 30, September 30, ----------------- ------------------ 2000 1999 2000 1999 --------- --------- --------- --------- NUMERATOR: Net income (loss) $ 394 $ (1,034) $ 414 $ (2,923) Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 23 24 69 69 -------- --------- -------- --------- Income (loss) attributable to common stockholders 371 (1,058) 345 (2,992) -------- --------- -------- --------- DENOMINATOR: Weighted average number of common shares outstanding during the period 20,537 17,200 19,141 16,192 Incremental shares from assumed conversions of warrants, options and preferred stock 1,921 -- 2,206 -- -------- --------- -------- --------- Adjusted weighted average shares 22,458 17,200 21,347 16,192 -------- --------- -------- --------- Basic earnings (loss) per share $ 0.02 $ (0.06) $ 0.02 $ (0.18) ======== ========= ======== ========= Diluted earnings (loss) per share $ 0.02 $ (0.06) $ 0.02 $ (0.18) ======== ========= ======== =========
The computation of diluted loss per share for the nine and three month periods ended September 30, 1999 excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was antidilutive due to losses incurred by the Company or such instruments had exercise prices greater than the average market price of the common shares during the periods presented. F-42 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (3) INVENTORIES Inventories consist of the following:
SEPTEMBER 30, 2000 DECEMBER 31, 1999 ------------------ ----------------- Raw materials $2,472,000 $1,623,000 Work-in-process 1,942,000 1,174,000 Finished goods 1,784,000 1,250,000 --------- --------- $6,198,000 $4,047,000 ========== ==========
(4) LITIGATION The Company and its subsidiaries from time to time become involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse affect on the Company's consolidated financial position, results of operations or cash flows. (5) ACQUISITION AND DISPOSITION OF BUSINESSES On January 7, 2000, the Company sold all of its interest in the common stock in Digital Transmission Systems, Inc. ("DTS") to Wi-LAN, Inc. ("Wi-LAN"), a company based in Alberta, Canada in exchange for $520,000 and 28,340 shares of Wi-LAN common stock. Wi-LAN is a publicly traded company on the Toronto Stock Exchange. The Wi-LAN common stock had a market value of $720,000 on the date of the transaction. The Company was restricted from selling the Wi-LAN stock until July 7, 2000 due to Toronto Stock Exchange rules that restrict sales of stock obtained in an acquisition related transaction. On July 7, 2000, the Company sold all its shares of Wi-LAN common stock for net proceeds of $917,000. The sale resulted in a gain of approximately $197,000 which is included in the Company's results of operations for the third quarter of 2000. On April 17, 2000, the Company finalized its acquisition of Belix Company, Ltd., ("Belix") including its two subsidiaries. The Company purchased the capital stock of Belix for $790,000 cash and an earn-out for the former stockholders based on sales. The Company has recorded an estimated earn-out accrual of approximately $800,000. In addition, the Company has recorded an additional accrual of approximately $384,000 for certain severance and relocation costs related to Belix. The Company has included accruals in the calculation of the cost of the acquisition. The acquisition of Belix has been accounted for as a purchase by the Company and resulted in approximately $1.8 million of goodwill. Belix is located in England, U. K. and is in the business of manufacturing power supplies for various applications. Belix has been integrated into the Company's existing power supply producer, XCEL Power Systems, Ltd. Belix's assets consist mostly of accounts receivable, inventories and fixed assets. All dollar amounts indicated in this paragraph are derived from the conversion of British pounds into U. S. dollars at the conversion rate in effect at the time of the acquisition. F-43 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS On September 22, 2000, the Company completed the acquisition, effective as of August 1, 2000, of substantially all of the assets of T-Com, LLC, a Delaware limited liability company ("T-Com"), and assumed certain liabilities of T-Com. The liabilities assumed consisted mostly of accounts payable, accrued payroll expenses and accrued commissions. The assets purchased are valued at approximately $1,496,000, and the liabilities assumed are approximately $496,000. T-Com is a manufacturer of high performance digital transmission test instruments used for the installation and maintenance of high speed telephone line services for telephone central offices, competitive local exchange carriers and private communications networks. The Company intends to use the acquired assets for substantially the same purposes as such assets were used by T-Com. The Company paid to T-Com for the net assets consideration valued at $1,000,000, as itemized below: - 150,000 shares of Series B Preferred Stock of the Company ("Series B Shares"). The Series B Shares become convertible into shares of common stock of the Company in three equal lots of 50,000 Series B Shares each at the end of six, twelve and eighteen months, respectively, following the acquisition closing date of September 22, 2000. Each Series B Share will be convertible into ten common shares, and conversion rights will be cumulative, with all 150,000 Series B Shares being convertible into common stock after eighteen months. The Series B Shares have a liquidation preference of $6.40 per share. The Company may redeem outstanding and unconverted Series B Shares for cash at a price per share equal to $7.36 by giving 20 days' prior written notice to the holders of Series B Shares to be redeemed. If less than all of the Series B Shares are to be optionally redeemed, the particular Series B Shares to be redeemed shall be selected by lot or by such other equitable manner determined by the Company's board of directors. The Company may not, however, redeem Series B Shares if there is an insufficient number of authorized and reserved shares of common stock for this purpose, to the extent the Series B Shares are subject to a lock-up, or to the extent the Company receives a conversion notice for Series B Shares prior to the redemption date. If the Company fails to pay the redemption price after calling any Series B Shares for optional redemption, the Company will have no further option to redeem Series B Shares. - Warrants to purchase up to 250,000 shares of the Company's common stock at a fixed exercise price of $1.25 per share, which are exercisable for a period of twenty-four months following the acquisition closing date of September 22, 2000. The warrants contain a cashless exercise feature. The consideration described above is valued at approximately $938,000 for the Series B Shares based on a value of $0.6253 per common share, the market value of the Company's common stock at the time the agreement in principal was signed, multiplied by the 1,500,000 common shares into which the preferred shares can be converted. The warrants have been valued at approximately $62,000 based on a calculation using the Black-Scholes valuation formula. F-44 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The following represents the unaudited pro forma results of operations as if the acquisition of T-Com had occurred on January 1, 1999:
Nine months ended September 30, 2000 1999 -------- ------- Net sales $ 21,189 $22,081 ======== ======= Income (loss) from continuing operations $ 722 $(2,888) ======== ======= Earnings (loss) per share from continuing operations: Basic $ 0.03 $ (0.18) ======== ======= Dilutd $ 0.03 $ (0.18) ======== =======
(6) DISCONTINUED OPERATIONS In October 2000, the Company decided to discontinue its circuits segment operations. At that time the circuits segment operations consisted of XCEL Etch Tek, a wholly owned subsidiary. Accordingly, current and prior financial information related to the circuits segment operations have been presented as discontinued operations in the accompanying consolidated condensed financial statements. The Company anticipates the sale of substantially all of the assets of XCEL Etch Tek in November 2000 for consideration of $260,000 in cash, a $50,000 note and the assumption of $75,000 in liabilities. The sale is expected to result in a loss of approximately $476,000. As of September 30, 2000 the Company has accrued for the expected loss on sale and a loss of approximately $158,000 related to the operations of XCEL Etch Tek from October 1, 2000 through November 15, 2000. While the Company has entered into a letter of intent for the sale of XCEL EtchTek and expects the transaction to close on November 21, 2000, there can be no assurance that the sale will be completed. If the sale does not occur, the Company may need to record an additional loss related to XCEL Etch Tek in the fourth quarter of 2000. In March 1999, the Company sold substantially all of the assets and liabilities of HyComp, a wholly owned circuits operations subsidiary, for $750,000 in cash and a royalty on 1999 revenues generated from HyComp's customer base in excess of a specified amount. The sale resulted in a gain of $331,000. (7) WARRANT EXERCISES In August and September 2000, warrants to purchase a total of 60,000 shares of the Company's common stock for $0.25 per share were exercised. (8) DOMESTIC CREDIT FACILITY On June 23, 2000, the Company's credit facility with Congress Financial expired. Congress Financial extended this facility through August 14, 2000. On August 16, 2000, the Company obtained a credit facility from Wells Fargo Business Credit, Inc. This facility provides for a revolving loan of up to $3,000,000 secured by the Company's inventory and accounts receivable and a term loan in the amount of $687,000 secured by the Company's machinery and equipment. The annual interest rate on both portions F-45 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS of the credit facility is the prime rate plus 2%. The facility contains a performance-based interest reduction feature. Based upon the Company's current and expected financial performance, the Company anticipates a reduction in the interest rate to the prime rate plus 1% upon completion of the audit of the Company's financial statements for the year ended December 31, 2000. The balance outstanding under this credit facility was $2,144,000 on September 30, 2000. There was $342,000 of additional borrowing available as of September 30, 2000. The credit facility expires on August 23, 2003. The Company's foreign subsidiaries have obtained credit facilities with Lloyds Bank in England, Banque National du Paris, Societe General and Banque Hervet in France and Johan Tokyo Credit Bank in Japan. (9) REPORTABLE SEGMENTS The Company has two reportable segments: Telecommunications and Electronic Components. The Telecommunications segment operates principally in the U.S. and European markets and designs, manufactures and distributes telecommunications test instruments and voice and data transmission and network equipment. The Electronic Components segment operates in the U.S., European and Asian markets and designs, manufactures and markets digital switches, information technology products, including input and display components, subsystem assemblies, and power supplies. In October 2000 the Company decided to discontinue its circuits segment operations. At that time the circuits segment operations consisted of XCEL Etch Tek, a wholly owned subsidiary. XCEL Etch Tek was offered for sale, see note 6. Accordingly, all current and prior financial information related to the circuits segment operations have been presented as discontinued operations in the accompanying consolidated condensed financial statements. The Company evaluates performance based upon profit or loss from operations before income taxes, exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. The Company's reportable segments are comprised of operating entities offering the same or similar products to similar customers. Each segment is managed separately because each business has different customers, design, manufacturing and marketing strategies. There were no other differences in the basis of segmentation or in the basis of measurement of segment profit or loss from the amounts disclosed in the Company's consolidated financial statements included in its 1999 Annual Report on Form 10-K. However, in this report, the two segments have been renamed to better describe the respective businesses. The Instrumentation and Test Equipment segment is now referred to as the Telecommunications segment, and the Components and Subsystems Assemblies segment is now named the Electronic Components segment. F-46 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS Selected financial data for each of the Company's operating segments is shown below.
Nine months ended Nine months ended September 30, 2000 September 30, 1999 ------------------ ------------------ SALES TO EXTERNAL CUSTOMERS: Telecommunications $ 10,680,000 $ 11,279,000 Components 8,879,000 8,165,000 ------------- ------------ $ 19,559,000 $ 19,444,000 ============= ============ INTERSEGMENT SALES: Telecommunications $ -- $ -- Components -- 217,000 ------------- ------------ $ -- $ 217,000 ============= ============ SEGMENT PRETAX INCOME (LOSS): Telecommunications 468,000 $ (2,120,000) Components 2,157,000 189,000 ------------- ------------ 2,625,000 $ (1,931,000) ============= ============
September 30, December 31, 2000 1999 ----------- ----------- SEGMENT ASSETS: Telecommunications $ 8,433,000 $ 8,070,000 Components 9,201,000 5,766,000 ----------- ----------- $17,634,000 $13,836,000 =========== ===========
F-47 MICROTEL INTERNATIONAL, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS The following is a reconciliation of the reportable segment loss and assets to the Company's consolidated totals.
Nine months ended Nine months ended September 30, 2000 September 30, 1999 ------------------- -------------------- Pretax income (loss) from continuing operations: Total income (loss) for reportable segments $ 2,625,000 $ (1,931,000) Unallocated amounts: Gain on sale of Wi-LAN, Inc. stock 197,000 -- Equity in earnings of unconsolidated affiliates -- 755,000 Warranty reserve reversal 110,000 -- Unallocated general corporate expenses (1,595,000) (1,104,000) -------------- -------------- Consolidated income (loss) from continuing operations before income taxes $ 1,337,000 $ (2,280,000) ============== ============== September 30, 2000 December 31, 1999 ------------------- -------------------- ASSETS Total assets for reportable segments $ 17,634,000 $ 13,836,000 Other assets 856,000 1,632,000 -------------- -------------- Total consolidated assets $ 18,490,000 $ 15,468,000 ============== ==============
F-48 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Members T-COM, LLC We have audited the accompanying balance sheet of T-COM, LLC as of December 31, 1999 and the related statements of operations, members' deficit and cash flows for the year then ended. 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, the financial statements referred to above present fairly, in all material respects, the financial position of T-COM, LLC at December 31, 1999 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred significant operating losses and negative cash flows from operations during the year ended December 31, 1999. As discussed in Notes 9 and 10, the Company has sold substantially all of its assets and certain liabilities and essentially remains as a holding company for certain equity investments. The Company does not expect to generate any future operating revenues subsequent to September 2000 but will continue to incur certain administrative expenses. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO Seidman, LLP Costa Mesa, California December 4, 2000 F-49 T-COM, LLC BALANCE SHEETS
December 31, June 30, 1999 2000 ------------------ --------------- (unaudited) ASSETS (NOTES 4, 5 AND 9) Current assets: Cash and cash equivalents $ 172,427 $ 26,855 Accounts receivable 231,272 481,130 Inventories (Note 2) 653,731 796,021 Prepaid and other current assets 3,875 5,315 ------------------ --------------- Total current assets 1,061,305 1,309,321 Property and equipment, net (Note 3) 166,751 160,575 Other assets 16,010 16,010 ------------------ --------------- $ 1,244,066 $ 1,485,906 ================== =============== LIABILITIES AND MEMBERS' DEFICIT Current liabilities: Accounts payable $ 166,622 $ 334,026 Accrued payroll and commissions (Note 7) 278,314 377,788 Other accrued expenses 86,420 53,339 ------------------ --------------- Total current liabilities 531,356 765,153 Line of credit (Notes 4 and 9) 505,176 508,262 Note payable (Notes 5 and 9) 2,053,333 2,053,333 ------------------ --------------- Total liabilities 3,089,865 3,326,748 ------------------ --------------- Commitment and contingencies (Notes 7 and 10) Subsequent events (Notes 6 and 9) Members' deficit (Notes 6 and 9): Members' capital 3,079,230 3,553,813 Accumulated deficit (4,925,029) (5,394,655) ------------------ --------------- Total members' deficit (1,845,799) (1,840,842) ================== =============== $ 1,244,066 $ 1,485,906 ================== ===============
See accompanying notes to financial statements. F-50 T-COM, LLC STATEMENTS OF OPERATIONS
Year Ended Six Months Ended December 31, June 30, 1999 2000 1999 ---- ---- ---- (unaudited) Net sales $ 3,239,376 $ 1,430,678 $ 1,649,941 Cost of sales 1,441,888 627,370 816,941 ----------------- --------------- --------------- Gross profit 1,797,488 803,308 833,000 Operating expenses: Selling, general and administrative 1,605,901 602,411 816,573 Engineering and product development 1,001,227 524,592 531,760 Write-down of goodwill (Note 8) 3,424,569 - - ----------------- --------------- --------------- Loss from operations (4,234,209) (323,695) (515,333) Other income (expense): Interest expense (280,325) (149,304) (141,315) Other, net 14,809 8,632 9,208 ----------------- --------------- --------------- Loss before income taxes (4,499,725) (464,367) (647,440) Income taxes (4,000) (5,259) (1,685) ----------------- --------------- --------------- Net loss $ (4,503,725) $ (469,626) $ (649,125) ================= =============== ===============
See accompanying notes to financial statements. F-51 T-COM, LLC STATEMENTS OF MEMBERS' EQUITY
Members' Accumulated Capital Deficit Total -------------- ----------------- -------------- Balance at December 31, 1998 $ 3,025,479 $ (421,304) $ 2,604,175 Options issued as compensation (Note 6) 53,751 - 53,751 Net loss - (4,503,725) (4,503,725) -------------- ----------------- -------------- Balance at December 31, 1999 3,079,230 (4,925,029) (1,845,799) Contribution 450,000 - 450,000 Options issued as compensation (Note 6) (unaudited) 24,583 - 24,583 Net loss (unaudited) - (469,626) (469,626) -------------- ----------------- -------------- Balance at June 30, 2000 (unaudited) $ 3,553,813 $ (5,394,655) $ (1,840,842) ============== ================= ==============
See accompanying notes to financial statements. F-52 T-COM, LLC STATEMENTS OF CASH FLOWS
Year Ended Six Months Ended December 31, June 30, 1999 2000 1999 ---- ---- ---- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (4,503,725) $ (469,626) $ (649,125) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 54,752 16,979 26,654 Amortization of intangible assets 123,037 - 123,037 Provision for inventory obsolescence 8,000 23,451 4,000 Write-down of goodwill 3,424,569 - - Options issued as compensation 53,751 24,583 28,238 Changes in operating assets and liabilities: Accounts receivable 322,359 (249,858) 121,156 Inventories 11,288 (165,741) 6,502 Prepaids and other assets 12,356 (1,440) 19,734 Accounts payable 7,983 167,404 145,706 Accrued payroll and commissions 151,185 99,474 82,244 Other accrued expenses (11,733) (33,081) (19,016) ---------------- -------------- -------------- Cash used in operating activities (346,178) (587,855) (110,870) ---------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property and equipment (13,585) (10,803) (7,544) ---------------- -------------- -------------- Cash used in investing activities (13,585) (10,803) (7,544) ---------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on line of credit 11,581 3,086 8,495 Proceeds from sale of member units - 450,000 - ---------------- -------------- -------------- Cash provided by financing activities 11,581 453,086 8,495 ---------------- -------------- -------------- Net decrease in cash and cash equivalents (348,182) (145,572) (109,919) Cash and cash equivalents at beginning of period 520,609 172,427 520,609 ---------------- -------------- -------------- Cash and cash equivalents at end of period $ 172,427 $ 26,855 $ 410,690 ================ ============== ============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 282,447 $ 123,900 $ 143,437 ================ =============== =============== Income taxes $ 4,800 $ 6,090 $ 4,700 ================ =============== ===============
See accompanying notes to financial statements. F-53 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS T-COM, LLC (the "Company") was organized in Delaware in April 1998. The Company designs, develops, manufactures and markets telecommunications test equipment. The Company has sales throughout the United States, with sales offices in four states. According to the Company's Limited Liability Company Agreement (the "LLC Agreement"), the term of the Company has been set at approximately 20 years and will continue until December 31, 2018. As further defined in the LLC, the Company was originally capitalized with contributions in cash to the Company as follows: (a) Five Members contributed a total of $25,479 in exchange for 3,925,000 units. These Members are hereinafter referred to as Non-Investor Members. (b) Fourteen Members contributed a total of $2,500,000 in exchange for 5,000,000 units. These Members are hereinafter referred to as Investor Members. PROFIT AND LOSS ALLOCATIONS As further defined in the LLC Agreement, net losses of the Company, as defined, shall be allocated as follows: (a) First, until losses allocated to Investor Members equal the Investor Member's aggregate capital contributions (i) 1% to Non-Investor Members pro rata based upon their percentage interests and (ii) 99% to Investor Members, pro rata based upon their percentage interests. (b) Next, on a pro rata basis to all Members based upon their percentage interest. As further defined in the LLC Agreement, net profits of the Company, as defined, shall be allocated as follows: (a) First, until the cumulative amounts of profits are equal to the cumulative allocations of previous losses, pro rata to all Members based on such previous allocations (b) Next, on a pro rata basis to all Members based upon their percentage interest. MEMBER DISTRIBUTIONS As further defined in the LLC Agreement, all distributions of cash of the Company shall be distributed among the Members, as follows: (a) First, until the capital contributions of the Investor Members have been returned, the Company will distribute 47% of the estimated annual profits, as defined, to each Non-Investor Member, on a pro rata basis based upon their percentage interest. F-54 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (b) Next, until capital contributions of the Investor Members have been returned, on a pro rata basis based upon their percentage interest until the amount of all distributions in (a) and (b) results in all distributions being in accordance with the percentage interests of the Non-Investor and Investor Members. (c) Next, to all Members on a pro rata basis based upon the aggregate of their unreturned capital contributions, until such amount has been returned to zero. (d) Next, to all Members on a pro rata basis based upon their percentage interest. In connection with the December 1998 investment (Note 6) by Investor Members (the "1998 Investor Members"), the 1998 Investor Members will receive a preferred return of $500,000 prior to (b) above. In connection with the January 2000 investment (Note 6) by Investor Members (the "2000 Investor Members"), the 2000 Investor Members will receive a preferred return of $1,350,000 prior to all of the distributions noted above. The LLC agreement was amended in September 2000 (Note 9). CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of all highly liquid investments with an original maturity of three months or less when purchased. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). PROPERTY AND EQUIPMENT Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed principally using the straight-line method over the useful lives of the assets ranging from 3 to 5 years. Maintenance and repairs are expensed as incurred while renewals and betterments are capitalized. LONG-LIVED ASSETS The Company reviews the carrying amount of its long-lived assets and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets 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 undiscounted 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. See Note 8. F-55 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenues are recorded when products are shipped. All sales are made under the terms of FOB shipping point. PRODUCT WARRANTIES The Company provides warranties for certain of its products for periods of generally one or two years. Estimated warranty expense is recognized at the time of the sale. ADVERTISING COSTS Advertising costs are expensed as incurred. Advertising expense was approximately $43,000, $30,000 (unaudited) and $22,000 (unaudited) for the year ended December 31, 1999 and the six months ended June 30, 2000 and 1999, respectively. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. INCOME TAXES The Company has been organized as a Limited Liability Company ("LLC"). Accordingly, the Company has not provided for Federal income taxes since the liability is that of the individual members. The Company is subject to a nominal amount of state income taxes. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" 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. This statement 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 December 31, 1999 and June 30, 2000, the fair value of all financial instruments approximated carrying value. The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items. The Company believes the carrying amounts of its line of credit and note payable approximate fair value because the interest rates on these instruments are subject to change with, or approximate, market interest rates. F-56 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) USE OF ESTIMATES 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 reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially expose the Company to concentration of credit risk, consist primarily of cash and accounts receivable. The Company places its cash with financial institutions. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation. The Company's accounts receivable results from sales to a broad customer base. The Company extends credit to its customers based upon an evaluation of the customer's financial condition and credit history and generally does not require collateral. The Company has not experienced significant write-offs or bad debt and actual credit losses are provided for in the financial statements and consistently have been within management's expectations. The Company had sales to one customer which represented approximately 10% of net sales for the year ended December 31, 1999. The accounts receivable balance from this and one other customer was approximately 22% and 12%, respectively of the Company's accounts receivable at December 31, 1999. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements and is effective for fiscal years beginning after December 15, 1997. The Company had no comprehensive income items to report for all periods presented. SEGMENT INFORMATION The Company follows the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.131 requires that companies report selected segment information in annual financial statements and requires companies to report selected segment information in interim financial statements. The Company operates solely in one operating segment; the design, development, manufacture and sale of telecommunications test equipment. INTERIM FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company's financial position as of June 30, 2000, and the results of operations and cash flows for the six months ended June 30, 2000 and 1999. The results of operations for the six months ended June 30, 2000 and 1999, are not necessarily indicative of the results to be expected for the full year. F-57 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collective referred to as derivatives), and for hedging activities. SFAS No 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company currently does not engage in, nor does it expect to engage in, derivative or hedging activities and, accordingly, the Company anticipates there will be no impact to its financial statements. In April 1998, the American Institute of Certified Public Accountants issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 requires that all start-up costs related to new operations must be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP 98-5 is adopted. The adoption of SOP 98-5 did not have a material impact on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes that its current revenue recognition policies comply with SAB 101. (2) INVENTORIES Inventories are summarized as follows:
December 31, June 30, 1999 2000 ----------------- ----------------- (unaudited) Raw materials $ 115,767 $ 194,035 Work-in-process 176,164 255,731 Finished goods 361,800 346,255 ----------------- ----------------- $ 653,731 $ 796,021 ================== =================
F-58 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (3) PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, June 30, 1999 2000 ------------------ ----------------- (unaudited) Computers and software $ 176,181 $ 187,003 Machinery and equipment 99,350 99,350 ------------------ ----------------- 275,531 286,353 Accumulated depreciation (108,780) (125,778) ------------------ ----------------- $ 166,751 $ 160,575 ================== =================
(4) LINE OF CREDIT The Company has a line of credit with a bank. The credit line is collateralized by substantially all assets of the Company, bears interest at the bank's prime rate (8.5% at December 31, 1999) plus 2% and is payable on demand. Borrowings are based upon the lesser of $800,000 or 80% of eligible accounts receivable and 40% of net inventory, as defined. The line of credit originally expired in June 1999 but was extended to January 2000 and then again to April 2000. The line of credit requires maintenance of certain financial ratios and contains other restrictive covenants. The Company was not in compliance with certain of such covenants throughout 1999 and 2000. In connection with the extensions, the covenant violations were waived through the extension periods. However, no additional borrowings were available and the Company was required to paydown a portion of the debt with a portion of any net income, as defined during the extension period. No such paydowns occurred due to continuing losses. In September 2000, the obligation under the line of credit and note payable (Note 5) was forgiven by the bank in exchange for a 33% interest in the Company (Note 9). Due to the transaction described in Note 9, the entire balance under the line of credit has been classified as a long-term liability on the accompanying balance sheets. (5) NOTE PAYABLE The note payable relates to a $2,200,000 note payable to bank with an outstanding balance of $2,053,333 at December 31, 1999 and June 30, 2000 (unaudited). The note bears interest at the bank's prime rate (8.5% at December 31, 1999) plus 2.5%. The note is collateralized by substantially all assets of the Company and is payable in monthly principal installments of approximately $37,000, plus interest through maturity in June 2002. As a result of the Company's non-compliance with certain financial covenants and as the Company was unable to make the required monthly payments in 1999 and 2000, the note is due on demand. In September 2000, the obligation under the note and line of credit (Note 4) was forgiven by the bank in exchange for a 33% interest in the Company (Note 9). Due to the transaction described in Note 9, the entire balance under the note payable has been classified as a long-term liability on the accompanying balance sheets. F-59 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (6) MEMBERS' DEFICIT CONTRIBUTIONS In December 1998, a contribution of $500,000 was made by Investor Members in exchange for 4,651,515 units. As of December 31, 2000, a total of 13,576,515 units were outstanding. In January 2000, a contribution of $450,000 was made by Investor Members in exchange for $1,350,000 preferred return. VOTING RIGHTS Investor Members shall have the right to vote only upon certain significant matters, including any amendments to the original LLC Agreement, admission of a new Member or dissolution of the Company. OPTIONS The Company's LLC Agreement includes a provision to issue an additional 1,000,000 units to key employees. The Company has chosen to issue options underlying these units instead of issuing the units outright. A summary of the option activity is as follows:
December 31, 1999 June 30, 2000 ------------------------------- --------------------------------- Weighted Weighted Average Average Exercise Exercise Units Price Units Price -------------- -------------- --------------- -------------- (unaudited) Outstanding, beginning of period 752,970 $ 0.0977 834,970 $ 0.0886 Granted 300,000 0.0052 75,000 0.0052 Cancelled (218,000 ) 0.0052 - - -------------- -------------- --------------- --------------- Outstanding, end of period 834,970 $ 0.0886 909,970 $ 0.0830 ============== ============== =============== =============== Options exercisable at period-end 410,970 487,470 ============== =============== Weighted-average fair value of options granted during period $ 0.3158 $ 0.1031 ============== ===============
F-60 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (6) MEMBERS' DEFICIT (CONTINUED) Information relating to options at December 31, 1999 summarized by exercise price is as follows:
Options Outstanding Options Exercisable ----------------------------------------------- ----------------------------------- Weighted Weighted Average Average Exercise Price Per Exercise Exercise Unit Units Life (Years) Price Units Price - --------------------- ------------- ------------- ------------- ----------------- -------------- $ 0.0052 538,000 4.13 $ 0.0052 114,000 $ 0.0052 0.1075 196,970 6.00 0.1075 196,970 0.1075 0.5000 100,000 5.41 0.5000 100,000 0.5000 -------- ------------- ------------- ------------- ----------------- -------------- $ 0.0052 to 0.5000 834,970 4.73 $ 0.0886 410,970 $ 0.2849 -------- ------------- ------------- ------------- ----------------- --------------
During the year ended December 31, 1999 and the six months ended June 30, 2000 and 1999, the Company recognized compensation expense of approximately $54,000, $25,000 (unaudited) and $28,000 (unaudited), respectively related to options issued. Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", requires the Company to provide pro forma information regarding net income as if such compensation cost for the Company's options had been determined in accordance with the fair value of each option at the grant date by using the present value approach with the following assumptions for grants in 1999: 0% dividend yield; a risk free interest rate of 5.5%; and expected lives of 2 years. Under the accounting provisions of SFAS 123 the Company's net loss for the year ended December 31, 1999 would have been decreased to the pro forma amount indicated below: As reported $ (4,503,725) Pro forma $ (4,503,801)
(7) COMMITMENTS AND CONTINGENCIES LEASES The Company conducts most of its operations from a leased facility under an operating lease which expires in December 2000. The Company also has an operating lease for a phone system which expires in August 2003. Total rent expense for the year ended December 31, 1999 was approximately $69,000. Total rent expense for the six months ended June 30, 2000 and 1999 was approximately $53,000 (unaudited) and $103,000 (unaudited), respectively. F-61 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (7) COMMITMENTS AND CONTINGENCIES (CONTINUED) The future minimum rental payments required under the two operating leases are as follows:
YEAR ENDING DECEMBER 31, AMOUNT - ------------------------- ------ 2000 $ 49,725 2001 2,939 2002 2,939 2003 1,714 2004 - ----------- $ 57,317 ===========
EMPLOYMENT AGREEMENT The Limited Liability Company Agreement includes a commitment to pay a Non-Investor Member $150,000 per year as compensation for services as an employee of the Company. As of December 31, 1999 and June 30, 2000, the Company has approximately $174,000 and $255,000 (unaudited), respectively, accrued related to this commitment. Such amount has been included in accrued payroll and commissions on the accompanying balance sheets. LITIGATION The Company is, from time to time, involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible the outcome of such legal proceedings, claims and litigation could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not have a material adverse affect on the Company's financial position, results of operations or cash flows. EMPLOYEE BENEFIT PLANS The Company sponsors a defined contribution plan ("401(k) Plan") covering the majority of its employees. Participants may make voluntary pretax contributions to such plans up to the limit as permitted by law. Annual contributions to the plan by the Company, if any, is discretionary. The Company made no contributions to the 401(k) Plan during the year ended December 31, 1999 or the six months ended June 30, 2000 (unaudited) and 1999 (unaudited), respectively. F-62 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (8) NON-RECURRING CHARGES; IMPAIRMENT OF GOODWILL The Company assesses the recoverability of its goodwill whenever adverse events or changes in circumstances or business climate indicate that expected future cash flows (undiscounted and without interest charges) may not be sufficient to support recorded goodwill. During 1999, due to a significant decrease in sales, declines in profit margins and continuing operating losses, the Company wrote-off the carrying value of goodwill originating with a June 1998 acquisition. This write-down totaled $3,424,569 and was charged to operations. The Company was previously amortizing the goodwill over 15 years using the straight-line basis. The statement of operations for the year ended December 31, 1999 and the six months ended June 30, 1999 (unaudited) each includes approximately $123,000 of goodwill amortization prior to the write-off. (9) SUBSEQUENT EVENTS In September 2000, the Company amended its LLC Agreement (the "Amendment") and concurrently completed the sale of substantially all of its assets and certain of its liabilities to MicroTel International, Inc. ("MicroTel"), effective August 1, 2000. In accordance with the terms of the sales agreement with MicroTel, the Company received 150,000 Series B Convertible Shares (the "Series B") of MicroTel. Series B have a liquidation preference of $6.40, are convertible into common stock of MicroTel at a rate of 10 common shares per Series B and are convertible in 3 equal lots of 50,000 at six, twelve and eighteen months after the closing of the sale. The Series B have no dividend rights. In addition, the Company received warrants to purchase 250,000 common shares of MicroTel for $1.25 per share, which are exercisable for twenty-four months. The sale excluded any obligations under the line of credit (Note 4), note payable (Note 5) and Non-Investor Member payroll accrual (Note 7). The Company has determined the fair value of the proceeds received and net assets sold to be approximately equal in value. As such, no significant gain or loss is expected to be recorded in connection with this sale. The warrants were valued using a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 95%; risk-free interest rate of 6%; and an expected life of two years. In accordance with the Amendment, the percentage interest of the Company was amended to: - 33% allocated to the Non-Investor Members as a group, - 33% allocated to the Investor Members as a group, - 33% to a bank. The 33% interest and $25,000 was allocated to a bank in exchange for the forgiveness of the line of credit (Note 4) and note payable (Note 5). Outstanding principal and interest under the line of credit and note payable totaled $2,620,025 as of the date of exchange. As the only remaining significant assets of the Company will be the proceeds received on the sale to MicroTel, the Company will record debt forgiveness of approximately $2.2 million (unaudited) for the difference between the balance of the debt of $2,620,025 and the bank's interest in the proceeds received in September 2000. F-63 T-COM, LLC NOTES TO FINANCIAL STATEMENTS (9) SUBSEQUENT EVENTS (CONTINUED) The Amendment includes a provision that a Non-Investor Member will forgive his rights to the accrued payroll liability ($207,907 as of the date of the Amendment). The Amendment also redefines the purpose of the Company from designing, developing and selling telecommunications test equipment to holding the MicroTel Series B and warrants for investment. (10) GOING CONCERN The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company incurred significant operating losses and negative cash flows from operations during the year ended December 31, 1999. As discussed in Notes 9, the Company sold substantially all of its assets and certain liabilities and essentially remains as a holding company for certain equity investments. The Company does not expect to generate any future operating revenues subsequent to September 2000 but will continue to incur certain administrative expenses. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company expects to be able to fund the limited administrative expenses through the remaining cash not sold as part of the transaction detailed in Note 9 and possible additional member contributions. While the Company is unsure as to the future distribution of any remaining assets, the MicroTel Series B Preferred Shares and warrants cannot be fully distributed to the Members until March 2002. F-64 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS) The Unaudited Pro Forma Condensed Combined Financial information reflects financial information which gives effect to MicroTel International, Inc.'s ("MicroTel" or the "Company") acquisition (the "Acquisition") of substantially all of the assets and certain liabilities of T-COM, Inc. ("T-COM"), which provided for the issuance of 150,000 shares of MicroTel Series B Preferred Stock and 250,000 MicroTel warrants. The Acquisition closed on September 22, 2000. The Pro Forma Financial Information included herein reflects the use of the purchase method of accounting, after giving effect to the pro forma adjustments discussed in the accompanying notes. The aggregate value of the consideration given was approximately $1,000,000 which approximates the fair value of the net assets acquired. Such financial information has been prepared from, and should be read in conjunction with, the historical consolidated financial statements and notes thereto of MicroTel and T-COM. The Pro Forma Condensed Combined Statements of Operations gives effect to the Acquisition as if it had occurred at the beginning of the earliest period presented, combining the results of MicroTel for the year ended December 31, 1999 and for the six months ended June 30, 2000 with those of T-COM, for the same periods. The Pro Forma Condensed Combined Statements of Operations presented do not include any potential cost savings. The Company believes that it may be able to reduce salaries and related costs and office and general expenses as it eliminates duplications of overhead. However, there can be no assurance that the Company will be successful in effecting any such cost savings. The Pro Forma Condensed Combined Financial Information is unaudited and is not necessarily indicative of the consolidated results which actually would have occurred if the above transactions had been consummated at the beginning of the periods presented, nor does it purport to present the future financial position and results of operations for future periods. A pro forma balance sheet has not been provided herein as the Acquisition has been reflected in the Company's September 30, 2000 balance sheet on Form 10-Q filed on November 20, 2000. F-65 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro-Forma Year Ended December 31, 1999 MicroTel T-COM Adjustments Combined -------------- ------------ -------------- ------------------- (a) Net sales $ 25,913 $ 3,239 $ -- $ 29,152 Cost of sales 17,066 1,442 -- 18,508 -------------- ------------ -------------- ------------------- Gross profit 8,847 1,797 -- 10,644 Operating expenses: Selling, general and administrative 10,132 1,606 -- 11,738 Engineering and product development 1,841 1,001 -- 2,842 Write-down of goodwill - 3,425 3,425 -------------- ------------ -------------- ------------------- Loss from operations (3,126) (4,235) -- (7,361) Other income (expense): Interest expense (297) (280) -- (577) Other, net 104 15 -- 119 -------------- ------------ -------------- ------------------- Loss from continuing operations before income taxes (3,319) (4,500) -- (7,819) Income taxes 128 4 (4)(b) 128 ============== ============ ============== =================== Loss from continuing operations $ (3,447) $ (4,504) $ 4 $ (7,947) ============== ============ ============== =================== Basic and diluted earnings per share from continuing operations $ (0.21) $ (0.48) ============== =================== Basic and diluted weighted average shares outstanding 16,638 16,638 ============== ===================
See notes to pro forma condensed combined income statements on pages F-65 and F-67. F-66 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Pro-Forma Six Months Ended June 30, 2000 MicroTel T-COM Adjustments Combined -------------- -------------- ----------------- ------------------- (a) Net sales $ 12,688 $ 1,430 $ -- $ 14,118 Cost of sales 7,565 627 -- 8,192 -------------- -------------- ----------------- ------------------- Gross profit 5,123 803 -- 5,926 Operating expenses: Selling, general and administrative 4,364 602 -- 4,966 Engineering and product development 496 525 -- 1,021 -------------- -------------- ----------------- ------------------- Income (loss) from operations 263 (324) -- (61) Other income (expense): Interest expense (153) (149) -- (302) Other, net 242 9 -- 251 -------------- -------------- ----------------- ------------------- Income (loss) from continuing operations before income taxes 352 (464) -- (112) Income taxes 10 5 (5)(b) 10 ============== ============== ================= =================== Income (loss) from continuing operations $ 342 $ (469) $ 5 $ (122) ============== ============== ================= =================== Earnings per share from continuing operations: Basic $ 0.02 $ 0.00 ============== =================== Diluted $ 0.01 $ 0.00 ============== =================== Weighted average shares outstanding: Basic 18,443 18,443 ============== =================== Diluted 20,476 18,443 ============== ===================
See notes to pro forma condensed combined income statements on page F-65. (a) The operating results of MicroTel have been reclassified to reflect the effect of MicroTel's decision, in October 2000, to discontinue its circuits segment. (b) To eliminate T-COM state income tax expense related to Limited Liability Company tax status. F-67 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the estimated expenses in connection with the offering described in this Registration Statement:
SEC Registration $ 561 NASD Fees -- Accounting Fees and Expenses 85,000 Legal Fees and Expenses 150,000 Blue Sky Fees and Expenses 5,000 Printing Costs 1,000 Miscellaneous Expenses 5,000 ------------------ TOTAL $ 246,561 ==================
All of the above estimated expenses have been or will be paid by the Registrant. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at its request in such capacity in another corporation or business association, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he 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 his conduct was unlawful. Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the corporation or its stockholders, (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) under Section 174 of the Delaware General Corporation Law, or (d) for any transaction from which the director derived an improper personal benefit. Article Fifth of the Registrant's Certificate of Incorporation, as amended, provides for the elimination of personal liability for a director for breach of fiduciary duty as permitted by 102(b)(7) of the Delaware General Corporation Law. Article XI of the Registrant's Bylaws provides for the indemnification of officers, directors and certain other persons acting on behalf of the Registrant: II-1 (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 an authorized representative of the Registrant, in connection with a threatened, pending or completed proceeding other than an action by or in the right of the Registrant, 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 Registrant, 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 proceeding by or in the right of the Registrant, by reason of the fact such person was or is an authorized representative of the Registrant, 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 Registrant (or if so found liable, if a proper court found such person to be fairly and reasonably entitled to indemnification). The Registrant's Bylaws further provide for mandatory indemnification of authorized representatives of the Registrant who have been successful in defense of any proceeding described above or in defense of any claim, issue or matter therein, against expenses actually and reasonably incurred in connection with such defense. Article XI of the Registrant's Bylaws also provides that the Registrant may purchase and maintain insurance on behalf of directors and officers to cover any liability arising out of their status as directors and officers, whether or not the Registrant would have the power to indemnify such directors and officers against such liability under the provisions of the Delaware General Corporation Law. The Registrant does not maintain directors' and officers' liability insurance on behalf of its executive officers and directors. Section 7.5 of the Employment Agreement dated as of October 15, 1997 between the Registrant and Carmine T. Oliva, and Section 7.5 of the Employment Agreement dated as of May 1, 1998 between the Registrant and Graham Jefferies provide that the Registrant shall indemnify Mr. Oliva and Mr. Jefferies to the maximum extent permitted by applicable law and the Registrant's Bylaws against all costs, charges and expenses incurred or sustained by them in connection with any action, suit or other proceeding by reason of either of them being an officer, director or employee of the Registrant or any subsidiary or affiliate of the Registrant. As a result of the above-described provisions, the Registrant 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 Registrant pursuant to the foregoing provisions, or otherwise, the Registrant 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 Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant 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 Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of II-2 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. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Between January 1997 and March 1997, the Registrant issued an aggregate of 173,500 shares of common stock with an aggregate value of $418,301 to a non-employee director as compensation for his services as a director. In January 1997, the Registrant issued 57,500 shares of common stock to a non-employee director. In March 1997, the Registrant issued an aggregate of 25,000 shares of common stock with an aggregate value of $76,563 to two consultants in exchange for services rendered. In March 1997, the Registrant issued an aggregate of 6,119,130 shares of common stock with an aggregate value of $18,739,836 to the former stockholders of XIT Corporation in connection with the Registrant's acquisition of all of the outstanding shares of common stock of XIT Corporation. In April 1997, the Registrant issued 2,000,000 shares of common stock and warrants to purchase up to an aggregate of 500,000 shares of common stock at an exercise price of $3.45 per share to 16 investors in a private placement in exchange for $4,258,000 in cash net of $742,000 of placement expenses. In May 1998, the Registrant issued to five of the investors replacement warrants to purchase an aggregate of 85,000 shares of common stock at $2.00 per share, which warrants were exercisable for a period of one year less than the original warrants. In July 1997, the Registrant issued 80,000 shares of common stock valued at $1.06 per share to a consultant in connection with a settlement relating to services rendered. In December 1998, these shares were cancelled upon reversal of the settlement. In October 1997, the Registrant issued 500,000 shares of common stock valued at $1,125,000 in connection with the acquisition by the Registrant's CXR Telcom subsidiary of all of the outstanding capital stock of Critical Communications Incorporated. In November 1997, the Registrant issued 30,000 shares of common stock to one individual upon exercise of an option with an exercise price of $3.25 per share. In June and July 1998, the Registrant sold 200 shares of Series A Preferred Stock for $10,000 per share to three institutional investors. Each share of Series A Preferred Stock is convertible at a conversion price equal to $10,000 divided by the lesser of $1.26 and 100% of the arithmetic average of the three lowest closing bid prices over the 40 trading days immediately prior to the date of conversion. The shares were accompanied by warrants to purchase up to an aggregate of 1,000,000 shares of common stock at an exercise price of $1.25 per share, which warrants were later modified in November 1998 and December 1999 to provide for exercise prices of $0.75 per share and $0.25 per share, respectively, and to extend their expiration dates from May 22, 2001 to December 22, 2002. The Registrant's agent in the private placement received warrants to purchase up to 250,000 shares of common stock at $1.25 per share. The Registrant received net proceeds of approximately $1,847,000 after deduction of commissions and transaction-related expenses. II-3 In November and December 1998, the Registrant issued an aggregate of 770,000 shares of common stock to three investors in connection with their conversions of an aggregate of 38.5 shares of Series A Preferred Stock. In December 1998, the Registrant issued warrants to purchase up to 152,381 shares of common stock at an exercise price of $0.66 per share to one entity in exchange for an option to purchase from the entity an ownership interest in Digital Transmission Systems, Inc. In January 1999, the Registrant exercised its option by issuing 1,000,000 shares of common stock valued at $1,000,000 in exchange for 41% of the outstanding common stock of Digital Transmission Systems, Inc. Between January and November 1999, the Registrant issued an aggregate of 2,659,011 shares of common stock to three investors in connection with their conversions of an aggregate of 102 shares of Series A Preferred Stock. In January 1999, the Registrant issued 250,000 shares of common stock valued at $225,675 to its then legal counsel in connection with legal services rendered. In January 1999, the Registrant issued 200,000 shares of common stock valued at $193,140 to an investor relations consultant in exchange for services rendered. In March 1999, the Registrant issued an aggregate of 150,000 shares of common stock valued at $72,510 to two individuals and one entity in connection with the settlement of litigation. In March and April 1999, the Registrant issued an aggregate of 635,000 shares of common stock valued at $263,435 to two individuals for investor relations consulting services rendered. In March 1999, the Registrant issued an aggregate of 75,000 shares of common stock valued at $32,603 to three individuals for consulting services rendered. In June 1999, the Registrant issued an aggregate of 555,641 shares of common stock valued at $362,667 to two employees who were former principals of Critical Communications Incorporated in connection with an earn out arrangement. Between February and April 2000, the Registrant made an offer to all holders of warrants to purchase shares of common stock at exercise prices of $1.00 or more pursuant to which these holders could elect to surrender their outstanding warrants with exercise prices of $1.00 or more in exchange for the issuance to them of warrants to purchase a number of shares equal to one-half of the number of shares underlying the surrendered warrants at an exercise price of one-half of the exercise price of the surrendered warrants. A total of 2,769,201 warrants with exercise prices ranging from $1.21 to $3.79 were surrendered in exchange for 1,384,602 warrants with exercise prices ranging from $0.605 to $1.895. The majority of warrants exchanged were held by persons or entities who were not employees or directors of the Registrant or its subsidiaries. In March 2000, the Registrant issued 306,148 shares of common stock in connection with a cashless exercise of warrants to purchase 500,000 shares of common stock at an exercise price of $.69 per share. In March 2000, the Registrant issued an aggregate of 35,000 shares of common stock to three employees upon exercise of warrants at an exercise price of $0.20 per share. II-4 In March 2000, the Registrant issued 306,148 shares of common stock to one entity in connection with the cashless exercise of a warrant to purchase up to 500,000 shares of common stock, which warrant had been issued in connection with settlement of litigation. In June 2000, the Registrant issued an aggregate of 55,000 shares of common stock to three employees upon exercise of warrants at an exercise price of $0.20 per share. In June 2000, the Registrant issued 1,743,285 shares of common stock to one investor upon conversion of 34.5 shares of the Registrant's Series A Preferred Stock. In June 2000, the Registrant issued an aggregate of 217,500 shares of common stock to five investors, including the Registrant's Chief Executive Officer and his brother and son, in connection with the exercise of warrants with an exercise price of $0.25 per share. In July 2000, the Registrant issued options to purchase up to 100,000 shares of common stock at an exercise price of $0.50 per share to each of the Registrant's two non-employee directors in connection with their service as directors. In August and September 2000, the Registrant issued an aggregate of 60,000 shares of common stock to one investor in connection with the exercise of warrants with an exercise price of $0.25 per share. In September 2000, the Registrant issued 150,000 shares of Series B Preferred Stock ("Series B Shares") in connection with the acquisition of substantially all of the assets of T-Com, LLC, a Delaware limited liability company. The Series B Shares become convertible into shares of common stock of the Registrant in three equal lots of 50,000 Series B Shares each at the end of six, twelve and eighteen months, respectively, following the acquisition closing date of September 22, 2000. Each Series B Share will be convertible into ten common shares, and conversion rights will be cumulative, with all 150,000 Series B Shares being convertible into common stock after eighteen months. The Series B Shares have a liquidation preference of $6.40 per share. The Registrant may redeem outstanding and unconverted Series B Shares for cash at a price per share equal to $7.36 by giving 20 days' prior written notice to the holders of Series B Shares to be redeemed. If less than all of the Series B Shares are to be optionally redeemed, the particular Series B Shares to be redeemed shall be selected by lot or by such other equitable manner determined by the Registrant's board of directors. The Registrant may not, however, redeem Series B Shares if there is an insufficient number of authorized and reserved shares of common stock for this purpose, to the extent the Series B Shares are subject to a lock-up, or to the extent the Registrant receives a conversion notice for Series B Shares prior to the redemption date. If the Registrant fails to pay the redemption price after calling any Series B Shares for optional redemption, the Registrant will have no further option to redeem Series B Shares. Exemption from the registration provisions of the Securities Act of 1933 for the transactions described above is claimed under Section 4(2) of the Securities Act of 1933, among others, on the basis that such transactions did not involve any public offering and the purchasers were sophisticated with access to the kind of information registration would provide. II-5 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 2.1 Merger Agreement dated December 31, 1996 between XIT Corporation, XIT Acquisition, Inc. and the Registrant (1) 2.2 Share Exchange Agreement among CXR Telcom Corporation, the Registrant and Eric P. Bergstrom, Steve T. Robbins and Mike B. Peterson, Dated October 17, 1997 (2) 2.3 Indemnity Escrow Agreement among CXR Telcom Corporation, the Registrant, Eric P. Bergstrom, Steve T. Robbins and Mike B. Peterson and Gallagher, Briody & Butler, Dated October 17, 1997 (2) 2.4 Form of Contingent Stock Agreement among CXR Telcom Corporation, the Registrant, Critical Communications Incorporated, Mike B. Peterson, Eric P. Bergstrom and Steve T. Robbins, Dated October 17, 1997 (2) 2.5 Form of Severance Agreement among CXR Telcom Corporation, Critical Communications Incorporated, Mike B. Peterson, Eric P. Bergstrom and Steve T. Robbins, Dated October 17, 1997 (2) 2.6 Asset Purchase Agreement dated January 9, 1998 among Arnold Circuits, Inc, BNZ Incorporated, Robert Bertrand, XCEL Arnold Circuits, Inc., XIT Corporation and Mantalica & Treadwell (2) 2.7 Addendum No. 1 to Asset Purchase Agreement, among Arnold Circuits, Inc, BNZ Incorporated, Robert Bertrand, XCEL Arnold Circuits, Inc., XIT Corporation and Mantalica & Treadwell, Dated March 31, 1998 (2) 2.8 Bill of Sale and Assignment and Assumption Agreement between XCEL Arnold Circuits, Inc.and Arnold Circuits, Inc., Dated March, 31 1998 (2) 2.9 Guaranty of Robert Bertrand in favor of XCEL Arnold Circuits, Inc., Dated March 31, 1998 (2) 2.10 Warrant to Purchase Common Stock of the Registrant issued to BNZ Incorporated (2) 2.11 Guaranty of BNZ Incorporated in favor of XCEL Arnold Circuits, Inc., Dated March 31, 1998 (2) 2.12 Pledge and Escrow Agreement between BNZ Incorporated and XCEL Arnold Circuits, Inc., Dated March 31, 1998 (2) 2.13 Promissory Note between Arnold Circuits, Inc. and XCEL Arnold Circuits, Inc. Dated March 31, 1998 (2) 2.14 Promissory Note between XIT Corporation and Arnold Circuits, Inc. Dated March 31, 1998 (2) II-6 2.15 Security Agreement between Arnold Circuits, Inc and XCEL Arnold Circuits, Inc. Dated March 31, 1998 (2) 2.16 Joint Marketing and Supply Agreement between Arnold Circuits, Inc and XCEL Etch Tek, Dated March 31, 1998 (2) 2.17 Letter agreement dated October 19, 1998 between the Registrant and Digital Transmission Systems, Inc. 2.18 Asset Purchase Agreement between HyComp, Inc. and HyComp Acquisition Corp., c/o SatCon Technology Corporation, dated March 31, 1999 (3) 2.19 Share Purchase Agreement dated December 29, 1999 between the Registrant and Wi-Lan Inc. 2.20 Share Purchase Agreement dated April 17, 2000 between XCEL Power Systems Limited and the stockholders of The Belix Company Limited (4) 2.21 Asset Purchase Agreement effective September 1, 2000 by and among the Registrant, CXR Telcom Corporation and T-Com, LLC (5) 2.22 Bill of Sale and Assignment and Assumption Agreement dated as of September 22, 2000 between T-Com, LLC and CXR Telcom Corporation (5) 2.23 Letter agreement dated October 2, 2000 among the Registrant, CXR Telcom Corporation and T-Com, LLC relating to Asset Purchase Agreement by and among the same parties (5) 2.24 Asset Purchase Agreement dated as of November 15, 2000 by and among XIT Corporation, the Registrant, Bryan Fuller, Tama-Lee Mapalo and Etch-Tek Electronics Corporation (6) 3.1 Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on July 14, 1989 3.2 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on October 12, 1989 3.3 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on October 16, 1991 3.4 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on April 19, 1994 3.5 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on March 6, 1995 3.6 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on August 28, 1996 3.7 Certificate of Designations, Preferences and Rights of Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on May 20, 1998 II-7 3.8 Amended Certificate of Designations, Preferences and Rights of Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on July 1, 1998 3.9 Certificate of Correction of Amended Certificate of Designations, Preferences and Rights of Preferred Stock as filed with the Delaware Secretary of State on November 20, 2000 3.10 Second Amended and Restated Certificate of Designations, Preferences and Rights of Preferred Stock as filed with the Delaware Secretary of State on December 28, 1999 (7) 3.11 Certificate of Correction of Second Amended Certificate of Designations, Preferences and Rights of Preferred Stock as filed with the Delaware Secretary of State on November 20, 2000 3.12 Certificate of Designations, Preferences and Rights of Series B Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on September 19, 2000 (5) 3.13 Bylaws of the Registrant 4.1 Form of Subscription Agreement for the sale of Series A Preferred Stock of the Registrant (8) 4.2 Form of Warrant to Purchase Common Stock of the Registrant issued in connection with the sale of Series A Preferred Stock (8) 4.3 Form of Warrant to Purchase Common Stock of the Registrant issued in connection with the Digital Transmission Systems, Inc. investment 4.4 Form of Warrant to Purchase Common Stock of the Registrant issued in connection with various private placements 5.1 Opinion of Rutan & Tucker, LLP (*) 10.1 1993 Stock Option Plan (#) 10.2 Employee Stock and Stock Option Plan (9) (#) 10.3 1997 Stock Incentive Plan (10) (#) 10.4 2000 Stock Option Plan (11) (#) 10.5 Employment Agreement dated October 15, 1997 between the Registrant and Carmine T. Oliva (#) 10.6 Employment Agreement dated May 1, 1998 between the Registrant and Graham Jefferies (#) 10.7 Credit and Security Agreement dated as of August 16, 2000 by and among XIT Corporation, CXR Telcom Corporation and Wells Fargo Business Credit, Inc. (5) II-8 10.8 Revolving Note dated August 16, 2000 in the principal sum of $3,000,000 made by CXR Telcom Corporation and XIT Corporation in favor of Wells Fargo Business Credit, Inc. (5) 10.9 Term Note dated August 16, 2000 in the principal sum of $646,765 made by XIT Corporation in favor of Wells Fargo Business Credit, Inc. (5) 10.10 Term Note dated August 16, 2000 in the principal sum of $40,235 made by CXR Telcom Corporation in favor of Wells Fargo Business Credit, Inc. (5) 10.11 Guarantee dated August 16, 2000 made by Carmine T. Oliva in favor of Wells Fargo Business Credit, Inc. (5) 10.12 Waiver of Interest dated August 16, 2000 made by Georgeann Oliva in favor of Wells Fargo Business Credit, Inc. (5) 10.13 Guarantee dated August 16, 2000 made by the Registrant in favor of Wells Fargo Business Credit, Inc. (5) 10.14 Guarantor Security Agreement dated August 16, 2000 made by the Registrant in favor of Wells Fargo Business Credit, Inc. (5) 10.15 Loan and Security Agreement between Congress Financial Corporation (Western) and the Registrant, XIT Corporation, CXR Telcom Corporation and HyComp, Inc. dated June 23, 1998 (8) 10.16 Security Agreement between Congress Financial Corporation (Western) and XIT Corporation dated June 23, 1998 (8) 10.17 Lease agreement between the Registrant and Property Reserve Inc. dated September 16, 1999 (12) 10.18 Lease agreement between XIT, Inc. and Rancho Cucamonga Development dated August 30, 1999 (12) 10.19 Lease Agreement between SCI Limited Partnership-I and CXR Telcom Corporation, Dated July 28, 1997 (13) 10.20 Lease agreement between XIT Corporation and P&S Development (14) 10.21 General Partnership Agreement between XIT Corporation and P&S Development (14) 10.22 Lease Agreement between XCEL Arnold Circuits, Inc. and RKR Associates (14) 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Certified Public Accountants 23.2 Consent of Rutan & Tucker, LLP (contained in Exhibit 5.1) (*) II-9 24.1 Power of Attorney (included on the signature page of this registration statement) - --------------- (*) To be filed by amendment. (#) Management contract or compensatory plan, contract or arrangement required to be filed as an exhibit. (1) Incorporated by reference to the Registrant's current report on Form 8-K for January 6, 1997 filed January 21, 1997 (File No. 1-10346) (2) Incorporated by reference to the Registrant's annual report on Form 10-K for the year ended December 31, 1997 (File No. 1-10346) (3) Incorporated by reference to the Registrant's interim report on Form 10-Q for the three months ended March 31, 1999 (File No. 1-10346) (4) Incorporated by reference to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2000 (File No. 1-10346) (5) Incorporated by reference to the Registrant's quarterly report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-10346) (6) Incorporated by reference to the Registrant's current report on Form 8-K for November 15, 2000 (File No. 1-10346) (7) Incorporated by reference to the Registrant's annual report on Form 10-K for the year ended December 31, 1999 (File No. 1-10346) (8) Incorporated by reference to the Registrant's interim report on Form 10-Q for the six months ended June 30, 1998 (File No. 1-10346) (9) Incorporated by reference to the Registrant's registration statement on Form S-8 (Registration Statement No. 333-12567) (10) Incorporated by reference to the Registrant's definitive proxy statement for the annual meeting of stockholders to be held June 11, 1998 (File No. 1-10346) (11) Incorporated by reference to the Registrant's definitive proxy statement for the special meeting of stockholders to be held January 16, 2001 (File No. 1-10346) (12) Incorporated by reference to the Registrant's interim report on Form 10-Q for the nine months ended September 30, 1999 (File No. 1-10346) (13) Incorporated by reference to the Registrant's registration statement on Form S-8 (Registration Statement No. 333-29925) (14) Incorporated by reference to the Registrant's annual report on Form 10-K/A for the year ended December 31, 1996 (File No. 1-10346) II-10 (b) FINANCIAL STATEMENT SCHEDULES The Consolidated Schedule II Valuation and Qualifying Accounts for the years ended December 31, 1999, 1998 and 1997 included in the financial statements beginning at page F-1 of the prospectus that is a part of this registration statement is incorporated by reference into this Item 16(b). ITEM 17. UNDERTAKINGS 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. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective 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. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described above in Item 14, or otherwise, the Registrant 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 Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant 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 Registrant 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. II-11 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Rancho Cucamonga, State of California, December 29, 2000. MICROTEL INTERNATIONAL, INC. By: /s/ Carmine T. Oliva ----------------------------------------- Carmine T. Oliva Chairman of the Board of Directors, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned officers and directors of MicroTel International, Inc., a Delaware corporation, which is filing Amendment No. 1 to a Registration Statement on Form S-1 with the Securities and Exchange Commission under the provisions of the Securities Act of 1933, as amended, hereby constitute and appoint Carmine T. Oliva his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all further amendments to the Registration Statement, including a Prospectus or an amended Prospectus therein, and all other documents in connection therewith to be filed with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all interests and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Carmine T. Oliva Chairman of the Board of Directors, December 29, 2000 - ------------------------------------ President, Chief Executive Officer Carmine T. Oliva (Principal Executive Officer and Director) /s/ Randolph D. Foote Chief Financial Officer December 29, 2000 - ----------------------------------- (Principal Accounting and Randolph D. Foote Financial Officer) /s/ Laurence P. Finnegan, Jr. Director December 29, 2000 - --------------------------------- Laurence P. Finnegan, Jr. /s/ Robert B. Runyon Director December 29, 2000 - ------------------------------------ Robert B. Runyon
II-12 EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2.17 Letter agreement dated October 19, 1998 between the Registrant and Digital Transmission Systems, Inc. 2.19 Share Purchase Agreement dated December 29, 1999 between the Registrant and Wi-Lan Inc. 3.1 Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on July 14, 1989 3.2 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on October 12, 1989 3.3 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on October 16, 1991 3.4 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on April 19, 1994 3.5 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on March 6, 1995 3.6 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on August 28, 1996 3.7 Certificate of Designations, Preferences and Rights of Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on May 20, 1998 3.8 Amended Certificate of Designations, Preferences and Rights of Preferred Stock of the Registrant, as filed with the Delaware Secretary of State on July 1, 1998 3.9 Certificate of Correction of Amended Certificate of Designations, Preferences and Rights of Preferred Stock as filed with the Delaware Secretary of State on November 20, 2000 3.11 Certificate of Correction of Second Amended Certificate of Designations, Preferences and Rights of Preferred Stock as filed with the Delaware Secretary of State on November 20, 2000 3.13 Bylaws of the Registrant 4.3 Form of Warrant to Purchase Common Stock of the Registrant issued in connection with the Digital Transmission Systems, Inc. investment 4.4 Form of Warrant to Purchase Common Stock of the Registrant issued in connection with various private placements 10.1 1993 Stock Option Plan 10.5 Employment Agreement dated October 15, 1997 between the Registrant and Carmine T. Oliva II-13 10.6 Employment Agreement dated May 1, 1998 between the Registrant and Graham Jefferies 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Certified Public Accountants 24.1 Power of Attorney (included on the signature page of this registration statement)
II-14 EX-2.17 2 a2034174zex-2_17.txt EXHIBIT 2.17 EXHIBIT 2.17 October 19, 1998 Mr. Andy Salazar President and Chief Executive Officer Digital Transmission Systems, Inc. 3000 Northwood Parkway, Building 300 Norcross, GA 30071 Re: ACQUISITION OF DIGITAL TRANSMISSION SYSTEMS, INC. Dear Andy: MicroTel International, Inc. ("MCTL") hereby offers to purchase all the issued and outstanding common stock of Digital Transmission Systems, Inc. ("DTSX") on the terms and conditions set forth in the Proposed Terms and Conditions of Acquisition dated October 19, 1998 attached hereto, subject to completion of due diligence review by both MCTL and DTSX; the approval by their respective boards of directors and shareholders, as applicable: and, the negotiation and execution of a definitive purchase and sale agreement. Time is of the essence with respect to this offer which shall expire at 5 p.m. pacific time on October 30, 1998. For and on behalf of Accepted on behalf of MICROTEL INTERNATIONAL, INC. DIGITAL TRANSMISSION SYSTEMS, INC. By:/S/ Carmine T. Oliva By:/S/Andy Salazar ---------------------------- -------------------------------------- Carmine T. Oliva Andy Salazar Chairman of the Board and President and Chief Executive Officer Chief Executive Officer CTO/jb enclosure CONFIDENTIAL PROPOSED TERMS AND CONDITIONS OF ACQUISITION OF DIGITAL TRANSMISSION SYSTEMS, INC. BY MICROTEL INTERNATIONAL, INC. October 19, 1998 The following are the proposed terms and conditions under which MicroTel International, Inc. ("MCTL") would acquire (the "Acquisition") all the outstanding common stock of Digital Transmission Systems, Inc. ("DTSX"). These terms and conditions are based in part on the information contained in the Revised Valuation Factors document dated October 19, 1998 attached hereto. Time is of the essence with regard to all dates contained herein. Securities to be issued At the closing of the Acquisition, MCTL shall issue approximately 5,876,640 shares of MCTL common stock in exchange for all outstanding shares of common stock of DTSX. The aforementioned number of shares of MCTL common stock to be issued is based upon the outstanding common shares of DTSX of 4,187,273 as of March 31, 1998 and 11,931,363 shares of MCTL as of September 30, 1998 and shall be adjusted to reflect the actual number of common shares of DTSX outstanding as of September 30, 1998 so as to cause the ownership percentage of the combined company by the shareholders of MCTL and DTSX as of September 30, 1998 to be 67% and 33%, respectively. The shares of MCTL issued shall be registered with the Securities and Exchange Commission on Form S-4 but shall contain a lock-up provision to be mutually agreed upon by the parties. Outstanding options and warrants Unless otherwise required by the terms and conditions of existing option and warrant purchase agreements, all outstanding options and warrants to purchase the common stock of MCTL shall not be adjusted in any manner and all outstanding options and warrants to purchase the common stock of DTSX shall be converted to options or warrants to purchase the common stock of MCTL as applicable on a ratio of 1.13:1 (subject to the adjustment noted above) with a corresponding adjustment in exercise price. CONFIDENTIAL Conditions precedent-MCTL MCTL shall commit to the sale of its HyComp, Inc. subsidiary ("HyComp") as soon as practical and shall continue to utilize all reasonable efforts to effect such sale. MCTL will obtain an agreement with the holders of its Series A Convertible Preferred Stock to convert such preferred stock at not less than $0.50 per common share. Conditions precedent-DTSX DTSX shall have completed the sale of the South Tech business operations not later than November 30, 1998. DTSX shall have a minimum of $500,000 in unencumbered cash in its possession as of the date of the closing of the Acquisition. DTSX shall have net intangible shareholders' equity of not less than $1 million as of the closing of the Acquisition. DTSX shall have not more that $600,000 in accounts payable over 60 days past due as of the closing of the Acquisition. In conjunction with the sale of South Tech, DTSX shall arrange the assumption by South Tech, or its successor, of $1 million of the existing $4 million in convertible debentures. DTSX shall arrange for the holders of the existing $4 million in convertible debentures to convert $3 million thereof at $2.00 per share not later than October 31, 1998. DTSX shall obtain the agreement of Peregrine Ventures to the terms and conditions referenced herein not later than October 31, 1998. Between the date of the execution of a letter of intent between the parties and the closing of the Acquisition, DTSX shall not solicit nor accept any other offer for the acquisition of its business operations in any form. DTSX shall finalize agreements concerning all fees to be paid in connection with the Acquisition to Colebrook Capital, P.K. Hickey & Associates, Neil Sussman and Broadview in a form acceptable to MCTL not later than October 31, 1998. All such fees shall be paid in the common stock and warrants to purchase the common stock of MCTL except for a small percentage to be paid in cash as mutually agreed by the parties if residual cash is -2- CONFIDENTIAL available following the payment of all other transaction expenses and the common stock issued and underlying the warrants issued as fees shall be registered concurrently with the common shares issued to the DTSX shareholders and shall be subject to the same lock-up provisions. The total value of all fees for all parties shall not exceed $275,000. DTSX shall arrange for Barrington Capital to become a market maker in MCTL common share with analyst coverage provided by Barrington. DTSX shall arrange for Colebrook Capital ("Colebrook") to use its best efforts to support the proposed sale by MCTL of HyComp by referring MCTL to other agents who would be capable of facilitating such sale and by referring to MCTL any potential purchasers of HyComp but Colebrook shall not be required to actively market HyComp on behalf of MCTL. DTSX shall obtain a fairness opinion but in no event shall the cost exceed $50,000. General A definitive purchase and sale agreement to effect the Acquisition shall be executed not later than December 31, 1998. Both MCTL and DTSX shall have timely filed all reports or any other documents required pursuant to the Securities and Exchange Act of 1934, as amended, or any rules and regulations promulgated thereunder. These terms and conditions shall be held as confidential by both MCTL and DTSX and no press release or other dissemination of the occurrence of ongoing discussions by the parties regarding the Acquisition or the contents of such discussions shall be disclosed other than to necessary internal employees or directors of the parties. Further, the content and timing of any press release(s) issued relating to the Acquisition shall be approved in writing in advance by the parties. No press release relating to the Acquisition shall be issued prior to the completion by DTSX of the sale of the South Tech business operations, except that MCTL may, at its sole option, issued such a press release if it believes such action will assist its efforts to support the market price of its common shares. -3- EX-2.19 3 a2034174zex-2_19.txt EXHIBIT 2.19 EXHIBIT 2.19 SHARE PURCHASE AGREEMENT made the 29th day of December, 1999. BETWEEN: WI-LAN INC., a body corporate, incorporated pursuant to the laws of the Province of Alberta (hereinafter referred to as the "Purchaser") OF THE FIRST PART. AND MICROTEL INTERNATIONAL, INC., a body corporate, incorporated pursuant to the laws of the State of Delaware (hereinafter referred to as the "Vendor") OF THE SECOND PART WHEREAS the Vendor is the beneficial owner of the DTS Shares; AND WHEREAS the Vendor has agreed to sell, transfer and assign and the Purchaser has agreed to purchase and acquire, the DTS Shares upon the terms and conditions set forth herein; In consideration of the premises, covenants and agreements herein and other good and valuable consideration (the receipt and sufficiency of which is hereby acknowledged), the parties hereto covenant and agree as follows: ARTICLE 1 INTERPRETATION 1.1 DEFINITIONS In this Agreement, unless the context otherwise requires: a. "AGREEMENT" means this agreement, including the recitals, as amended or supplemented from time to time, and "hereby", "hereof", "herein", "hereunder", "herewith", "hereto" and similar terms refer to this Agreement and not to any particular provision of this Agreement; b. "BUSINESS DAY" means a day, other than a Saturday, Sunday or statutory holiday, when banks are generally open for the transaction of banking business in the City of Calgary; c. "CLOSING" means the closing of the transactions contemplated herein; d. "CLOSING DATE" means January 7, 2000 or such later date upon which the transactions contemplated by the Related Agreements have been completed or such other date as may be agreed upon by the parties hereto; e. "CLOSING TIME" means 2.00 p.m. (Calgary time), or such other time as may be agreed upon by the parties hereto, on the Closing Date; f. "CORPORATION" or "DTS" means Digital Transmission Systems, Inc., a body corporate incorporated under the laws of the State of Delaware; g. "DTS SHARES" means 1,738,159 common shares in the capital stock of the Corporation; as Constituted on the date hereof; h. "ENCUMBRANCE" includes, without limitation, any mortgage, pledge, assignment, charge, lien, security interest, claim, trust, royalty, carried, working, participation, net profits interest or ether third party interest and any agreement, option, right or privilege (whether by law, contractor otherwise) capable of becoming any of the foregoing; i. "EXCHANGE" means The Toronto Stock Exchange; j. "PERSON" includes an individual, partnership, firm, trust, body corporate, governmental authority, unincorporated body of persons or association; k. "PURCHASER" or "Wi-LAN" means WI-LAN Inc. a body corporate incorporated under the laws of the Province or Alberta; l. "PURCHASER'S COUNSEL" means Burnet, Duckworth & Palmer or such other legal counsel as may be designated by the Purchaser; m. "RELATED AGREEMENTS" means the agreements of even date herewith entered into between the Purchaser and Finova Mezzanine Capital Inc. and the Purchaser and DTS; and n. "WI-LAN COMMON SHARES" means common shares of the Purchaser as a class, as constituted on the date hereof. 1.2 SCHEDULES The following Schedules form part of this Agreement: Schedule A Representation Letter Schedule B The Toronto Stock Exchange Private Placement Questionnaire and Undertaking 1.3 HEADINGS The division of this Agreement into articles, sections and paragraphs and the insertion of ,headings are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. -2- 1.4 SECTION REFERENCES Unless the context otherwise requires, references in this Agreement to an article, section, paragraph, clause, subclause or schedule by number, letter or otherwise refer to the article, section, subsection, paragraph, clause, subclause or schedule, respectively, bearing that designation in this Agreement. 1.5 GENDER, PLURAL In this Agreement, unless the contrary intention appears, words importing the singular include the plural and vice versa; words importing gender shall include all genders. 1.6 Date for Actions 1.6 DATE FOR ACTIONS In the event that the date on which any action is required to be taken hereunder by any of the parties is not a business day in the place where the action is required to be taken, such action shall be required to be taken on the next succeeding day which is a business day in such place. 1.7 Enforceability 1.7 ENFORCEABILITY All representations and warranties in or contemplated by this Agreement as to the enforceability of any agreement or document are subject to enforceability being limited by applicable bankruptcy, insolvency, reorganization and other laws affecting creditors' rights generally and the discretionary nature of certain remedies (including specific performance and injunctive relief). ARTICLE 2 PURCHASE AND SALE 2.1 AGREEMENT TO PURCHASE AND SELL At the Closing Time, the Vendor agrees to sell, transfer and assign to the Purchaser or, its, nominee, and the Purchaser or its nominee agree to purchase and acquire from the Vendor, the DTS Shares, in exchange for an aggregate of U.S. $520,000 and 28,340 Wi-LAN Common Shares. 2.2 EXECUTION OF PURCHASE AND SALE At the Closing Time, the Purchaser shall deliver to the Vendor a certified cheque or bank draft in the amount of U.S. $520,000 and a share certificate representing 28,340 Wi-LAN Common Shares against delivery by the Vendor to the Purchaser of share certificates representing the DTS Shares Owned by the Vendor, duly endorsed in blank for transfer, or accompanied by duly executed powers of attorney for transfer in blank. -3- ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE VENDOR 3.1 REPRESENTATIONS AND WARRANTIES OF THE VENDOR The Vendor represents and warrants to the Purchaser that: a. the Vendor is duly and validly incorporated, organized and existing under the laws of its jurisdiction of Incorporation; b. the Vendor has all requisite power and authority to enter into this Agreement and all documents to be delivered pursuant hereto and to perform its obligations hereunder and thereunder; c. the Vendor owns the DTS Shares and has full power and authority to transfer the DTS Shares to the Purchaser and to receive U.S. $520,000 and the Wi-LAN Common Shares therefor and to agree to the terms, conditions and provisions herein contained; d. all of the DTS Shares transferred hereunder are owned by the Vendor as the sole beneficial owner with good, valid and marketable title and good, valid and marketable title to such securities will vest in the Purchaser as a result of the consummation of the transactions contemplated herein free and clear of any Encumbrances, voting trusts, unanimous or other shareholder agreements, proxies and other interests, claims or demands of every kind or nature whatsoever (other than such as may be created by the Purchaser); e. except pursuant to this Agreement, no person has any agreement, option, right or privilege (including, without limitation, whether by law, pre-emptive right, contract or otherwise) to purchase, convert into, exchange for or otherwise acquire, nor any agreement, option, right or privilege capable of becoming any such agreement, option, right or privilege, any of the Vendor's DTS Shares, or any interest therein; f. the DTS Shares are not subject to any trading restrictions under federal or state laws in the United States; g. the DTS shares are listed on the Nasdaq Over-The-Counter Market; h. there are no actions, suits or proceedings commenced, pending or threatened against the Vendor with respect to the DTS Shares; i. the execution and delivery of this Agreement does not and will not result in a breach of, or constitute a default under, any term or provision of any agreement or other documents to which the Vendor is a party; j. the Vendor has not incurred any obligation or liability. contingent or otherwise, for brokerage fees, finders' fees, agents' commission or similar forms of compensation with respect to the transactions contemplated herein; -4- k. the Vendor will not resell the Wi-LAN Common Shares it receives hereunder except in accordance with the provisions of applicable securities legislation and the rules of the Exchange; l. the Vendor has executed this Agreement in the United States, and it has concurrently executed and delivered the Representation Letter attached as Schedule A to this Agreement; m. if required by applicable securities legislation, policy or order or by any securities commission, stock exchange or other regulatory authority, the Vendor will execute, deliver, file and otherwise assist the Corporation in fling, such reports, undertakings and other documents with respect to the issue of the 28,340 Wi-LAN Common Shares to the Vendor (including, without limitation, any undertaking required by the Exchange in the form attached as Schedule B to this Agreement); n. to the best of the Vendor's knowledge, information and belief, the representations and warranties of the Corporation contained in the Convertible Debenture Purchase Agreement dated December 28, 1999 between the Corporation and the Vendor are true and correct in all material respects; o. the Vendor has no information or knowledge of any fact relating to the business of the Corporation or the DTS Shares which if known to the Purchaser, might reasonably be expected to deter the Purchaser from completing the transactions of purchase and sale contemplated herein; and p. this Agreement has been duly executed and delivered by the Vendor and all documents to be delivered by the Vendor pursuant hereto will be duly executed and delivered and this Agreement does and such documents will constitute legal, valid and binding obligations of the Vendor enforceable in accordance with their respective terms. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER 4.1 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Vendor that: a. the Purchaser is duly organized and validly existing under the law of the jurisdiction of its incorporation; b. the Wi-LAN Common Shares are listed and posted for trading on the Exchange; c. the Purchaser has all requisite power and authority to enter into this Agreement and all documents to be delivered pursuant hereto and to perform its obligations hereunder and thereunder; d. the Purchaser will have full power and authority to pay U.S. 520,000 to the Vendor and to issue the 28,340 Wi-LAN Common Shares to the Vendor upon receipt of the required -5- regulatory approval and has full power and authority to receive the DTS Shares therefor and to agree to the terms, conditions and provisions herein contained; and e. this Agreement has been duly authorized, executed and delivered by the Purchaser and all documents to be delivered by the Purchaser pursuant hereto will be duly executed and delivered and this Agreement does and such documents will constitute legal, valid and binding obligations of the Purchaser enforceable in accordance with their respective terms. ARTICLE 5 PURCHASER'S CLOSING CONDITIONS 5.1 CONDITIONS PRECEDENT The obligations of the Purchaser to complete the transactions contemplated herein is subject to: a. the Purchaser being satisfied in its sole discretion with its due diligence review of DTS and its assets and operations including, without limitation, the financial statements of DTS, the obligations and liabilities of DTS, the products and revenue stream of DTS and the material agreements of DTS; b. since December 20,1999 DTS shall have carried on its business in the ordinary course of business consistent with past practices and shall not have engaged in any material transactions outside the ordinary course of business (including increasing long-term debt) except as disclosed to and approved by Wi-LAN in writing; c. DTS's issued and outstanding share capital at the Closing Time consisting of an aggregate of 4,646,221 common shares, 1,314,333 preferred shares, warrants entitling the holders thereof to acquire an aggregate of 2,433,315 common shares at exercise prices ranging from U.S. $0.12 to U.S. $9.00 per share, options entitling the holders thereof to acquire an aggregate of 1,019,880 common shares at exercise prices ranging from U.S. $0.47 to U.S. $13.75 per share and a U.S. $2,000,000 convertible debenture entitling the holder thereof to acquire 2,000,000 common shares at an exercise price of U.S. $1.00 per share; d. since December 20, 1999 DTS shall not have declared or paid any dividends or made any other distributions of any of its shares or granted any further options or warrants or any right or privilege capable of becoming an option or agreement in respect of its shares; e. the Purchaser having obtained all consents, approvals and authorizations necessary or required in connection with the transactions contemplated herein, including without limitation the approval of The Toronto Stock Exchange on terms and conditions reasonably satisfactory to the Purchaser on or before the Closing Time; f. the Purchaser shall have received the opinion of Gallager, Briody & Butler, counsel for the Vendor dated the Closing Date, addressed to the Purchaser, in form and substance satisfactory to the Purchaser's Counsel; -6- g. the transactions contemplated by the Related Agreements shall have been completed; h. the vendor, having completed, executed and delivered the Representation Letter attached as Schedule A hereto; i. the Vendor, having completed, executed and delivered The Toronto Stock Exchange Private Placement Questionnaire end Undertaking attached as Schedule B hereto in a form satisfactory to the Exchange; j. the board of directors of DTS being comprised of a majority of Wi-LAN representatives at the Closing Time; k. all MicroTel representatives resigning from the board of directors of DTS at the Closing Time; l. except as contemplated by this Agreement, them shall not have occurred any material change, change of material fact or any development that could result in a material change or change of a material fact in the business, operations or affairs of DTS; m. there will be no actions, suits or proceedings, whether or not purportedly on behalf of DTS, outstanding, pending or threatened by or against DTS at law or in equity or before or by any federal, provincial, municipal or other governmental department, commission, bureau, agency or instrumentality; n. all necessary steps and proceedings shall have been taken to allow the DTS Shares to be duly transferred from the Vendor to the Purchaser and to vest in the Purchaser good and marketable title in the DTS Shares free and clear of any Encumbrances, voting trusts, unanimous or other shareholder agreements, proxies and other interests, claims or demands of every kind or nature whatsoever (other than such as may be created by the Purchaser); o. any consents or approvals required to be obtained from any third party, including any holder of indebtedness or any outstanding security of DTS, and any amendments of agreements; which shall be necessary to permit the consummation of the transactions contemplated hereby shall have been obtained and all such consents or amendments shall be satisfactory in form and substance to the Purchaser. and the Purchaser's Counsel; and p. the representations and warranties made by the Vendor herein shall be true at the Closing Time as if made at and as of such time and the Vendor shall have complied with its covenants herein and the Purchaser shall have received a certificate signed by the President of the Vendor confirming same. 5.2 WAIVER OF CONDITIONS The conditions precedent set forth in Section 5.1 are for the benefit of the Purchaser and may be waned, in whole or in part, by the Purchaser at any time. If any of the said conditions precedent shall not be complied with or waived as aforesaid on or before the date required for the -7- fulfillment thereof, the Purchaser may, in addition to the other remedies it may have at law or in equity, rescind and terminate this Agreement by notice to the other party. ARTICLE 6 CLOSING 6.1 PLACE OF CLOSING Closing shall take place at the offices of the Purchaser's Counsel at the Closing Time, or at such other place as may be agreed upon by the parties hereto. ARTICLE 7 INDEMNITY 7.1 VENDOR INDEMNIFY a. The Vendor shall indemnify and save the Purchaser harmless against and from all liabilities, claims, demands, losses, costs (including, without limitation, legal fees and disbursements on a full indemnity basis), damages and expenses to which the Purchaser may be subject or which the Purchaser may suffer or incur. whether under the provisions of any statute or otherwise, in any way caused by, or arising directly or indirectly from or in consequence of any breach of, default under or non-compliance by the Vendor with any representation, warranty, term, covenant or condition of this Agreement or in any certificate or other document delivered by or on behalf of the Vendor hereunder or pursuant hereto. b. The rights and remedies of the Purchaser set forth in paragraph 7.1(a) are to the fullest extent possible in law cumulative and not alternative and the election by the Purchaser to exercise any such right or remedy shall not be, and shall not be deemed to be, a waiver of any other rights and remedies. The Purchaser shall not be obligated to pursue. any claim or remedy against any third party including, without limitation, DTS or Finova Mezzanine Capital Inc. before being entitled to obtain full indemnification from the Vendor pursuant to paragraph 7.1(a). c. Any liability of the Vendor under paragraph 7.1 (a) shall be limited to U.S. $1,000,000. ARTICLE 8 NOTICES 8.1 NOTICES Any notice, consent, waiver, direction or other communication required or permitted to be given under this Agreement by a party to any other party shall be in writing and shall be delivered by hand delivery, facsimile transmission or (provided that the mailing party does not know and should not reasonably have known of any disruption or anticipated disruption of postal service which might affect delivery of the mail) by registered mail (postage prepaid), addressed to the party to whom the notice is to be given, at its address for service herein. Any notice, consent, waiver, direction or other communication aforesaid shall, if hand delivered or delivered -8- by telex or facsimile transmission, be deemed to have been given and received on the date on which its was hand delivered or delivered by facsimile transmission to the address provided herein (if a business day and, if not, the next succeeding business day) and if sent by registered mail be deemed to have been given and received on the third business day at the point of delivery following the date on which it was so sent. 8.2 ADDRESS FOR SERVICE The address for service of each of the parties hereto shall be as follows: if to the Purchaser: Wi-LAN Inc. Suite 300, 801 Manning Road N.E. Calgary, Alberta T2E 8J8 Attention: Hatim Zaghloul, Chairman and Chief Executive Officer Telecopy: (403) 273-5100 if to the Vendor: MicroTel International, Inc. 4290 East Brickell Street Ontario, CA 81761 Attention: Carmine T. Oliva, Chairman and Chief Executive Officer Telecopy: (909) 297-2644 or such other address as may be designated by notice to the other parties hereto. ARTICLE 9 MISCELLANEOUS 9.1 ENTIRE AGREEMENT This Agreement, together with documents to be delivered pursuant hereto, constitutes the entire agreement between the parties hereto, and cancels and supersedes all prior agreements and understandings between the parties hereto, with respect to the subject matter hereof. 9.2 FURTHER ASSURANCES Each party hereto shall, from time to time, and at all times hereafter, at the request of the other party hereto, but without further consideration, do all such further acts and execute and deliver all such further documents and instruments as shall be reasonably required in order to fully perform and carry out the terms and intent hereof. -9- 9.3 SURVIVAL The representations, warranties, covenants and agreements herein and In any document delivered pursuant hereto shall survive the Closing and remain in full force and effect provided that no party hereto shall be liable in respect of any representation or warranty unless the party seeking to rely upon such representation or warranty shall have given notice to the party who made such representation or warranty of its intention to make such claim on or before the date 24 months following the Closing Date. 9.4 TIME Time shall be of the essence in this Agreement. 9.5 AMENDMENTS This Agreement may only be amended by a written instrument signed by the parties hereto. 9.6 GOVERNING LAW This Agreement shall be governed by, and be construed in accordance with, the laws of the Province of Alberta and applicable laws of Canada but the reference to such laws shall not, by conflict of laws rules or otherwise. require the application of the law of any jurisdiction other than the Province of Alberta. 9.7 ATTORNMENT Each party hereto hereby irrevocable attorns to the jurisdiction of the Courts of the Province of Alberta in respect of all matters arising under or in relation to this Agreement. 9.8 SEVERABILITY If any one or more of the provisions or parts thereof contained in this Agreement should be or become invalid, illegal or unenforceable in any respect in any jurisdiction, the remaining provisions or parts thereof contained herein shall be and shall be conclusively deemed to be, as to such jurisdiction, severable therefrom and: a. the validity, legality or enforceability of such remaining provisions or parts thereof shall not in any way be affected or impaired by the severance of the provisions or parts thereof severed; and b. the invalidity, illegality or unenforceability of any provision or party thereof contained in this Agreement in any jurisdiction shall not affect or impair such provision or pant thereof or any other provisions of this Agreement in any other jurisdiction. -10- 9.9 EXECUTION IN COUNTERPART This Agreement may be executed in any number of counterparts with the same effect as if all signatures to the counterparts had signed one document, all such counterparts shall together constitute, and be construed as, one instrument and each of such counterparts shall, notwithstanding the date of its execution, be deemed to bear the date first above written. 9.10 WAIVER No waiver by any party hereto shall be effective unless in writing and any waiver shall afflict only the matter, and the occurrence thereof, specifically identified and shall not extend to any other. matter or occurrence. 9.11 ENUREMENT This Agreement shall enure to the benefit of and be binding upon the parties hereto end their respective successors and assigns. 9.12 ASSIGNMENT This Agreement may not be assigned by any party herein without the prior consent of the other parties hereto. 9.13 RELIANCE The parties hereto acknowledge and agree that they have entered into this Agreement in reliance upon each of the representations, warranties, covenants and agreements herein of the other party hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Wi-LAN INC. Per./S/Hatim Zaghloul ----------------------------------------- Hatim Zaghloul Chairman and Chief Executive Officer MICROTEL INTERNATIONAL, INC. Per./S/Carmine T. Oliva ----------------------------------------- Carmine T. Oliva Chairman and Chief Executive Officer -11- ACKNOWLEDGEMENT DTS hereby acknowledges that it is [illegible] of the terms and conditions of this Agreement and DTS is entering into the Convertible Debenture Purchase Agreement dated December 29, 1999 between DTS and the Purchaser as material consideration for and as an inducement to the Purchaser to enter into this Agreement. Digital Transmission Systems, Inc. Per:/S/Andres C. Salazar ------------------------------------- Andres C. Salazar Chief Executive Officer -12- EX-3.1 4 a2034174zex-3_1.txt EXHIBIT 3.1 EXHIBIT 3.1 FILED JUL 14 1989 CERTIFICATE OF INCORPORATION 10 AM OF SECRETARY OF STATE CXR CORP. FIRST: The name of the Corporation is CXR Corp. SECOND: The address of the Corporation's registered office in the state of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is fifteen million (15,000,000) and the par value of each such share is One-Third of One Cent (1/3 cent) amounting in the aggregate to Fifty Thousand Dollars ($50,000). FIFTH: To the fullest extent permitted by the Delaware General Corporation Law as the same exists or may hereafter be amended, a director of this corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of the foregoing provisions of this Article Fifth shall not adversely affect any right or protection of a director of this corporation existing at the time of such repeal or modification. SIXTH: The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation and for the purpose of creating, defining, limiting and regulating powers of the Corporation and its directors and stockholders: (a) The Board of Directors shall have the power to adopt, amend or repeal bylaws of the Corporation. b) Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide. (c) The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, and to merge, sell its assets and take other corporate action to the extent and in the manner now or hereafter permitted or prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. SEVENTH: The name and mailing address of the incorporator is: Gerald V. Niesar, 595 Market St., 16th Fl., San The undersigned incorporator hereby acknowledges that the foregoing certificate of incorporation is his act and deed and that the facts stated therein are true. /s/ Gerald V. Niesar --------------------------- -2- EX-3.2 5 a2034174zex-3_2.txt EXHIBIT 3.2 EXHIBIT 3.2 FILED CERTIFICATE OF AMENDMENT OCT 12 1989 OF CERTIFICATE OF INCORPORATION SECRETARY OF STATE OF CXR CORP. CXR Corp., a corporation organized and existing under and by virtue of the Delaware General Corporation Law, DOES HEREBY CERTIFY: FIRST: At a regular meeting of the Board of Directors held on July 27, 1989, resolutions were duly adopted setting forth a proposed amendment to the Certificate of Incorporation of said corporation, declaring said amendment to be advisable and directing that such amendment be considered by the sole stockholder of said corporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the certificate of incorporation of the corporation shall be amended by amending Article FIRST so that said Article shall be and read in full as follows: "FIRST: The name of the Corporation is CXR Corporation." SECOND: Pursuant to the resolution of the Board of Directors, approval of the sole stockholder of the Corporation was obtained pursuant to written consent, dated October 11, 1989, in which the foregoing amendment was duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. IN WITNESS WHEREOF, CXR Corp. has caused this Certificate to be signed by F. Jack Gorry, its President, and Kent M. Wilkins, its Secretary, this 11th day of October, 1989. By: /S/F. Jack Gorry ---------------------------------------- F. Jack Gorry President Attest: /S/Kent M. Wilkins ------------------------------------ Kent M. Wilkins Secretary EX-3.3 6 a2034174zex-3_3.txt EXHIBIT 3.3 EXHIBIT 3.3 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 10/16/1991 731289001 - 2202214 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CXR CORPORATION CXR Corporation (the "Corporation"), a corporation organized and existing by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That at a meeting of the Board of Directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the Certificate of Incorporation of this Corporation be amended by adding Articles "Eighth" and "Ninth" thereof, so that as amended, said Articles shall be and read as follows: "EIGHTH: (a) Classification of Board of Directors. The Board of Directors shall be divided into three classes, as nearly equal in number as the then total number of directors constituting the entire Board of Directors permits with the term of office of one class expiring each year. At the annual meeting of stockholders in 1990 directors of the first class shall elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors for any reason, and any directorships resulting from any increase in the number of directors, may be filled only by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their successors shall be elected and qualified. (b) Removal for Cause. Notwithstanding any other provisions of this Certificate of Incorporation or the Bylaws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law, this Certificate of Incorporation or the Bylaws of the Corporation), any director, or the entire Board of Directors of the Corporation may be removed at any time, but only for cause. (c) Amendment or Repeal. The provisions set forth in this Article Eighth may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of not less than 67 percent of the outstanding shares of Common Stock of the Corporation. NINTH: Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by a consent in writing by such holders. This Articles Ninth may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of not less than 67 percent of the outstanding shares of Common Stock of the Corporation." SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the state of Delaware at which meeting the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by F. Jack Gorry, its President, and Kent M. Wilkins, its Secretary, this 14th day of October, 1991. By: /S/F. Jack Gorry ------------------------------------- F. Jack Gorry, President ATTEST: /S/Kent M. Wilkins --------------------------------- Kent M. Wilkins, Secretary -2- EX-3.4 7 a2034174zex-3_4.txt EXHIBIT 3.4 EXHIBIT 3.4 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 02:30 PM 04/19/1994 944067411-2202214 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CXR CORPORATION CXR Corporation (the "Corporation"), a corporation organized and existing by virtue of the General Corporation Law of the State of Delaware, does hereby certify: FIRST: That at a meeting of the Board of Directors of the Corporation, resolutions were duly adopted setting forth a proposed amendment of the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the amendment is as follows: RESOLVED, that Article Fourth of the Certificate of Incorporation of the Company be amended to read as follows: "FOURTH: This corporation is authorized to issue only one class of stock; and the total number of shares which this corporation is authorized to issue is 25,000,000, 1/3 cent par value." SECOND: That thereafter, pursuant to resolution of its Board of Directors, the annual meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware at which the necessary number of shares as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by Henry A. Mourad, its President, and Kent M. Wilkins, its Secretary, this 18th day of April, 1994. By: /S/Henry A. Mourad ---------------------------------------- Henry A. Mourad, President Attest: /S/Kent M. Wilkins ------------------------------------ Kent M. Wilkins, Secretary EX-3.5 8 a2034174zex-3_5.txt EXHIBIT 3.5 EXHIBIT 3.5 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 04:30 PM 03/06/1995 950049638 - 2202214 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF CXR CORPORATION The following amendment to the Certificate of Incorporation was adopted by the stockholders of the Corporation as follows: FIRST: The name of the corporation is: CXR Corporation SECOND: The corporation hereby amends its Certificate of Incorporation as follows: Paragraph FIRST of the Certificate of Incorporation, relating to the corporate title of the corporation, is hereby amended to read as follows: "FIRST: The name of the corporation is: MicroTel International Inc. Paragraph FOURTH of the Certificate of Incorporation, relating to the capital stock of the Corporation, including the creation of a class of Preferred stock, is hereby amended to read as follows: "FOURTH: The aggregate number of shares of all classes of capital stock which the Company has the authority to issue is Thirty Million (30,000,000), which is divided into two classes as follows: Twenty-Five Million (25,000,000) shares of Common Stock (Common Stock) with a par value of 1/3 cent per share, and Five Million (5,000,000) shares of Preferred Stock (Preferred Stock) with a par value of $.01 per share. The designations, voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the Preferred Stock is as follows: (1) ISSUANCE OF SERIES. Shares of Preferred Stock may be issued in one or more series at such time or times, and for such consideration or considerations as the Board of Directors may determine. All shares of any one series of Preferred Stock will be identical with each other in all respects, except that shares of one series issued at different times may differ as to dates from which dividends thereon may be cumulative. All series will rank equally and be identical in all respects, except as permitted by the following provisions of paragraph 2 of this Article FOURTH. (2) AUTHORITY OF THE BOARD WITH RESPECT TO SERIES. The Board of Directors is authorized, at any time and from time to time, to provide for the issuance of the shares of Preferred Stock in one or more series with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as are stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, and as are not stated and expressed in this Certificate of Incorporation or any amendment hereto including, but not limited to, determination of any of the following: (i) The number of shares constituting that series and the distinctive designation of that series; (ii) The dividend rate or rates on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, the payment date or dates for dividends and the relative rights of priority, if any, of payment of dividends on shares of that series; (iii) Whether that series shall have voting rights, in addition to the voting rights provided by law, and , if so, the terms of such voting rights; (iv) Whether that series shall have conversion privileges and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) Whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (vi) Whether that series shall have a sinking or retirement fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking or retirement fund; (vii) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company, and the relative rights of priority, if any, of payment of shares of that series; (viii) Any other preferences, privileges and powers, and relative participating, optional or other special rights, and qualifications, limitations or restrictions of series, as the Board of Directors may deem advisable and are not inconsistent with the provisions of this Certificate of Incorporation. -2- (3) DIVIDENDS. Dividends on outstanding shares of Preferred Stock shall be paid or declared and set a part for payment in accordance with their respective preferential and relative rights before any dividends shall be paid or declared and set apart for payment on the outstanding shares of Common Stock with respect to the same dividend period. (4) LIQUIDATION. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the assets available for distribution to holders of shares of Preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all series of Preferred Stock in accordance with the respective preferential and relative amounts (including unpaid cumulative dividends, if any) payable with respect thereto. (5) REACQUIRED SHARES. Shares of Preferred Stock which have been issued and reacquired in any manner by the Company (excluding, until the Company elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired, and shares which have been converted into shares of Common Stock) will have the status of authorized and unissued shares of Preferred Stock and may be reissued. (6) VOTING RIGHTS. Shares of Preferred Stock shall each have the number of votes provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock, or as otherwise required by law. Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever. THIRD: This Certificate of Amendment has been duly adopted in accordance with the provisions of Section 241 of the General Corporation Law of the State of Delaware. FOURTH: The corporation has not received any payment for any of its stock. IN WITNESS WHEREOF, I hereunto sign my name and affirm that the statements made herein are true under the penalties of perjury, this day of March 1, 1995. /S/Daniel Dror ---------------------------------------------- Daniel Dror, Chief Executive Officer -3- EX-3.6 9 a2034174zex-3_6.txt EXHIBIT 3.6 EXHIBIT 3.6 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 03:00 PM 08/28/1996 960251693 - 2202214 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF MICROTEL INTERNATIONAL INC. The undersigned, being, respectively, Chief Executive officer and secretary of MicroTel International, Inc., a Delaware corporation (the "Corporation"), do hereby certify as follows: FIRST: That the Board of Directors of the Corporation adopted a resolution proposing and declaring advisable a reverse split of the Corporation's Common Stock, $.0033 par value per share, on a one-for-five basis (without modification in par value), and an increase in the total number of shares of preferred stock authorized by adoption of the following amendment to the Certificate of Incorporation of said corporation: "FOURTH: The aggregate number of shares of all classes of capital stock which the Company has the authority to issue is thirty (35,000,000), which is divided into two classes as follows: Twenty-Five Million (25,000,000) shares of common Stock (Common Stock) with a par value of 1/3 cent per share, and Ten Million (10,000,000) shares of Preferred Stock (Preferred Stock) with a par value of $.01 per share. The designations, voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions of the Preferred Stock is as follows: (1) Issuance in Series. Shares of Preferred Stock may be issued in one or more series at such time or times, and for such considerations as the Board of Directors may determine. All shares of any one series of preferred Stock will be identical with each other in all respects, except that shares of one series issued at different times may differ as to dates from which dividends thereon may be cumulative. All series will rank equally and be identical in all respects, except as permitted by the following provisions of paragraph 2 of this Article FOURTH. (2) Authority of the Board with Respect to Series. The Board of Directors is authorized, at any time and from time to time, to provide for the issuance of the shares of Preferred Stock in one or more series with such designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as are stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, and as are not stated and expressed in this Certificate of Incorporation or any amendment hereto including, but not limited to, determination of any of the following: (i) The number of shares constituting that series and the distinctive designation of that series; (ii) The dividend rate or rates on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, the payment date or dates for dividends and the relative rights of priority, if any, of payment of dividends on shares of that series; (iii) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (iv) Whether that series shall have conversion privileges and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) whether or not the share of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (vi) Whether that series shall have a sinking or retirement fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking or retirement fund; (vii) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company, and the relative rights of priority, if any, of payment of shares of that series; (viii) Any other preferences, privileges and powers, and relative participating, optional or other special rights, and qualifications, limitations or restrictions of a series, as the Board of Directors may deem advisable and are not inconsistent with the provisions of this Certificate of Incorporation. (3) Dividends. Dividends on outstanding shares of Preferred Stock shall be paid or declared and get apart for payment in accordance with their respective preferential and relative rights before any dividends shall be paid or declared and act apart for payment on the outstanding shares of Common Stock with respect to the same dividend period. -2- (4) Liquidation. If upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, the assets available for distribution to holders of shares of preferred Stock of all series shall be insufficient to pay such holders the full preferential amount to which they are entitled, then such assets shall be distributed ratably among the shares of all aeries of Preferred Stock in accordance with the respective preferential and relative amounts (including unpaid cumulative dividends, if any) payable with respect thereto. (5) Reacquired Shares. Shares of Preferred Stock which have been issued and reacquired in any manner by the Company (excluding, until the Company elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired, and shares which have been converted into shares of Common Stock) will have the status of authorized and unissued shares of Preferred Stock and may be reissued. (6) Voting Rights. Shares of Preferred Stock shall each have the number of votes provided in the resolution or resolutions of the Board of Directors Creating any aeries of Preferred Stock, or as otherwise required by law. Unless and except to the extent otherwise required by law or provided in the resolution or resolutions of the Board of Directors creating any series of Preferred Stock, the holders of the Preferred Stock shall have no voting power with respect to any matter whatsoever." SECOND: The foregoing amendment has been duly adopted by the stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. -3- IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed by Daniel Dror, its Chief Executive officer, and attested by Barry Reifler, its Secretary, this 29th day of August, 1996. /S/Daniel Dror ------------------------------------ Daniel Dror Chief Executive Officer ATTEST: /S/Barry Reifler - --------------------------------------- Barry Reifler, Secretary -4- EX-3.7 10 a2034174zex-3_7.txt EXHIBIT 3.7 EXHIBIT 3.7 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 12:00 PM 05/20/1998 981193867 - 2202214 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF PREFERRED STOCK OF MICROTEL INTERNATIONAL INC., A DELAWARE CORPORATION The undersigned, Carmine T. Oliva, hereby certifies that: A. He is the duly elected and acting President of MicroTel International Inc., a Delaware a corporation (the "Corporation"). B. Pursuant to authority given by the corporation's Certificate of Incorporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation has duly adopted the following recitals and resolutions: WHEREAS, the Certificate of Incorporation of this corporation provides for two classes of shares known as Common Stock and Preferred Stock; WHEREAS, the Board of Directors of the Corporation is authorized by the Certificate of Incorporation to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof; and NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors deems it advisable to adopt, and hereby does adopt, the Corporation's Certificate of Designations, Preferences and Rights of Series A Preferred Stock of MicroTel International Inc., a Delaware corporation: A. DESIGNATION. One series of Preferred Stock, designated Series A Preferred Stock, is hereby provided for, which shares shall have the rights, privileges and preferences set forth below. B. AUTHORIZED NUMBER. The number of shares constituting the Series A Preferred Stock shall be 250, parvalue .01 per share. C. DIVIDEND PROVISIONS. The holders of shares of Series A Preferred Stock shall not be entitled to receive dividends. D. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, the holders of shares of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Common Stock by reason of their ownership, an amount per share equal to $10,000 (the "Stated Value") for each outstanding share of Series A Preferred Stock. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock on a share-by-share basis in proportion to the aggregate preferential amounts of each such series of Preferred Stock. (b) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by the Corporation of a transaction or series of related transactions in which mote than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation, dissolution or winding up within the meaning of this Section D but shall instead be treated pursuant to Section E hereto. E. CONVERSION. The holders of the Series A Preferred Shams shall have conversion rights as follows (the "Conversion Rights"): (1) CONVERSION RIGHTS. (i) All Series A Preferred Share shall be convertible, at the option of the holders of such shares, at any time after the ninetieth (90th) day of issuance of such shares, at the office of the Corporation or any transfer agent for the Series A Preferred Shares, into the number of fully paid and nonassessable unrestricted and nonlegended Common Shares of the Corporation at the conversion price per Series A Preferred Share equal to $10,000 divided by the lesser of (x) $1.26 and (y) One Hundred Percent (100%) of the arithmetic average of the three lowest closing bid prices over the forty (40) trading days prior to the exercise date of any such conversion. No more than 20% of the aggregate number of Series A Preferred Shares originally purchased and owned by the Buyer may be converted in any thirty (30) day period after the ninetieth (90th) day of issuance. (ii) In the event of a call for redemption of any Series A Preferred Share pursuant to Section F hereof, each bolder of any Series A Preferred Shares shall have the right to exercise the conversion rights set forth in this Section E and the right to convert each share shall cease as to the shares designated for redemption as of the close of business on the business day immediately prior to the redemption date, unless default is made in payment of the redemption price, If the Corporation has received a notice of conversion with respect to any Series A Preferred Shares the Corporation may not redeem such Series A Preferred Shares provided the Series A Preferred Shares are delivered for conversion as set forth in Section E(2). (2) MECHANICS OF CONVERSION. (i) No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Shares. In lieu of any fractional share to which the holder would otherwise be entitled, the Corporation shall round up to the nearest whole share. In the case of a dispute as to the calculation of the Conversion Rate, the Corporation's calculation shall be deemed conclusive absent manifest error. In order to convert Series A Preferred Shares into full shares of Common Stock, the holder shall surrender the certificate or certificates therefor, -2- duly endorsed, by either overnight courier or 2-day courier, to the office of the Corporation for the Series A Preferred Shares, and shall give written notice to the Corporation at such office that the holder elects to convert the same, the number of shares of Series A Preferred Shares so converted and a calculation of the Conversion Rate (with an advance copy of the certificates) and the notice by facsimile); provided, however, that the Corporation shall not be obligated to deliver certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such Series A Preferred Shares are delivered to the Corporation as provided above, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. (ii) The Corporation shall use reasonable efforts to cause to be issued and delivered within two (2) business days after delivery to the Corporation of such Series A Preferred Shares, or after such agreement and indemnification, to such holder of Series A Preferred Shares at the address of the holder on the stock books of the Corporation, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid. The date on which notice of conversion is given (the "Date of Conversion") shall be deemed to be the date set forth in such notice of conversion provided the original Series A Preferred Shares to be converted are received by the Corporation within five (5) business days thereafter and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original Series A Preferred Shares to be converted are not received by the Corporation within five (5) business days after the Conversion, the notice of conversion shall become null and void. (3) CONVERSION PRICE ADJUSTMENT. The closing bid price used to determine the Conversion Price shall be appropriately adjusted to reflect, as deemed equitable and appropriate by the Corporation, any stock dividend, stock split or share combination of the Common Stock. In the event of a merger, reorganization, recapitalization or similar event of or with respect to the Corporation (a "Corporate Change") (other than a Corporate Change in which all or substantially all of the consideration received by the holders of the Company's equity securities upon such Corporate Change consists of cash or assets other than securities issued by the acquiring entity or any affiliate thereof), the Series A Preferred Shares shall be convertible into such class and type of securities as the Holder would have received had the Holder converted the Series A Preferred Shares immediately prior to such Corporate Change, as appropriately adjusted to equitably reflect the conversion price and any stock dividend, stock split or share combination of the common stock after such corporate event. (4) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Shares solely for the purpose of effecting the conversion of the Series A Preferred Shares such number of its Common Shares as shall from time to time be sufficient to effect the conversion of all outstanding Series A Preferred Shares; and if at any time the number of authorized but unissued Common Shares shall not be sufficient to effect the conversion of all then outstanding Series A Preferred Shares, in addition to such other remedies as shall be available to the holder of such Series A Preferred Shares, the Corporation will take such corporate action as may, in the opinion -3- of its counsel, be necessary to increase its authorized but unissued Common Shares to such number of shares as shall be sufficient for such purposes. F. REDEMPTION OF SERIES A PREFERRED SHARES. (1) OPTIONAL REDEMPTION. The Corporation may redeem all outstanding and unconverted Series A Preferred Shares for cash at a per share price equal to $11,500 (115% of the Stated Value) for each Series A Preferred Share by giving written notice to Buyer at least twenty (20) days in advance of such redemption. If the Corporation has received a notice of conversion with respect to any Series A Preferred Shares, the Corporation may not redeem such Series A Preferred Shares provided the Series A Preferred Shares are delivered for conversion as set forth in Section E(2) during the notice period prior to the redemption date as set forth in F(3)(ii) below. (2) MANDATORY REDEMPTION. On May 22, 2003, the Corporation shall redeem all Series A Preferred Shares then outstanding, by the payment therefor of the redemption price of $11,500 per share. (3) MANNER OF REDEMPTION OF SERIES A PREFERRED SHARES. (i) If less than all of the outstanding Series A Preferred Shares shall be called for redemption, the particular shares of such series to be redeemed shall be selected by lot or by such other equitable manner as may be prescribed by resolution of the Board of Directors. (ii) Notice of redemption of any Series A Preferred Shares shall be given by the Corporation by fax or other written communication, at least twenty (20) days prior to the date fixed by the Board of Directors of the Corporation for redemption (herein called the "redemption date"), to the holders of record of the shares to be redeemed at their respective addresses then appearing on the records of the Corporation. The notice of the redemption shall state: (A) the redemption date, (B) the redemption price (which must be paid within five (5) business stays after the date of redemption), (C) whether the redemption is an optional redemption or a mandatory redemption, (D) if less that ail outstanding Series A Preferred Shares are to be redeemed, the identification of the Series A Preferred Shares to be redeemed, (E) the conversion rate on the date of the notice, (F) that on the redemption date the redemption price will become due and payable upon each Series A Preferred Shares to be redeemed and the right to convert each share of Series A Preferred Share shall cease as of the close of business on the -4- business day prior to the redemption date, unless default shall be made in the payment of the redemption price, and (G) the place or places where such Series A Preferred Shares to be redeemed are to be surrendered for payment of the redemption price. (4) FAILURE TO REDEEM. If the Corporation fails to pay the redemption price after calling any Series A Preferred Shares for optional redemption under Section F(1), the Corporation shall have no further right to redeem Series A Preferred Shares under Section F(1). (5) REACQUIRED SHARES. Any shares of the Series A Preferred Stock converted, redeemed or purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Series A Preferred Stock and may be reissued at the direction of the Corporation subject to the conditions or restrictions on issuance not forth herein. G. CORPORATE EVENTS. In the event of(i) any declaration by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than cash dividend) or other distribution or (ii) any capita; reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other Corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series A Preferred Shares at least twenty (20) days prior to the record date specified therein, a notice specifying (A) the date on which any such record is to be declared for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and (C) the time, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) will receive for securities or other property deliverable upon such reorganization, reclassification, transfer, consolidation, merger, dissolution or winding up. H. VOTING RIGHTS. (1) The Holders of the Series A Preferred Shares shall not have any voting rights except as set forth below or as otherwise from time to time required by law. (2) To the extent that under California law the vote of the holders of the Series A Preferred Shares, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the outstanding Series A Preferred Shares shall constitute the approval of such action by the class. To the extent that under California law the holders of the Series A Preferred Shares are entitled to vote on a matter with holders of Common Stock voting together as one class, each Series A Preferred Shares shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of -5- stockholders as the date as of which the Conversion Price is calculated. Holders of the Series A Preferred Shares shall be entitled to notice of all shareholder meetings or written consents with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws arid applicable statutes. I. PROTECTIVE PROVISIONS. So long as the Series A Preferred Shares are outstanding, the Corporation shall not take any action that would impair the rights of the holders of the Series A Preferred Shares set forth herein and shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority in aggregate principal amount or the Series A Preferred Shares then outstanding: (1) Alter or change the rights, preferences or privileges of the Series A Preferred Shares so as to affect adversely the Series A Preferred Shares. (2) For a period of eight (8) months from the issuance of the Series A Preferred Shares, create any new class or series of stock which ranks prior to or PARI PASSU to the Series A Preferred Share with respect to liquidation preference, other than any additional series of Preferred Shares issued for a purchase price not to exceed $2 million, which may rank PARI PASSU. (3) Do any act or thing which would result in taxation of the holders of Series A Preferred Shares under Section 305 of the Internal Revenue Code of 1985, as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its authorized officer as of May 20, 1998. MICROTEL INTERNATIONAL, INC. By: /S/Carmine T. Oliva -------------------------------------------- Carmine T. Oliva President and Chief Executive Officer -6- EX-3.8 11 a2034174zex-3_8.txt EXHIBIT 3.8 EXHIBIT 3.8 STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 11:00 AM 07/01/1998 981256571 - 2202214 AMENDED CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF PREFERRED STOCK OF MICROTEL INTERNATIONAL INC., A DELAWARE CORPORATION The undersigned, Carmine T. Oliva, hereby certifies that: A. He is the duly elected and acting President of MicroTel International Inc., a Delaware a corporation (the "Corporation"). B. Pursuant to authority given by the corporation's Certificate of Incorporation, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation seeks to provide the Shareholders of misstatements has duly adopted the following amended and restated recitals and resolutions: WHEREAS, the Certificate of Incorporation of this corporation provides for two classes of shares known as Common Stock and Preferred Stock; WHEREAS, on May 19, 1998, the Board of Directors adopted a Certificate of Designations, Preferences and Rights of Series A Preferred Stock of MicroTel International Inc. (the "Certificate of Designation"), which was filed with the Secretary of State of the State of Delaware on May 20, 1998; and WHEREAS, certain purchasers of the Corporation's Series A Preferred Stock have requested the Corporation to clarify certain provisions of the Series A Certificate and to provide certain provisions to the Shareholders of Series A Preferred Stock of the Corporation (the "Series A Shareholders"); and WHEREAS, the Board of Directors of the Corporation desires to clarify the Certificate of Designation and to provide the Series A Shareholders with certain protections; NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors deems it advisable to adopt, and hereby does adopt, the Corporation's Amended Certificate of Designations, Preferences and Rights of Series A Preferred Stock of MicroTel International Inc., a Delaware corporation as follows: A. DESIGNATION. One series of Preferred Stock, designated Series A Preferred Stock, is hereby provided for, which shares shall have the rights, privileges and preferences set forth below. B. AUTHORIZED NUMBER. The number of shares constituting the Series A Preferred Stock shall be 200, par value .01 per share. C. DIVIDEND PROVISIONS. The holders of shares of Series A Preferred Stock shall not be entitled to receive dividends. D. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation. either voluntary or involuntary, the holders of shares of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this corporation to the holders of the Common Stock by reason of their ownership, an amount per share equal to $10,000 (the "Stated Value") for each outstanding share of Series A Preferred Stock. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts. then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series A Preferred Stock on a share-by-share basis in proportion to the aggregate preferential amounts of each such series of Preferred Stock. (b) A consolidation or merger of the Corporation with or into any other corporation or corporations, or a sale, conveyance or disposition of all or substantially all of the assets of this corporation or the effectuation by the Corporation of a transaction or series of related transactions in which mote than 50% of the voting power of the Corporation is disposed of, shall not be deemed to be a liquidation. dissolution or winding up within the meaning of this Section D but shall instead be treated pursuant to Section E hereto. E. CONVERSION. The holders of the Series A Preferred Shares shall have conversion rights as follows (the "Conversion Rights"): (1) CONVERSION RIGHTS. (i) All Series A Preferred Share shall be convertible, at the option of the holders of such shares, at any time after the ninetieth (90th) day of issuance of such shares, at the office of the Corporation or any transfer agent for the Series A Preferred Shares, into the number of fully paid and nonassessable unrestricted and nonlegended Common Shares of the Corporation at the conversion price per Series A Preferred Share equal to $10,000 divided by the lesser of (x) $1.25 and (y) One Hundred Percent (100%) of the arithmetic average of the three lowest closing bid prices (not necessarily consecutive) over the forty (40) trading days prior to the exercise date of any such conversion. (ii) In the event of a call for redemption of any Series A Preferred Shares pursuant to Section F hereof, each bolder of any Series A Preferred Shares shall have the right to exercise the conversion rights set forth in this Section B and the right to convert each share shall cease as to the shares designated for redemption as of the close of business on the business day immediately prior to the redemption date, unless default is made in payment of the redemption price, If the Corporation has received a notice of conversion with respect to any Series A Preferred Shares the Corporation may not redeem such Series A Preferred Shares provided the Series A Preferred Shares are delivered for conversion as set forth in Section E(2). (2) MECHANICS OF CONVERSION. (i) No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Shares. In lieu of any fractional share to which the holder -2- would otherwise be entitled, the Corporation shall round up to the nearest whole share. In the case of a dispute as to the calculation of the Conversion Rate, the Corporation's calculation shall be deemed conclusive absent manifest error. In order to convert Series A Preferred Shares into full shares of Common Stock, the holder shall surrender the certificate or certificates therefor, duly endorsed, by either overnight courier or 2-day courier, to the office of the Corporation for the Series A Preferred Shares, and shall give written notice to the Corporation at such office that the holder elects to convert the same, the number of shares of Series A Preferred Shares so converted and a calculation of the Conversion Rate (with an advance copy of the certificates) and the notice. by facsimile); provided, however. that to Corporation shall not be obligated to deliver certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such Series A Preferred Shares are delivered to the Corporation as provided above, or the holder notifies the Corporation that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. (ii) The Corporation shall use reasonable efforts to cause to be issued and delivered within two (2) business days after delivery to the Corporation of such Series A Preferred Shares or after such agreement and indemnification, to such holder of Series A Preferred Share at the address of the holder on the stock books of the Corporation, a certificate or certificates for the number of shares of Common Stock to which ho shall be entitled as aforesaid. The date on which notice of conversion is given (the "Date of Conversion") shall be deemed to be the date set forth in such notice of conversion provided the original Series A Preferred Shares to be convened arc received by the Corporation within live (5) business days thereafter and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. If the original Series A Preferred Shares to be converted are not received by the Corporation within five (5) business days after the Conversion, the notice of conversion shall become null and void. (3) CONVERSION PRICE ADJUSTMENT. The closing bid price used to determine the Conversion Price shall be appropriately adjusted to reflect, as deemed equitable and appropriate by the Corporation, any stock dividend, stock split or share combination of the Common Stock. In the event of a merger, reorganization, recapitalization or similar event of or with respect to the Corporation (a "Corporate Change") (other than a Corporate Change in which all or substantially all of the consideration received by the holders of the Company's equity securities upon such Corporate Change consists of cash or assets other than securities issued by the acquiring entity or any affiliate thereof), the Series A Preferred Shares shall be convertible into such class and type of securities as the Holder would have received had the Holder converted the Series A Preferred Shares immediately prior to such Corporate Change, as appropriately adjusted to equitably reflect the conversion price and any stock dividend, stock split or share combination of the common stock after such corporate event. (4) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued Common Shares solely for the purpose of effecting the conversion of the Series A Preferred Shares such number of its Common Shares as shall from time to time be sufficient to effect the conversion of all outstanding Series A Preferred Shares; and if at any time the number of authorized but unissued -3- Common Shares shall not be sufficient to effect the conversion of all then outstanding Series A Preferred Shares, in addition to such other remedies as shall be available to the holder of such Series A Preferred Shares, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued Common Shares to such number of shares as shall be sufficient for such purposes. F. REDEMPTION OF SERIES A PREFERRED SHARES. (1) OPTIONAL REDEMPTION. The Corporation may redeem all outstanding and unconverted Series A Preferred Shares for cash at a per share price equal to $11,500 (115% of the Stated Value) for each Series A Preferred Share by giving written notice to the Holders at least twenty (20) days in advance of such redemption. If the Corporation has received a notice of conversion with respect to any Series A Preferred Shares, the Corporation may not redeem such Series A Preferred Shares provided the Series A Preferred Shares are delivered for conversion as set forth in Section E(2) during the notice period prior to the redemption date as set forth in F(3)(ii) below. If the Corporation fails to redeem after giving written notice, it shall pay to the Holders pro-rata a total of five (5%) percent of the amount to be redeemed as liquidated damages. (2) MANDATORY REDEMPTION. On May 22, 2003, the Corporation shall redeem all Series A Preferred Shares then outstanding, by the payment therefore of the redemption price of $11,500 per share. (3) MANNER OF REDEMPTION OF SERIES A PREFERRED SHARES. (i) If less than all of the outstanding Series A Preferred Shares shall be called for redemption, the particular shares of such series to be redeemed shall be selected by lot or by such other equitable manner as may be prescribed by resolution of the Board of Directors. (ii) Notice of redemption of any Series A Preferred Shares shall be given by the Corporation by fax or other written communication, at least twenty (20) days prior to the date fixed by the Board of Directors of the Corporation for redemption (herein called the "redemption date"), to the holders of record of the shares to be redeemed at their respective addresses then appearing on the records of the Corporation. The notice of the redemption shall state: (A) the redemption date, (B) the redemption price (which must be paid within five (5) business stays after the date of redemption), (C) whether the redemption is an optional redemption or a mandatory redemption, (D) if less that ail outstanding Series A Preferred Shares are to be redeemed, the identification of the Series A Preferred Shares to be redeemed, -4- (E) the conversion rate on the date of the notice, (F) that on the redemption date the redemption price will become due and payable upon each Series A Preferred Shares to be redeemed and the right to convert each share of Series A Preferred Share shall cease as of the close of business on the business day prior to the redemption date, unless default shall be made in the payment of the redemption price, and (G) the place or places where such Series A Preferred Shares to be redeemed are to be surrendered for payment of the redemption price. (4) FAILURE TO REDEEM. If the Corporation fails to pay the redemption price after calling any Series A Preferred Shares for optional redemption under Section F(1), the Corporation shall have no further right to redeem Series A Preferred Shares under Section F(1). (5) REACQUIRED SHARES. Any shares of the Series A Preferred Stock converted, redeemed or purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Series A Preferred Stock and may be reissued at the direction of the Corporation subject to the conditions or restrictions on issuance not forth herein. G. CORPORATE EVENTS. In the event of (i) any declaration by the Corporation of a record date of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than cash dividend) or other distribution or (ii) any capital; reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, and any transfer of all or substantially all of the assets of the Corporation to any other Corporation, or any other entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Series A Preferred Shares at least twenty (20) days prior to the record date specified therein, a notice specifying (A) the date on which any such record is to be declared for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, transfer. consolidation. merger, dissolution, liquidation or winding up is expected to become effective and (C) the time, if arty, that is to be fixed. as to when the holders of record of Common Stock (or other securities) will receive for securities or other property deliverable upon such reorganization, reclassification. transfer, consolidation, merger, dissolution or winding up. H. VOTING RIGHTS. (1) The Holders of the Series A Preferred Shares shall not have any voting rights except as set forth below or as otherwise from time to time required by law. (2) To the extent that under California law the vote of the holders of the Series A Preferred Shares, voting separately as a class, is required to authorize a given action of the Corporation, the affirmative vote or consent of the holders of at least a majority of the outstanding Series A Preferred Shares shall constitute the approval of such action by the class. -5- To the extent that under California law the holders of the Series A Preferred Shares are entitled to vote on a matter with holders of Common Stock voting together as one class, each Series A Preferred Shares shall be entitled to a number of votes equal to the number of shares of Common Stock into which it is then convertible using the record date for the taking of such vote of stockholders the date no of which the Conversion Price is calculated, Holders of the Series A Preferred Shares shall be entitled to notice of all shareholder meetings or written consent with respect to which they would be entitled to vote, which notice would be provided pursuant to the Corporation's bylaws arid applicable statutes. I. PROTECTIVE PROVISIONS. So long as the Series A Preferred Shares are outstanding, the Corporation shall not take any action that would impair the rights of the holders of the Series A Preferred Shares set forth herein and shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority in aggregate principal amount or the Series A Preferred Shares then outstanding: (1) Alter or change the rights, preferences or privileges of the Series A Preferred Shares so as to affect adversely the Series A Preferred Shares. (2) For a period of eight (8) months from the issuance of the Series A Preferred Shares, create any new class or series of stock which ranks prior to or PARI PASSU to the Series A Preferred Share with respect to liquidation preference, other than any additional series of Preferred Shares issued for a purchase price not to exceed $2 million, which may rank PARI PASSU. (3) Do any act or thing which would result in taxation of the holders of Series A Preferred Shares under Section 305 of the Internal Revenue Code of 1985. as amended (or any comparable provision of the Internal Revenue Code as hereafter from time to time amended). IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its authorized officer as of June 30, 1998. MICROTEL INTERNATIONAL, INC. By: /S/Carmine T. Oliva ---------------------------------------- Carmine T. Oliva President and Chief Executive Officer -6- EX-3.9 12 a2034174zex-3_9.txt EXHIBIT 3.9 EXHIBIT 3.9 CERTIFICATE OF CORRECTION OF AMENDED CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF PREFERRED STOCK OF MICROTEL INTERNATIONAL, INC., a Delaware corporation The undersigned hereby certifies that: 1. The name of the corporation is MicroTel International, Inc. 2. The corporation was incorporated in the State of Delaware on July 14, 1989. 3. The Amended Certificate of Designations, Preferences and Rights of Preferred Stock (the "Amended Certificate of Designations") which was filed in the Office of the Delaware Secretary of State on July 1, 1998 requires correction, as permitted by Section 103 of the Delaware General Corporation Law, in that the Amended Certificate of Designations was filed in error because the Amended Certificate of Designations was filed without proper approval by the stockholders of the Corporation. 4. The Amended Certificate of Designations filed on July 1, 1998 should be rendered null and void. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Correction of Amended Certificate of Designations, Preferences and Rights of Preferred Stock of MicroTel International, Inc. this 20th day of November, 2000. /s/ Randolph D. Foote --------------------------- Randolph D. Foote, Senior Vice President and Chief Financial Officer EX-3.11 13 a2034174zex-3_11.txt EXHIBIT 3.11 EXHIBIT 3.11 CERTIFICATE OF CORRECTION OF SECOND AMENDED CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF PREFERRED STOCK OF MICROTEL INTERNATIONAL, INC., a Delaware corporation The undersigned hereby certifies that: 1. The name of the corporation is MicroTel International, Inc. 2. The corporation was incorporated in the State of Delaware on July 14, 1989. 3. The Second Amended Certificate of Designations, Preferences and Rights of Preferred Stock (the "Second Amended Certificate of Designations") which was filed in the Office of the Delaware Secretary of State on December 28, 1999 requires correction, as permitted by Section 103 of the Delaware General Corporation Law, in that the Second Amended Certificate of Designations was filed in error because the Second Amended Certificate of Designations was filed without proper approval by the stockholders of the Corporation. 4. The Second Amended Certificate of Designations filed on December 28, 1999 should be rendered null and void. IN WITNESS WHEREOF, the undersigned has executed this Certificate of Correction of Second Amended Certificate of Designations, Preferences and Rights of Preferred Stock of MicroTel International, Inc. this 20th day of November, 2000. /s/ Randolph D. Foote --------------------------- Randolph D. Foote, Senior Vice President and Chief Financial Officer EX-3.13 14 a2034174zex-3_13.txt EXHIBIT 3.13 EXHIBIT 3.13 BYLAWS OF CXR CORP. A DELAWARE CORPORATION ARTICLE I Offices Section 1. REGISTERED OFFICE. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. (Del. Gen. Corp. Law Section 131) Section 2. OTHER OFFICES. The corporation shall also have and maintain a principal place of business at such place as may be fixed by the Board of Directors and may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require. (Del. Gen. Corp. Law Section 122 (8) ) ARTICLE II CORPORATE SEAL Section 3. CORPORATE SEAL. The corporate seal shall consist of a die bearing the name of the corporation and the date of incorporation. (Del. Gen. Corp. Law section 122(3)) ARTICLE III STOCKHOLDERS' MEETINGS Section 4. PLACE OF MEETINGS. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the principal place of business of the corporation as determined pursuant to Section 2 hereof. (Del. Gen. Corp. Law Section 211(a)) Section 5. ANNUAL MEETINGS. The annual meeting of the stockholders of the corporation for the purpose of election of Directors and for such other business as may lawfully come before it shall be held on such date and at such time as may be designated from time to time by the Board of Directors. (Del. Gen. Corp. Law Section 211(D)) Section 6. SPECIAL MEETINGS. Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, at any time by the President, the Board of Directors or the holders of shares entitled to cast not less than 10% of the votes at the meeting. (Del. Gen. Corp. Law Section 221(d)) Section 7. NOTICE OF MEETINGS. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (l0) or mare than sixty (60) days before the date of the meeting to each stockholder entitled to vote as such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (Del. Gen. Corp. Law Sections 211, 229) Section 8. QUORUM. At all meetings of stockholders, except where otherwise provided by statute, the Certificate of Incorporation or these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Any shares, the voting of which at such meeting has been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at such meeting. In the absence of a quorum any meeting of stockholders may be adjourned, from time to time, by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. Any meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the corporation. (Del. Gen. Corp. Law Section 216) Section 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of stockholders, whether annual or special, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are present either in person or by proxy. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (Del. Gen. Corp. Law Section 222(c)) Section 10. VOTING. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote or execute consents shall have the right to do so either in person or by an -2- agent or agents authorized by a written proxy executed by such person or his dully authorized agent, which proxy shall be filed with the Secretary at or before the meeting at which it is to be used. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period. All elections of Directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation. (Del. Gen. Corp. Law Section 211(e)) Section 11. JOINT OWNERS OF STOCK. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) of more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (i) if only one (1) votes, his act binds all; (ii) if more than one (1) vote, the act of the majority so voting binds all; or (iii) if more than one (1) vote, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionately, or may apply to the Delaware Court of Chancery for relief as provided in the General Corporation Law of Delaware, Section 217(b)(3). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of clause (iii) shall be majority or even-split in interest. (Del. Gen. Corp. Law section 217 (b) ) Section 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting, arranged in alphabetical order, showing the address of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (l0) days prior to the meeting, either at a place within the city where the meeting shall be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. (Del. Gen. Corp. Law Section 219(a)) Section 13. ACTION WITHOUT MEETING. Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. (Del. Gen. Corp. Law Section 22B(a), (c)) Section 14. ORGANIZATION. At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or, if the President is absent, any Vice President, or in the absence of any such officer, a chairman of the -3- meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the President or the Secretary, shall act as secretary of the meeting. ARTICLE IV DIRECTORS Section 15. NUMBER AND TERM OF OFFICE. The Board of Directors shall consist of four (4) or more members, the number thereof to be determined from time to time by resolution of the Board of Directors. The authorized number of Directors may not be reduced below four (4) without the vote or written consent of stockholders holding eighty (80%) percent of the voting power of the corporation. Except as provided in Section 17, the Directors shall be elected by the stockholders at their annual meeting in each year and shall hold office until the next annual meeting and until their successors shall be duly elected and qualified. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause the Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. (Del. Code Ann. Sections 141(b), 211(b), 211(c)) Section 16. POWERS. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of incorporation. (Del. Gen. Corp. Law Section 471(a)) Section 17. VACANCIES. Unless otherwise provided in the Certificate of Incorporation, vacancies and newly created directorships resulting from any increase in the authorized number of Directors may be filled by a majority of the Directors then in office, although less than a quorum, or by a sole remaining Directors, and each Director so elected shall hold office for the unexpired portion of the term of the Director whose place shall be vacant and until his successor shall have been duly elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this section in the case of the death, removal or resignation of any Director, or if the stockholders fail at any meeting of stockholders at which Directors are to be elected (including any meeting referred to in Section 19 below) to elect the number of Directors then constituting the whole Board. (Del. Gen. Corp. Law Section 223(a) and (b)) Section 18. RESIGNATION. Any Director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more Directors shall resign from the Board, effective at a future date, a majority of the Directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified. (Del. Gen. Corp. Law Sections 141(b), 223(d)) -4- Section 19. REMOVAL. At a special meeting of stockholders called for the purpose and in the manner hereinabove provided, the Board of Directors, or any individual Director, may be removed from office, with or without cause, and a new Director or Directors elected by a vote of stockholders holding a majority of the outstanding shares entitled to vote at an election of Directors. Section 20. MEETINGS. (a) ANNUAL MEETINGS. The annual meeting of the Board of Directors shall be held immediately after the annual meeting of stockholders and at the place where such meeting is held. No notice of annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) REGULAR MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors shall be held at any place within or without the State of Delaware which has been designated by resolution of the Board of Directors or the written consent of all Directors. (Del. Gen. Corp. Law Section 141(g)) (c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the President or a majority of the Directors. (Del. Gen. Corp. Law Section 141(g)) (d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meetings. (Del. Gen. Corp. Law section 141(i)) Section 21. NOTICE OF MEETINGS. Written notice of the time and place of all regular and special meetings of the Board of Directors shall be delivered personally to each Director, or sent to each Director by mail, or by other form of written communication, at least one (1) day before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. (Del. Gen. Corp. Law Section 229) Section 22. WAIVER OF NOTICE. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the Directors to present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. Neither the business to be transacted at, nor the purpose of any regular or special meeting of the Board of Directors, or any committee thereof, need be specified in any written waiver of notice. -5- All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. (Del. Gen. Corp. Law section 229) Section 23. QUORUM AND VOTING. (a) QUORUM. Unless the Certificate of Incorporation requires as greater number, a quorum of the Board of Directors shall consist of a majority of the exact number of Directors fixed from time to time in accordance with Section 15 of these Bylaws, but not less than one (1); provided, however, at any meeting, whether a quorum be present or otherwise, a majority of the Directors present may adjourn from time to time, without notice other than by announcement at the meeting. (Del. Gen. Corp. Law Section 141(b)) (b) MAJORITY VOTE. At each meeting of the Board of Directors at which a quorum is present all questions and business shall be determined by a vote of a majority of the Directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws. (Del. Gen. Corp. Law Section 141(b)) Section 24. ACTION WITHOUT MEETINGS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board or committee. (Del. Gen. Corp. Law Section 141(f)) Section 25. FEES AND COMPENSATION. Directors shall not receive any stated salary for their services as Directors, but by resolution of the Board a fixed fee, with or without expense of attendance, may be allowed for attendance at each meeting and at each meeting of any committee of the Board of Directors. Nothing herein contained shall be construed to preclude any Director from serving the corporation in any other capacity or as an officer thereof. (Del. Gen. Corp. Law Section 141(h)) Section 26. COMMITTEES. (a) EXECUTIVE COMMITTEE. The Board of Directors, may by resolution passed by a majority of the whole Board, appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and specifically granted by the Board, shall have and may exercise when the Board or Directors is not in session all the powers of the Board in the management of the business and affairs of the corporation, including, without limitation, the power and authority to authorize the issuance of stock, except such committee shall not have the power or authority to declare a dividend, to amend the Certificate of Incorporation, to adopt an agreement of merger or consolidation, to recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, to recommend to the stockholders of the corporation a dissolution of the corporation or a revocation of a dissolution or to amend these Bylaw. (Del. Gen. Corp. Law Section 141(c)) -6- Section 27. OTHER COMMITTEES. The Board of Directors may, by resolution passed by a majority of the whole Board, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors, and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall such committee have the powers denied to the Executive Committee in these Bylaws. (Del. Gen. Corp. Law Section 141(c)) Section 28. TERM. The members of all committees of the Board of Directors shall serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board, subject to the provisions of subsections (a) or (b) of this Section 24, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation. The Board may at any time for any reason remove any individual committee member, and the Board may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (Del. Gen. Corp. Law Section 141(c)) Section 29. MEETING. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 24 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee shall be held at any place which has been designated from. time to time by resolution of such committee or by written consent of all members thereof, and may be called by any Director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any Director by attendance thereat, except when the Director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. (Del. Gen. Corp. Law Sections 14l(c) , 229) Section 30. ORGANIZATION. At every meeting of the Directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the President, or if the President is absent, any Vice President, or, in the absence of any such officer, a chairman of the meeting chosen by a majority of the Directors present, shall preside over the meeting. The -7- Secretary, or in his absence, an Assistant Secretary directed to do so by the President or the Secretary, shall act as secretary of the meeting. ARTICLE V OFFICERS Section 31. OFFICERS DESIGNATED. The officers of the corporation shall be the Chairman of the Board of Directors, the President, one or more Vice Presidents, the Secretary, the Treasurer and the Controller, all of whom shall be elected at the annual meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. (Del. Gen. Corp. Law Sections l22(5), 142 (a), 142 (b)) Section 32. TENURE AND DUTIES OF OFFICERS. (a) GENERAL. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. (Del. Gen. Corp. Law Section 141 (b) and (e)) (b) DUTIES OF CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall perform such duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (Del. Gen. Corp. Law Section 142 (a)) (c) DUTIES OF PRESIDENT. The President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform such other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (Del. Gen. Corp. Law Section 142(a)) (d) DUTIES OF VICE PRESIDENTS. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform such other duties commonly incident to their office and shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (Del. Gen. Corp. Law Section 142 (a)) Section 33. DUTIES OF SECRETARY. The Secretary shall attend all meetings of the stockholders and of the Board of Directors, and shall record all acts and proceedings thereof in -8- the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders, and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall keep the seal of the corporation in safe custody and see that the seal is affixed to all documents authorized to be executed on behalf of the corporation under its seal. The Secretary shall keep or cause to be kept a stock register. The Secretary shall prepare, issue, record, transfer and cancel certificates of stock of the corporation. The Secretary shall act as custodian of the records of the corporation. The Secretary shall keep a record of stock owned by the corporation in all subsidiary and other companies. The Secretary shall perform all other duties given in these Bylaws and shall perform such other duties. commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President or the Vice President-Finance shall designate from time to time. The President or the Vice President-Finance may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform such other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President or the Vice President-Finance or the Secretary shall designate from time to time. (Del. Gen. Corp. Law Section 142(a)) Section 34. DUTIES OF TREASURER. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as the Beard of Directors or the President or the Vice President-Finance shall designate from time to time. The President or the Vice President-Finance may, direct any Assistant Treasurer to assume and perform the duties of the Treasurer in the absence or disability of the Treasurer, and each Assistant Treasurer shall perform such other duties commonly incident to his office and shall perform such other duties and have such other powers as the board of Directors or the President or the Vice President-Finance or the Treasurer shall designate from time to time. (Del. Gen. Corp. Law Section 142(a)) Section 35. DUTIES OF CONTROLLER. The Controller shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the President or the Vice President-Finance. The Controller shall perform such other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President or Vice President-Finance shall designate from time to time. (Del. Gen. Corp. Law Section 142(a)) Section 36. RESIGNATIONS. Any officer may resign at any time by giving written notice to the Board of Directors or to the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. (Del. Gen. Corp. Law Section 142(b)) -9- ARTICLE VI EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE CORPORATION Section 37. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. (Del. Gen. Corp. Law Sections 103 (a), 142 (a), 158) Unless otherwise specifically determined by the Board of Directors or otherwise required by law, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board of Directors, or the President or any Vice President, and by the Secretary or any Assistant Secretary. A11 other instruments and documents requiring the corporate signature, but not requiring the corporate seal, shall be executed as aforesaid or in such other manner as may be directed by the Board of Directors. (Del. Gen. Corp. Law Sections 103(a), 142(a), 158) All checks and drafts drawn on banks or other depositories on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as ,the Board of Directors shall authorize so to do. (Del. Gen. Corp. Law Sections 103(a), 142(a), 158) Section 38. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the President, or any Vice President. (Del. Gen. Corp. Law Section 123) ARTICLE VII SHARES OF STOCK Section 39. FORM AND EXECUTION OF CERTIFICATES. CERTIFICATES. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Secretary or any Assistant Secretary, certifying the number of shares owned by him in the corporation. Where such certificate is countersigned by a transfer agent other than the corporation or its employee, or by a registrar other than the corporation or its employee, any other signature on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile -10- signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the designations, preferences, limitations, restrictions on transfer and relative rights of the shares authorized to be issued. (Del. Gen. Corp. Law Section 158) Section 40. LOST CERTIFICATES. A new certificate shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owners of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 41. TRANSFERS. Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares. (Del. Code Ann., tit.5A, Section 8-401) Section 42. FIXING RECORD DATES. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less then ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If no record date is fixed: (i) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (ii) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and (iii) the record date for determining stockholders for any other purpose shall be at the close of business on the date on which the Board of Directors adopts the resolution relating thereto A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting: provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (Del. Gen. Corp. Law Section 213) Section 43. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have -11- express or other notice thereof, except as otherwise provided by the laws of Delaware. (Del. Gen. Corp. Law Sections 213(a), 219) ARTICLE VIII OTHER SECURITIES OF THE CORPORATION Section 44. EXECUTION OF OTHER SECURITIES. All bonds, debentures and other corporate securities of the corporation, other than stock certificates, may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debentures or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon and not ceased to be such officer of the corporation. ARTICLE IX DIVIDENDS Section 45. DECLARATION OF DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of' Incorporation, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. (Del. Gen. Corp. Law Sections 170, 173) ARTICLE X FISCAL YEAR Section 46. FISCAL YEAR. The fiscal year of the corporation shall end on June 30 of every year. -12- ARTICLE XI INDEMNIFICATION OF OFFICERS, DIRECTORS AND EMPLOYEES Section 47. GENERAL RIGHT TO INDEMNIFICATION. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a Director, officer or employee of the corporation, or is or was, at the request of the corporation, (a) serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (b) administering or assisting the administration of any employee benefit plan of the corporation, shall be indemnified by the corporation against expenses (including attorneys' fees), judgments, ,fines and amounts paid in settlement actually and reasonably incurred by him in connection With such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of. the corporation or such plan, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation or such plan, and, with respect to any criminal action or proceeding, had reasonable cause to believe that this conduct was unlawful. (Del. Gen. Corp. Law Section 145(a)) Section 48. INDEMNIFICATION IN DERIVATIVE ACTIONS. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a Director, officer or employee of the corporation, or is or was, at the request of the corporation, (a) serving as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, or (b) administering or assisting in the administration of any employee benefit plan of the corporation, shall be indemnified by the corporation against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be is or is not opposed to the best interests of the corporation or such plan and except. that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation or such plan unless and only to the extent that the Delaware Court of chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware court of chancery or other such court shall deem proper. (Del. Gen. Core. Law Section l45(b)) Section 49. INDEMNIFICATION IN DERIVATIVE ACTIONS. To the extent that a Director, officer or employee of the corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 47 or 48 above, or in defense of ally claim, issue or matter therein, he shall be indemnified against all expanses (including attorneys' -13- fees) actually and reasonably incurred by him in connection therewith. (Del. Gen. Corp.. Law Section 145(c)) Section 50. DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification under Sections 40 or 41 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the Director, officer or employee is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 40 and 41. Such determination shall be made (i) by the Board of Directors by a majority vote of a quorum of Directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by a majority vote of a quorum of the stockholders. (Del. Gen. Corp. Law Section 145(c) and (d)) Section 51. AUTHORITY TO ADVANCE EXPENSES. Expenses incurred in defending a civil or criminal action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board of Directors in the specific case upon receipt of an undertaking by or on behalf of the Director, officer or employee to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the corporation as authorized by this Article. (Del. Gen. Corp. Law section 145(e)) Section 52. PROVISIONS NONEXCLUSIVE. The indemnification provided by this Article shall not be deemed exclusive of any other rights to which an agent seeking indemnification may be entitled under any bylaw, agreement, employee benefit plan of the corporation, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. The indemnification provided by this Article shall continue as to a person who has ceased to be a Director, officer or employee and shall inure to the benefit of the heirs, executors and administrators of such a person. (Gel. Gen. Corp. Law Section la-5(f) and (7) ) Section 53. AUTHORITY TO INSURE. The corporation is authorized to purchase and maintain insurance on behalf of any person who is or was a Director, officer or employee of the corporation, or is or was, at the request of the corporation, (a) serving as a director, officer or employee of another corporation, partnership, joint. venture. trust or other enterprise, or (b) administering or assisting in the administration of any employee benefit plan of the corporation, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. (Del. Can. Core. Law Section 145(g)) Section 54. DEFINITION OF CORPORATION. For the purposes of references to "the corporation" include any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had authority to indemnity its directors, officers and employees so that any person who is or was a director, officer or employee of such constituent corporation or is or was, at the request of such constituent corporation, (a) serving as a director, officer or employee of another corporation, partnership, joint venture, trust or other enterprise, or (b) administering or assisting, in the administration of any employee benefit plan of the constituent corporation, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving -14- corporation as he would have with respect to such constituent corporation if its separate existence had continued (Del. Gen. Corp. Law Section 145(h)) Section 55. SEVERABILITY. The invalidity or unenforceability of any provision of this Article shall not affect the validity or enforceability of the remaining provisions of this Article. ARTICLE XII NOTICES Section 56. NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. (Del. Gen. Corp. Law Section 222) (a) NOTICE TO DIRECTORS. Any notice required to be given to any Director may be given by the method stated in subsection (a), or by telegram, except that such notice ether than One which is delivered personally shall be sent to such address as such Director shall have filed in writing with the secretary, or, in the absence of such filing to the last known post office address of such Director. (Del. Can. Core. Law Section 222) (b) ADDRESS UNKNOWN. If no address of a stockholder or Director be known, notice may be sent to the principal business office of the corporation as the Board of Directors shall fix pursuant to Section 2 of these Bylaws. (Del. Gen. Corp. Law (c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or Director or Directors, to whom any notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. (Del. Gen. Corp. Law Section 222) (d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by telegram shall be deemed to have been given as at the sending time recorded by the telegraph company transmitting the notices. (Del. Gen. Corp. Law Section 222) (e) METHODS OF NOTICE. It shall not be necessary that the same method of giving notice be employed in respect of all Directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. (Del. Gen. Corp. Law Section 222) -15- ARTICLE XIII AMENDMENTS Section 57. AMENDMENTS. These Bylaws may be repealed, altered or amended or new Bylaws adopted by the stockholders. The Board of Directors shall also have the authority, if such authority is conferred upon the Board of Directors by the Certificate of Incorporation, to repeal, alter or amend these Bylaws or adopt new Bylaws, subject to the power of the stockholders to change or repeal such Bylaws. (Del. Code Ann. Sections 109(a), 122(6)) -16- EX-4.3 15 a2034174zex-4_3.txt EXHIBIT 4.3 EXHIBIT 4.3 THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON, THE WARRANTS AND WARRANT SHARES MAY NOT BE OFFERED OR SOLD TO ANY U.S. PERSON, THE WARRANTS MAY NOT BE EXERCISED IN THE UNITED STATES (EXCEPT AS PERMITTED BY REGULATION S), AND THE WARRANT SHARES MAY NOT BE DELIVERED IN THE UNITED STATES, UNLESS, IN EACH CASE, THE WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY. THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR ENCUMBERED EXCEPT UNDER THE LAWS OF DESCENT AND DISTRIBUTION OR BY OPERATION OF LAW. WARRANTS TO PURCHASE COMMON STOCK NO. __ MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company") hereby grants to ______________________________________________________ (the "Holder") _________________________ (____) non-transferable warrants (the "Warrants") for the purchase of common stock of the Company (the "Common Stock"), with each whole Warrant entitling the Holder to purchase one share of Common Stock (each a "Warrant Share" and collectively the "Warrant Shares") on the terms and subject to the conditions set forth herein. 1. TERM. The Warrants may be exercised, in whole or in part, at any time and from time to time from the date hereof until 5:00 Pacific Time on December 31, 2003 (the "Exercise Period"). 2. EXERCISE PRICE. The initial exercise price of each whole Warrant shall be $0.65625 (the "Exercise Price"). The Exercise Price shall be subject to adjustment as provided in Section 9. 3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms provided herein at any time during the Exercise Period by the surrender of this certificate to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, accompanied by payment in full, in immediately available funds, of the amount of the aggregate Exercise Price of the Warrant Shares being purchased upon such exercise. The Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this certificate is surrendered together with the completed Notice of Exercise and payment in full as required above (the "Exercise Date"). In the event the Holder exercises less than all of the Warrants, the Company shall, concurrent with the issuance of that portion of the Warrant Shares issuable upon such exercise, issue to Holder new warrants in an amount equal to the remaining unexercised Warrants. The Holder shall be deemed -1- the record owner of such Warrant Shares as of and from the close of business on the date on which this certificate is surrendered together with the completed Notice of Exercise and payment in full as required above (" the Exercise date"). The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter. 4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common Stock upon exercise of the Warrants, the Company may pay the Holder a cash amount determined by multiplying the fraction of a share otherwise issuable by the Fair Market Value of one share of Common Stock. For this purpose, "Fair Market Value" means the average closing sale price for the ten trading days immediately preceding the Exercise Date or, if there is no last-sale reporting for the Common Stock at such time, then the value as determined in good faith by the Board of Directors of the Company. 5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have any rights as a stockholder of the Company with regard to the Warrant Shares prior to the Exercise Date for any actual purchase of Warrant Shares. 6. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrant Shares issuable upon the exercise of the Warrants have been registered under the Securities Act or any state securities laws. The Holder acknowledges by acceptance of this certificate that, as of the date of this Warrant and at the time of exercise, (a) the Holder has acquired the Warrants or the Warrant Shares, as the case may be, for investment and not with a view to distribution; and either (b) the Holder has a pre-existing personal or business relationship with the Company or its executive officers, or by reason of the Holder's business or financial experience the Holder has the capacity to protect the Holder's own interests in connection with the transaction; and (c) the Holder is an accredited investor as that term is defined in Rule 501(a) of Regulation D under the Securities Act. The Holder agrees, by acceptance of this certificate, that any Warrant Shares purchased upon exercise of the Warrants may have to be held indefinitely, until registered and qualified for resale pursuant to Section 8, or until an exemption from registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. The Holder, by acceptance of this certificate, consents to the placement of a restrictive legend (the "Legend") on the certificates representing any Warrant Shares that are purchased upon exercise of the Warrants during the applicable restricted period under Regulation S or any other applicable restricted period under the Securities Act. The Legend shall be in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS ("STATE LAWS") OR ANY SECURITIES LAWS OF JURISDICTIONS OUTSIDE OF THE UNITED STATES, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A "U.S. PERSON," AS THAT TERM IS DEFINED IN REGULATION S UNDER THE SECURITIES ACT, EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT COVERING THE SECURITIES, OR (2) UPON DELIVERY TO THE COMPANY OF AN OPINION OF U.S. COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT THE SECURITIES MAY BE TRANSFERRED WITHOUT REGISTRATION PURSUANT TO (A) RULE 144, RULE A, OR RULE 904 OF REGULATION S PROMULGATED UNDER THE -2- SECURITIES ACT OR (B) ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT. 7. REGISTRATION RIGHTS. The Company shall have no obligation to register the Warrant Shares under the Securities Act of 1933, as amended (the "Securities Act") in a separate registration statement with the Securities and Exchange Commission (the "SEC") and accordingly, the Warrant Shares shall constitute "restricted securities" for purposes of the Securities Act and Holder will not be able to transfer such Shares except upon compliance with the registration requirements of the Securities Act and applicable state securities laws or an exception therefrom and the certificate(s) evidencing the Warrant Shares to be issued shall contain a legend to the foregoing effect. Notwithstanding the foregoing, the Company shall grant to Holder "piggy-back" registration rights so as to include the Warrant Shares in any applicable registration statement filed by the Company with the SEC at any time during the one (1) year period following the issuance of the Warrant Shares. 8. RESERVATION OF SHARES. The Company agrees that, at all times during the Exercise Period, the Company will have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of the Warrants, a sufficient number of shares of its Common Stock to provide for the issuance of the Warrant Shares and upon issue such sahres shall be fully paid and non-assessable. 9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time during the Exercise Period shall, by subdivision, combination or reclassification of securities, change any of the securities into which the Warrants are exercisable into the same or a different number of securities of any class or classes, the Warrants shall thereafter entitle the Holder to acquire such number and kind of securities as would have been issuable as a result of such change with respect to the Warrant Shares if the Warrant Shares had been outstanding immediately prior to such subdivision, combination, or reclassification. If shares of the Company's Common Stock are subdivided into a greater number of shares of Common Stock, the Exercise Price for the Warrant Shares upon exercise of the Warrants shall be proportionately reduced and the number of Warrant Shares shall be proportionately increased; and conversely, if shares of the Company's Common Stock are combined into a smaller number of shares of Common Stock, the Exercise Price shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. 10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any certificate representing the Warrants or the Warrant Shares (referred to herein as the "original certificate"), and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the original certificate if mutilated, the Company will make and deliver a new certificate of like tenor in lieu of the original certificate. 11. ASSIGNMENT. The Warrants are fully transferable subject only to applicable securities laws. -3- 12. GENERAL. This certificate shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. The headings herein are for purposes of convenience and reference only and shall not be used to construe or interpret the terms of this certificate. The terms of this certificate may be amended, waived, discharged or terminated only by a written instrument signed by both the Company and the Holder. All notices and other communications from the Company to the Holder shall be mailed by first-class registered or certified mail, postage pre-paid, to the address furnished to the Company in writing by the last Holder who shall have furnished an address to the Company in writing. Dated: , 2000 -------------------- MICROTEL INTERNATIONAL, INC. By: --------------------------------- (Authorized Signature) ------------------------------------ (Name and Title) -4- NOTICE OF EXERCISE To: MicroTel International, Inc. (the "Company") 1. The undersigned hereby elects to exercise a total of ___________ Warrants for the purchase of a like number of Warrant Shares, and tenders herewith payment of the Exercise Price for such shares in full. 2. In exercising the Warrants, the undersigned hereby confirms and acknowledges that the Warrant Shares are being acquired solely for the account of the undersigned for investment, and that the undersigned will not offer, sell or otherwise dispose of any of the Warrant Shares unless the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. 3. The undersigned hereby certifies that either (i) the undersigned is not a U.S. person (as such term is defined in Regulation S under the Securities Act), or (ii) the undersigned has delivered to the Company an opinion of counsel to the effect that the Warrants and the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available. 4. The undersigned further certifies that the Warrants are not being exercised in the United States and understands and agrees that the Warrant Shares may not be delivered in the United States, except as permitted by Regulation S, absent registration under the Securities Act or an available exemption from such registration. 5. Please issue a certificate representing the Warrant Shares in the name of the Holder and deliver the certificate to the address set forth below. 6. Please issue a new certificate representing the unexercised portion (if any) of the Warrants in the name of the Holder and deliver the certificate to the address set forth below. Dated: --------------------- ---------------------------------------- (Name of Holder) ---------------------------------------- (Authorized Signature) Address for Delivery: ---------------------------------------- ---------------------------------------- ---------------------------------------- ---------------------------------------- -5- EX-4.4 16 a2034174zex-4_4.txt EXHIBIT 4.4 EXHIBIT 4.4 THE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE UNDERLYING WARRANT SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE WARRANTS MAY NOT BE EXERCISED OFFERED OR SOLD UNLESS, IN EACH CASE, THE WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS EVIDENCED BY AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY. THE WARRANTS REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED AND ENCUMBERED. WARRANTS TO PURCHASE COMMON STOCK MICROTEL INTERNATIONAL, INC., a Delaware corporation (the "Company") hereby grants to ____________ (the "Holder") _____________ (_________) non-transferable warrants (the "Warrants") for the purchase of common stock of the Company (the "Common Stock"), with each whole Warrant entitling the Holder to purchase one share of Common Stock (each a "Warrant Share" and collectively the "Warrant Shares") on the terms and subject to the conditions set forth herein. 1. TERM. The Warrants may be exercised, in whole or in part, at any time and from time to time from the date hereof until 5:00 Pacific Time on May 3, 2002 (the "Exercise Period"). 2. EXERCISE PRICE. The initial exercise price of each whole Warrant shall be $0.75 per share (the "Exercise Price"). The Exercise Price shall be subject to adjustment as provided in Section 9. 3. EXERCISE OF WARRANTS. The Warrants are exercisable on the terms provided herein at any time during the Exercise Period by the surrender of this certificate to the Company at its principal office together with the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, accompanied by payment in full, in immediately available funds, of the amount of the aggregate Exercise Price of the Warrant Shares being purchased upon such exercise. The Holder shall be deemed the record owner of such Warrant Shares as of and from the close of business on the date on which this certificate is surrendered together with the completed Notice of Exercise and payment in full as required above (the "Exercise Date"). The Company agrees that the Warrant Shares so purchased shall be issued as soon as practicable thereafter. It shall be a condition to the exercise of the Warrants that the Holder or any transferee hereof provide an opinion of counsel reasonably satisfactory to the Company that the Warrants and the Warrant Shares to be delivered upon exercise thereof have been registered under the Securities Act or that an exemption from the registration requirements of the Securities Act is available. 4. FRACTIONAL INTEREST. In lieu of issuing fractional shares of Common Stock upon exercise of the Warrants, the Company may pay the Holder a cash amount determined by multiplying the fraction of a share otherwise issuable by the Fair Market Value of one share of Common Stock. For this purpose, "Fair Market Value" means the average closing sale price for the ten trading days immediately preceding the Exercise Date or, if there is no last-sale reporting for the Common Stock at such time, then the value as determined in good faith by the Board of Directors of the Company. 5. WARRANTS CONFER NO RIGHTS OF STOCKHOLDER. The Holder shall not have any rights as a stockholder of the Company with regard to the Warrant Shares prior to the Exercise Date for any actual purchase of Warrant Shares. 6. INVESTMENT REPRESENTATION. Neither the Warrants nor the Warrants Shares issuable upon the exercise of the Warrants have been registered under the Securities Act or any state securities laws. The Holder acknowledges by signing this certificate that, as of the date of this Warrant and at the time of exercise that: (a) the Holder has acquired the Warrant or the Warrant Shares, as the case may be, for the Holder's own account; (b) the Holder has acquired the Warrants or the Warrant Shares, as the case may be, for investment and not with a view to distribution; and (c) either the Holder has a pre-existing personal or business relationship with the Company or its executive officers, or by reason of the Holder's business or financial experience the Holder has the capacity to protect the Holder's own interests in connection with the transaction. The Holder agrees, by acceptance of this certificate, that any Warrant Shares purchased upon exercise of the Warrants may have to be held indefinitely, until registered and qualified for resale pursuant to Section 7, or until an exemption from registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. The Holder, by acceptance of this certificate, consents to the placement of a restrictive legend (the "Legend") on the certificates representing any Warrant Shares that are purchased upon exercise of the Warrants during the applicable restricted period under Rule 144 or any other applicable restricted period under the Securities Act. The Legend shall be in substantially the following form: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, UNLESS IN THE WRITTEN LEGAL OPINION (APPROVED BY THE COMPANY) OF COUNSEL SATISFACTORY TO THE COMPANY, SUCH REGISTRATION IS NOT REQUIRED. 7. REGISTRATION RIGHTS. The Company shall have no obligation to register the Warrant Shares under the Securities Act of 1933, as amended (the "Securities Act") in a separate registration statement with the Securities and Exchange Commission (the "SEC") and accordingly, the Warrant Shares shall constitute "restricted securities" for purposes of the Securities Act and Holder will not be able to transfer such Shares except upon compliance with the registration requirements of the Securities Act and applicable state securities laws or an exception therefrom and the certificate(s) evidencing the Warrant Shares to be issued shall contain a legend to the foregoing effect. 8. RESERVATION OF SHARES. The Company agrees that, at all times during the Exercise Period, the Company will have authorized and reserved, for the exclusive purpose of issuance and delivery upon exercise of the Warrants, a sufficient number of shares of its Common Stock to provide for the issuance of the Warrant Shares. 9. ADJUSTMENT FOR CHANGES IN CAPITAL STOCK. If the Company at any time during the Exercise Period shall, by subdivision, combination or reclassification of securities, change any of the securities into which the Warrants are exercisable into the same or a different number of securities of any class or classes, the Warrants shall thereafter entitle the Holder to acquire such number and kind of securities as would have been issuable as a result of such change with respect to the Warrant Shares if the Warrant Shares had been outstanding immediately prior to such subdivision, combination, or reclassification. If shares of the Company's Common Stock are subdivided into a greater number of shares of Common Stock, the Exercise Price for the Warrant Shares upon exercise of the Warrants shall be proportionately reduced and the number of Warrant Shares shall be proportionately increased; and conversely, if shares of the Company's Common Stock are combined into a smaller number of shares of Common Stock, the Exercise Price shall be proportionately increased, and the number of Warrant Shares shall be proportionately decreased. 10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF CERTIFICATE. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any certificate representing the Warrants or the Warrant Shares (referred to herein as the "original certificate"), and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the original certificate if mutilated, the Company will make and deliver a new certificate of like tenor in lieu of the original certificate. 11. ASSIGNMENT. The Warrants may not be transferred or assigned. 12. GENERAL. This certificate shall be governed by and construed in accordance with the laws of the State of California applicable to contracts between California residents entered into and to be performed entirely within the State of California. The headings herein are for purposes of convenience and reference only and shall not be used to construe or interpret the terms of this certificate. The terms of this certificate may be amended, waived, discharged or terminated only by a written instrument signed by both the Company and the Holder. All notices and other communications from the Company to the Holder shall be mailed by first-class registered or certified mail, postage pre-paid, to the address furnished to the Company in writing by the last Holder who shall have furnished an address to the Company in writing. IN WITNESS WHEREOF, the undersigned have executed this Agreement on _____________. MICROTEL INTERNATIONAL, INC. By: ---------------------------------- Carmine T. Oliva Chairman of the Board, President & Chief Executive Officer [NAME OF HOLDER] Dated: By: ------------- ---------------------------------- (Authorized Signature) ---------------------------------- (Name and Title) NOTICE OF EXERCISE To: MicroTel International, Inc. (the "Company") 1. The undersigned hereby elects to exercise a total of ___________ Warrants for the purchase of a like number of Warrant Shares, and tenders herewith payment of the Exercise Price for such shares in full. 2. In exercising the Warrants, the undersigned hereby confirms and acknowledges that: (a) the Warrant Shares are being acquired solely for the account of the undersigned for investment and not with a view to or for sale in connection with any distribution; (b) the undersigned has a pre-existing personal or business relationship with the Company or its executive officers, or by reason of the undersigned's business or financial experience the undersigned has the capacity to protect the undersigned's own interests in connection with the exercise of the Warrants; and (c) the undersigned will not offer, sell or otherwise dispose of any of the Warrant Shares unless the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available, as evidenced by an opinion of counsel reasonably satisfactory to the Company. 3. The undersigned hereby certifies that the undersigned has delivered to the Company an opinion of counsel to the effect that the Warrants and the Warrant Shares have been registered under the Securities Act or an exemption from such registration is available. 4. Please issue a certificate representing the Warrant Shares in the name of the Holder and deliver the certificate to the address set forth below. 5. Please issue a new certificate representing the unexercised portion (if any) of the Warrants in the name of the Holder and deliver the certificate to the address set forth below. Dated: ------------- --------------------------------- (Name) --------------------------------- (Authorized Signature) Address for Delivery: --------------------------------- --------------------------------- --------------------------------- --------------------------------- EX-10.1 17 a2034174zex-10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 CXR CORPORATION 1993 STOCK OPTION PLAN 1. PURPOSE This 1993 Stock Option Plan (the "Plan") is intended to reward past service by, increase incentive for and encourage stock ownership on the part of selected key employees of, and independent contractors retained by, CXR Corporation (the "Corporation") or other corporations which are or become subsidiaries of the Corporation. It is also the purpose of the Plan to provide such employees and independent contractors with a proprietary interest, or increase their proprietary interest, in the Corporation and its subsidiaries, and to encourage them to continue in the employ of or to be retained by the Corporation or the subsidiaries. It is intended that certain options granted pursuant to the Plan shall constitute incentive stock options ("incentive stock options") within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and that certain options granted pursuant to the Plan shall not constitute incentive stock options ("non-qualified stock options"). The word "subsidiaries" as used in the Plan shall mean corporations in which the Corporation owns, directly or indirectly, 50 percent or more of the voting stock, in accordance with Section 424(f) of the Code. 2. STOCK The Stock subject to the Plan shall be the shares of the Corporation's authorized but unissued common stock, $.0033 par value (the "Common Stock"). The aggregate number of shares which may be issued under the Plan shall not exceed 1,500,000, subject to such adjustments as may be required pursuant to Section 6 hereof. In the event that any outstanding option under the Plan shall expire or be terminated for any reason, the shares of the Common Stock allocated to the unexercised portion of such option shall again become available to be made subject to an option under the Plan. 3. ADMINISTRATION The Plan shall be administered by the Compensation Committee of the Board of Directors of the Corporation (the "Board"). The Board shall be authorized, subject to the provisions of the Plan, to establish such rules and regulations as it may deem appropriate for the proper administration of the Plan, and to make such determinations under, and such interpretations of, and to take such steps in connection with, the Plan or the options granted thereunder as it may deem necessary or advisable. The interpretation and construction by the Board of any provisions of the Plan or any option granted pursuant thereto shall be final, binding and conclusive. No member of the Board shall be liable for any action, failure to act, determination or interpretation made in good faith with respect to the Plan or any transaction thereunder. Notwithstanding the foregoing, the Board shall have the authority to delegate its duty to administer the Plan to a committee of the Board appointed by the Board. In addition, the Plan shall be administered in such manner as the Board shall determine in order to assure that the Plan complies with Rule 16b-3 of the Securities and Exchange Commission ("Rule 16b-3") if the Board shall deem such compliance necessary or desirable. Any committee charged with administration of the Plan shall have all the powers and protections authorized to the Board under the Plan, except those powers set forth in Section 14 hereof, until the Board shall decide otherwise. -2- 4. ELIGIBILITY AND AWARD OF OPTIONS The Board shall have full and final authority in its discretion, at any time and from time to time, to grant or authorize the granting of options to such officers and other key employees of and independent contractors retained by the Corporation or its subsidiaries, whether or not members of the Board, as it may select, and for such numbers of shares as it shall designate. The Board shall have full and final authority in its discretion to determine, in the case of officers and other key employees, whether such options shall be incentive stock options or nonqualified stock options and whether incentive stock options and non-qualified stock options shall be awarded pursuant to separate grants or in conjunction. To the extent that the aggregate fair market value (determined as of the date on which the option is granted) of the Common Stock with respect to which incentive stock options granted to an officer or other key employee are exercisable for the first time by such individual during any calendar year (under all incentive stock option plans of his or her employer corporation and its parent and subsidiary corporations) exceeds $100,000, such options (taken into account in the order in which they were granted) shall be treated as non-qualified stock options. Persons selected by the Board who are prospective employees of or independent contractors retained by the Corporation or its subsidiaries shall be eligible to receive non-qualified stock options; provided, however, that, in the case of prospective employees, such options shall be subject to such persons' becoming employees of the Corporation or its subsidiaries. All options granted under the Plan shall be subject to the Corporation's receipt of adequate consideration in accordance with applicable law. The date which an option shall be granted shall be the date of the Board's authorization of such grant or such later date as may be determined by the Board at the time such grant is authorized. Any individual may hold more than one option. -3- 5. TERMS AND CONDITIONS OF OPTIONS Stock options granted pursuant to the Plan shall be evidenced by agreements in such form as the Board shall determine, which agreements shall comply with the following terms and conditions: A. OPTIONEE'S RETENTION OR EMPLOYMENT Each option agreement shall state that it shall not be construed as granting an optionee who is an independent contractor any right to continued retention by or employment with, or an optionee who is or becomes an employee any right to continued employment with, the Corporation or any subsidiary and that, subject to any written retention or employment agreement between the optionee and the Corporation or any subsidiary, such retention and employment shall be terminable at will by the Corporation or such subsidiary. B. NUMBER OF SHARES Each option agreement shall state the number of shares of the Common Stock to which the option pertains. C. OPTION PRICE Each option agreement shall state the option price per share, which shall be not less than 100 percent of the fair market value of a share of the Common Stock on the date the option is granted. Notwithstanding the foregoing, the option price per share of an option granted to a person who, on the date of such grant and in accordance with Section 424(d) of the Code, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Corporation (or of its parent or subsidiary corporation) shall be not less than 110 percent of the fair market value of a share of the Common Stock on the date the option is granted. Fair market value shall mean (i) the closing price of the Common Stock quoted on any exchange on which the Common Stock is listed, whichever is applicable, as published in the -4- Western Edition of THE WALL STREET JOURNAL for the date an option is granted or, if no report is available for such date, for the next preceding date for which such a report is available; or (ii) if the Common Stock is not traded Over-The-Counter or on an exchange, the amount determined in good faith by the Board for the date an option is granted by applying the rules and principles of valuation set forth in Treasury Regulation Section 20.2031-2, relating to the valuation of stocks for purposes of Section 2031 of the Code. D. MEDIUM AND TIME OF PAYMENT The option price shall be payable upon the exercise of an option in legal tender of the United States (in cash or by certified check) or, in the discretion of the Committee, shares of Common Stock, provided such shares shall have been held by the Optionee for not less than six months prior to the date of tender to the Company. Upon receipt of payment, the Corporation shall promptly deliver to the optionee (or the person entitled to exercise the option) a certificate or certificates for the shares of the Common Stock to which the option pertains. E. TERM AND EXERCISE OF OPTION Each option shall state the time or times when it becomes exercisable and, subject to the other provisions of the Plan, the time or times when it expires, both of which provisions shall be determined by the Board. To the extent that an option has become exercisable, it may be exercised in whole or in such lesser amount as authorized by the option agreement. If exercised in part, the unexercised portion of an option shall continue to be held by the optionee and may thereafter be exercised a provided in the option agreement and herein. Notwithstanding any other provision of the Plan, no option granted under the Plan shall be exercisable after the expiration of ten (10) years from the date of its grant, and no option granted under the Plan to a person who, on the date of such grant and in accordance with Section 424(d) f the Code, owns stock possessing more than 10 percent of the total combined voting power of all classes of stock -5- of the Corporation (or of its parent or subsidiary corporation) shall be exercisable after the expiration of five (5) years from the date of its grant. F. TERMINATION OF EMPLOYMENT OR RETENTION (i) If an optionee who is an employee shall cease to be employed, or an optionee who is an independent contractor shall cease to be retained (other than to become an employee), by the Corporation and any of its subsidiaries for any reason other than death or permanent and total disability, his or her option may be exercised within a period, determined by the Board and set forth in the relevant option agreement, not longer than three (3) months after the date of such cessation of employment or retention, as the case may be, but only to the extent such option was exercisable under the terms of such option agreement on such date. (ii) If an optionee who is an employee shall cease to be employed, or an optionee who is an independent contractor shall cease to be retained, by the Corporation and any of its subsidiaries by reason of permanent and total disability, his or her option may be exercised within a period, determined by the Board and set forth in the relevant option agreement, not longer than one (1) year after the date of such cessation of employment or retention, as the case may be, but only to the extent such option was exercisable under the terms of such option agreement on such date. (iii) If an optionee should die while in the employ of, or while retained by, the Corporation or any subsidiary or within the period not longer than three (3) months or one (1) year referred to above, whichever is applicable, his or her option may be exercised, to the extent it was exercisable under the terms of the relevant option agreement immediately prior to the optionee's death, at any time within a period, determined by the Board and set forth in such option agreement, not longer than one (1) year after the optionee's death by the optionee's executors or administrators or the person or persons to whom the option is transferred by will or -6- by the applicable laws of descent and distribution. No transfer of an option by the optionee by will or by the applicable laws of descent and distribution shall be effective unless the Corporation shall have been furnished with written notice thereof, and such other evidence as the Board may deem necessary to establish the validity of the transfer and the acceptance of the transferee or transferees of the terms and conditions of the option, and to establish compliance with any laws or regulations pertaining thereto. Permanent and total disability shall mean an optionee's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months, in accordance with Section 22(e)(3) of the Code. G. OTHER PROVISIONS The option agreements authorized under the Plan shall contain such other provisions, including, without limitation, restrictions upon the exercise of the option, restrictions on the transferability and/or right to retain shares of the Common Stock received upon the exercise of options, and restrictions required by any applicable securities laws, as the Board shall deem advisable. 6. CHANGES IN CAPITALIZATION, REORGANIZATIONS AND OTHER EVENTS Subject to any action by the stockholders of the Corporation required by law, the number of shares of the Common Stock covered by the Plan and each outstanding option, and the price per share thereof, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of the Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend (but only on the Common Stock) or -7- any other increase or decrease in the number of such shares effected without the receipt of consideration by the Corporation; provided, however, that no such adjustment shall result in the issuance of any fractional shares of the Common Stock. The issuance of shares of the Common Stock upon the conversion of convertible securities shall be treated as an issuance for which the Corporation receives consideration for this purpose. Adjustments pursuant to this paragraph shall be made by the Board, whose determinations shall be final, binding and conclusive. A dissolution or liquidation of the Corporation, a merger or consolidation in which the Corporation is not the surviving corporation or a change in control of the Corporation shall affect each outstanding option in the manner set forth in the applicable option agreement. The grant of an option pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes in its capital or business structure or to merge, consolidate, dissolve, liquidate, sell or transfer all or any part of its business or assets. 7. NONASSIGNABILITY No option granted under the Plan shall be assignable or transferable by an optionee except by will or the laws of descent and distribution. An option granted under the Plan shall be exercisable, during the optionee's lifetime, only by the optionee. 8. NO OBLIGATION TO EXERCISE OPTION The granting of an option shall impose no obligation upon the optionee or a transferee of the optionee o exercise such option. -8- 9. RIGHTS AS A STOCKHOLDER An optionee or a transferee of an optionee shall have no rights as a stockholder with respect to any shares of the Common Stock covered by his or her option until the date of the issuance of a stock certificate to the optionee or transferee for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 6. 10. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS Subject to the terms and conditions and within the limitations of the Plan, the Board may modify, extend, renew or accelerate the exercisability or outstanding options granted under the Plan. Furthermore, the Board may, subject to any applicable provisions of the Plan, upon the cancellation of previously granted higher priced options, regrant options at a lower price. Notwithstanding the foregoing, however, no modification or cancellation and regrant of an option shall, without the written consent of the optionee, alter or impair any rights or obligations under any option theretofore granted under the Plan. 11. USE OF PROCEEDS The proceeds received from the sale of shares of the Common Stock pursuant to the exercise of options granted under the Plan shall be used for general corporate purposes. 12. APPROVAL OF STOCKHOLDERS Options granted under the Plan shall be subject to approval of the Plan by the stockholders of the Corporation in accordance with Section 422(b)(1) of the Code. No option granted hereunder may become exercisable unless and until such approval is obtained. In the -9- event an equity security of the Corporation is registered under Section 12 of the Exchange Act, the Plan shall again be submitted for approval by the stockholders for purposes of Rule 16b-3 and in accordance with the provisions of such Rule if the Board shall deem compliance with such Rule necessary or desirable. 13. TERM OF PLAN The plan is effective September 1, 1993 and, unless terminated sooner pursuant to Section 14, shall remain in effect until the earlier of the close of business on August 31, 2003 or when all the shares of the Common Stock subject to or which may become subject tot the Plan have been issued upon the exercise of options granted under the Plan. 14. TERMINATION OR AMENDMENT OF THE PLAN The Board may from time to time suspend, discontinue or terminate the Plan or revise or amend it in any respect whatsoever; provided, however, that no such action of the Board shall: (A) without the consent of the optionee, alter or impair any rights or obligations under any option theretofore granted under the Plan; (B) without the approval of the stockholders of the Corporation in accordance with Section 422(b)(1) of the Code, increase the aggregate number of shares of the Common Stock which may be issued under options granted under the Plan (except as may be effected pursuant to the provisions of Section 6); (C) without the approval of the stockholders of the Corporation in accordance with Section 422(b)(1) of the Code, change the designation of the employees or class of employees eligible to receive incentive stock options under the Plan; (D) as of the date of the first registration of an equity security of the Corporation under Section 12 of the Exchange Act and if the Board shall deem compliance with Rule 16b-3 -10- necessary or desirable, without the approval of the stockholders of the Corporation for purposes of Rule 16b-3 and in accordance with the provisions of such Rule, materially increase the benefits accruing to participants under the Plan, materially increase the number of securities which may be issued under the Plan or materially modify the requirements as to eligibility for participation in the Plan; or (E) without such approval by the stockholders of the Corporation as shall be necessary in the opinion of counsel, otherwise amend or modify the Plan. -11- EX-10.5 18 a2034174zex-10_5.txt EXHIBIT 10.5 EXHIBIT 10.5 EMPLOYMENT AGREEMENT This agreement is made as of this 15th day of October, 1997, by and between Microtel International, Inc., a Delaware corporation with offices at 4290 E. Brickell Street, Ontario, California, 91761-1511 (the "Employer" or the "Company"), and Carmine T. Oliva, who resides at 80 Brandywyne Drive, Florham Park, N.J., 07932, (the "Employee"). WITNESSETH WHEREAS, the Employee desires to be employed by the Employer, and the Employer desires to employ the Employee upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and agreements hereinafter contained the parties hereto agree as follows: I. EMPLOYMENT 1.1 EMPLOYMENT. Subject to the provisions for termination as hereinafter provided, the terms of this agreement shall begin on the date first written above and shall terminate on October 15, 2002 (the "Employment Period"). 1.2 RENEWAL. Subject to the provisions for termination as hereinafter provided, this agreement shall be automatically renewed for three (3) successive two (2) year terms commencing on October 15, 2002, (the "Renewal Periods") unless, during the following periods, either party to this Agreement shall notify the other party in writing of its desire not to renew this Agreement; provided, however, any action required to be taken with respect to this Employment Agreement by the Employer shall only be taken after the Executive Compensation and Management Development Committee of the Board of Directors of the Employer approves such action. The required notice periods in order to prevent an automatic renewal of this Agreement shall be as follows:
Period During Which Notice Of Non-Renewal Must Be Given Renewal Period - ------------------------- -------------- 8/15/01 to 10/15/01 10/15/02 to 10/15/04 8/15/03 to 10/15/03 10/15/04 to 10/15/06 8/15/05 to 10/15/05 10/15/06 to 10/15/08
- 2 - 1.3 DUTIES. Subject to Section 1.4, the Employee hereby promises to perform and discharge well and favorably the duties of Chairman, President and Chief Executive Officer and to perform services in such additional capacities as may be directed by the Company's Board of Directors (the "Board") in accordance herewith. As Chairman, President and Chief Executive Officer, the Employee's duties shall consist of the usual and customary duties of his position and he shall be subject to the direction and control of the Board. Further the Employee shall at all times have the authority as shall reasonably be required to enable him to discharge such duties in an efficient manner. 1.4 REDESIGNATION. The Board may, in its discretion, elect or appoint the Employee to offices or positions other than, or in addition to, Chairman, President and Chief Executive Officer (hereinafter the "Redesignation") by providing the Employee with prompt written notice of the Redesignation. If any Redesignation and related addition to and/or reduction of Employee's duties results in a substantial net change in the scope of the Employee's responsibilities, the Employee may elect, in his sole discretion, not to accept such Redesignation and to resign upon providing written notice of his resignation to the Employer not less than thirty (30) days after the Employee has been provided with written notice of the Redesignation. In such event, if such Redesignation occurs during the Employment Period, the Employer shall pay the Employee his annual salary, as provided herein, for three (3) years following the effective date of such resignation or until October 15, 2002, whichever is the longer period. In the event that the Redesignation shall occur at any time after the Employment Period, and during one of the Renewal Periods, the Employer shall pay the Employee his annual salary, as provided herein, for three (3) years following the effective date of such resignation. All sums owing hereunder in the event of a Redesignation and a subsequent resignation by the Employee shall be due and payable within thirty (30) days of the effective date of such resignation 1.5 OTHER BUSINESS ACTIVITIES. The Employee shall devote his full time, attention and energies to the business of the Company and shall not, so long as he remains in the employ of the Company, be engaged in any other employment or business of substantial nature, whether or not such business activity is pursued for gain and profit, without the written consent of the Company. Nothing contained herein, however, shall be construed as preventing the Employee from (i) making passive investments of his assets in such form or manner as he desires, providing such investments: (a) do not require the Employee to render services in the operations or affairs of the firms, corporations or other entities in which such investments are made, and (b) are not made in any business directly or indirectly competing with the Employer or its subsidiaries or affiliated corporations, if any, unless the stock of such company is listed on a national stock exchange and the Employee owns less than three percent (3%) of the outstanding voting securities, or (ii) becoming a member of the Board of Directors of any other corporation that the Employee desires, provided that the corporation upon whose Board the Employee is a member of is not, in the sole discretion of the Employer's Board of Directors, in competition with the business of the Employer. - 3 - The Company shall provide the Employee with adequate office and support staff to accomplish the objectives for which he is employed and in order to perform the duties as set forth herein. II. COMPENSATION 2.1 ANNUAL SALARY. The Employer shall pay to the Employee in compensation for Employee's services hereunder, a base salary at an annual rate of $250,000, payable in equal periodic installments in accordance with the customary payroll policy of the Employer. The Employee shall also be eligible to receive merit or promotional increases in accordance with the Employer's annual review, or other general review of its officer compensation. 2.2 ABATED COMPENSATION. Commencing in July, 1996, the Employee voluntarily agreed to abate a portion of his annual salary for the Company's benefit, in conjunction with the Company's salary abatement program then in effect, until such time as the Company has reported two (2) consecutive profitable quarters during the term of the agreement or any renewals thereof. As of the date hereof, the Employee's annual salary has been reduced to one hundred ninety-eight thousand, eight hundred sixty-five dollars ($198,865). As of the first day of the month following the public reporting of such consecutive profitable fiscal quarters, the Employee's annual base salary shall be increased, as set forth in Section 2.1 of this Agreement. 2.3 EXPENSES. The Employer agrees to reimburse the Employee against his receipts for all reasonable business expenses incurred by him during the Employment Period or Renewal Periods in connection with the performances of his services hereunder. 2.4 BONUSES. The Employer agrees that the Employee will be entitled to portico-pate in any bonus or similar plan approved by the Employer's Board of Directors. 2.5 STOCK PURCHASE WARRANTS. As a condition of his entering into this Employment Agreement, Employee is entitled to purchase, subject to the provisions of the warrant ("Warrant"), from Microtel International, Inc., at $3.45 per share, two hundred fifty thousand (250,000) shares of the Company's common stock, ("common stock"), no-par value, at any time during the period commencing on the date of Warrant, October 15, 1997, to 5:00 PM New York City time, October 14, 2002. 2.6 STOCK OPTIONS AND OTHER INCENTIVE PLANS. The Employee shall continue to be eligible to participate in any Incentive Stock Option or Non-Qualified Stock Option Plan or other incentive plans duly approved by the Board of Directors for implementation within the Company. 2.7 INSURABILITY: RIGHT TO INSURE. Employee represents and warrants to the Company that on the date hereof he is, and upon the commencement of the Employment Period he will be, insurable at standard premium rates. Employee agrees that the - 4 - Employer shall have the right during the Employment Period to insure the life of Employee by a policy or policies of insurance (including that presently in force) in such amount or amounts as it may deem necessary or desirable, and Employer shall be beneficiary of any such policy and shall pay the premiums or other costs thereof. The Employer shall have the right, from time to time, to modify any such policy or policies of insurance or to take out new insurance on the life of the Employee. Employee agrees, upon request, at any time or times prior to the commencement of or during the Employment Period or Renewals thereof, to sign and deliver any and all documents and to submit to any physical or other reasonable examinations which may be required in connection with any such policy or policies of insurance or modifications thereof. 2.8 PERSONAL GUARANTEE/CAPITAL PRESERVATION INSURANCE. The Company will provide a life insurance policy on Employee's life, in the amount of $1 million, payable to Employee's estate in the event of his death during the life of this Agreement and any extensions thereof. The benefit is in return for, and will protect the estate from financial loss arising from, any and all personal guarantees which the Employee provided in favor of the Corporation, as required by various corporate lenders. It will also enable such estate to exercise all warrants and options pertaining to the Company's capital stock, thereby preserving to his heirs the Employee's equity in the Company. 2.9 ADDITIONAL BENEFITS. The Employee shall be entitled to the customary and usual vacation, medical insurance, and other fringe benefits made available to the Employer's employees generally. III. TERMINATION 3.1 TERMINATION DUE TO DEATH. If during the Employment Period or Renewals thereof, Employee shall die, this Agreement shall terminate, except that the compensation or other amounts payable hereunder, to or for the benefit of Employee shall be paid for one (1) year following the death of the Employee to such person or persons as Employee may designate by notice to the Employer from time to time or, in the absence of such designation, to his legal representatives. 3.2 TERMINATION DUE TO DISABILITY. If during the Employment Period, or Renewals thereof, Employee shall become physically or mentally disabled, whether totally or partially, so that he is unable substantially to perform his services hereunder (i) for a period of 180 consecutive days, or (ii) for shorter periods aggregating 180 days during any period of eighteen consecutive months , the Employer may at any time after the last day of the 180 consecutive days of disability or the day on which the shorter periods of disability shall have equaled an aggregate of 180 days, by 10 days written notice to Employee (but before Employee has recovered from such disability), terminate this Agreement. Notwithstanding such disability, the Employer shall continue to pay Employee compensation or other amounts payable hereunder, to or for the benefit of Employee up to and including the date two (2) years after the effective date of such termination. - 5 - 3.3 TERMINATION FOR CAUSE. The Employer may at any time during the Employment Period and any Renewals thereof, by notice, terminate this Agreement and discharge the Employee for cause, whereupon the Employer's obligation to pay any compensation, severance allowance, or other amounts payable hereunder to or for the benefit of Employee shall terminate on the date of such discharge, notwithstanding anything herein contained to the contrary. As used herein, the term "for cause" shall be deemed to mean and include chronic alcoholism, drug addiction; misappropriation of any money or other assets or properties of the Employer or its subsidiaries; willful violation of specific and lawful written directions from the Board of Directors of the Employer; failure or refusal to perform the services required of Employee under this Agreement; willful disclosure of trade secrets or other confidential information resulting in substantial detriment to the Company as documented by the Employer under oath or affirmation; conviction in a court of competent jurisdiction of any crime involving the funds or assets of the Company including, but not limited to, embezzlement and larceny; any civil or criminal conduct or personal misbehavior which is detrimental to the image, reputation, welfare or security of the Employer where such misconduct or misbehavior and judgment have been documented by the Employer under oath or affirmation; and any other acts or omissions that constitute grounds for cause under the laws of the States of Delaware, California, Massachusetts or Illinois, or such other States or locations wherein the Company may have operations. 3.4 TERMINATION WITHOUT CAUSE. The Employer may terminate this Agreement without cause at any time upon sixty (60) days written notice to the Employee. In the event the Employer does terminate this Agreement without it being "for cause", the Employee, if requested in writing by the Employer, shall continue to render services at full compensation until the effective date of such termination. Thereafter, during the Employment Period, Employee shall be paid his annual salary for two and one-half (21/2) years following the effective date of such termination, or until October 15, 2002, whichever is the longer period. In the event such termination pursuant to this Section 3.4 occurs during any of the Renewal Periods, the Employee shall be paid his Annual Salary through the expiration of the particular Renewal Term to which the Company is obligated under Section 1.2, as well as all other amounts payable hereunder. Termination "without cause" shall include the ceasing of operations due to bankruptcy and/or the general inability of the Employer to meet the Employer's obligations as they become due. 3.5 TERMINATION WITHOUT CAUSE FOLLOWING A CHANGE IN CONTROL. This Agreement may be terminated by Employer, or successor to Employer, upon thirty (30) days written notice to Employee upon the happening of any of the following events: a. Sale by Employer of substantially all of its assets; b. Sale, exchange or other disposition of two-thirds or more of the outstanding capital stock of the Employer; - 6 - c. Merger or reorganization in which shareholders of the Employer immediately prior to such merger or reorganization receive less than fifty percent (50%) of the outstanding voting shares of the successor corporation. In the event that the Employee's employment is terminated without cause within two years following a change of control, the Employer or successor to Employer shall: a. Pay to Employee, in a lump sum within thirty (30) days from date of termination, or, at Employee's election, in installments, the Employee's Annual Salary and all other amounts payable hereunder for two and one-half (2 1/2) years following the effective date of such termination or until October 15, 2002, whichever is the longer period. b. In the event such termination occurs during any of the Renewal Periods, pay to Employee his Annual Salary to the expiration of that particular Renewal Period, his Annual Salary for a period of two years following the end of such Renewal Period, plus all other amounts payable hereunder c. Pay to Employee the average of the Annual Executive Bonuses awarded to him in the three years preceding his termination over the same time span and under the same conditions as Annual Salary. d. Pay to Employee any Executive Bonus awarded but not yet paid. e. Continue Employee's coverage in all benefit programs in which he was participating on the date of his termination of employment until the earlier of (1) the end of the Employment Period or Renewal Period, or (2) the date he receives equivalent coverage and benefits under plans and programs of a subsequent employer. 3.6 CONSEQUENCES OF TERMINATION a. In the event of a termination of this Agreement for any reason and unless otherwise agreed to by the parties hereto, (i) all obligations incurred by the Employee on behalf of the Employer, including any and all lease obligations signed by the Employee related to the performance of his duties hereunder, including but not limited to residence lease agreements between the Employee and third parties, shall be voided on or about the effective date of such termination or fully assumed by the Employer or successor. - 7 - (ii) all loan collateral pledged by the Employee shall be returned to him as soon as practicable, and replaced by collateral of similar value by the Company. It is the expressed understanding of the parties hereto that as soon as practicable after the effective date of the Employee's termination of employment, or termination of the lease relating to the occupancy of a certain domicile used by the Employee and other business related persons, all personal property of the Employee will be returned to the principal place of residence of the Employee at the expense of the Employer. b. In the event that the Employer fails to comply in full with the requirements of subparagraph (a) of this section, the Employee's Annual Salary shall be paid, or continue to be paid, until compliance is rendered in full, and such payments shall be addition to any severance payments and not set off against same. IV. COVENANTS NOT TO COMPETE 4.1 The Employee agrees that (i) during the Employment Period and any Renewals thereof, or in the event of a termination pursuant to Section 3.3 and, thereafter for a period of two (2) years or (ii) in the event of a termination pursuant to Sections 3.4 or 3.5 and for the period from the effective date of such termination until the expiration of a period of twelve months following his resignation upon Redesignation for the Interim Period as defined in Section 1.4, he will not act as a principal, agent, employee, employer, consultant, control person, stockholder, director or co-partner of any person, firm, business entity other than the Employer, or in any individual representative capacity whatsoever, directly or indirectly, without the express consent of the Employer: (a) engage or participate or be employed in any business whose products or services are competitive with those of the Employer in the world; provided, however, that the ownership by the Employee of not more than three percent (3%) of a corporation or similar business venture shall not be deemed to be a violation of this covenant as long as the Employee does not become a controlling person or actively involved in the management of such corporation or business venture; (b) approach, solicit business from, or otherwise do business or deal with any customer of the Employer in connection with any product or service competitive with any provided by the Employer; provided, however, the Employee may approach, solicit business from, or otherwise do business or deal with any subsidiary or division of any customer of the Employer provided that such customer's division or subsidiary does not provide a product or service competitive with any provided by the Employer. - 8 - (c) approach, counsel, solicit, assist to solicit or attempt to induce any person who is then in the employ of the Employer, its affiliates or subsidiaries to leave the employ of the Employer, or employ, or attempt to employ on behalf of any person or entity any such person or persons who at any time during the preceding six months was in the employ of the Employer; (d) aid or counsel any other person, firm, corporation or business entity to do any of the above. For purposes of this Section 4.1, the term "customer" shall mean (i) any person or entity who was a customer of the Employer at any time during the last two months of the Employee's employment by the Employer; (ii) any prospective customer to whom the Employer had made a presentation, or similar offering of product(s) during the last year of the Employee's employment by the Employer. The Employee acknowledges (i) that his position with the Employer requires performance of services which are special, unique, extraordinary and intellectual in character and places him in a position of confidence and trust with the customers and employees of the Employer, through which, among other things, he shall obtain knowledge of such organization's "technical information" and "know how" and become acquainted with their customers, in which matters such organizations have substantial proprietary interests, (ii) that the restrictive covenants set forth above are necessary in order to protect and maintain such proprietary interests and other legitimate business interests of the Company, and (iii) that the Employer would not have entered into this agreement unless such covenants were included herein. The Employee also acknowledges that the business of the Employer presently extends throughout the world, that he has personally supervised or engaged in such business on behalf of the Employer, or will do so pursuant to the terms of this Agreement, and, accordingly, it is reasonable that the restrictive covenants set forth above are not more limited as to geographic area than is set forth therein. The Employee also represents to the Employer that the enforcement of such covenants will not prevent the Employee from earning a livelihood. If any of the provisions of this Section, or any part thereof, is hereinafter construed to be invalid or unenforceable, the same shall not affect the remainder of such provision or provisions, which shall be given full effect, without regard to the invalid portions. If any of the provisions of this Section, or any part thereof, is held to be unenforceable because of the duration of such provision, the area covered thereby or the type of conduct restricted therein, the parties agree that the court making such determination shall have the power to modify the duration, geographic area and/or other terms of such provision and, as so modified, said provision shall then be enforceable. In the event that the courts of any one or more jurisdictions shall hold such provisions wholly or partially unenforceable by reason of the scope thereof or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the - 9 - Employer's right to the relief provided for herein in the courts of any other jurisdictions as to breaches or threatened breaches of such provisions in such other jurisdictions, the above provisions as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. V. CONFIDENTIAL INFORMATION 5.1 DISCLOSURE OF INFORMATION. The Employee recognizes and acknowledges that the financial information, trade secrets, technical information, and confidential or proprietary information of the Employer, including such information as may exist from time to time, and information as to the identity of customers or prospective customers of the Employer and other similar items, are valuable, special and unique assets of the Employer's business, access to and knowledge of which are essential to the performance of the duties of the Employee hereunder. The Employee will not, during or after the term hereof, in whole or in part, disclose such secrets or confidential, technical or proprietary information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the Employee make use of any such property or information for his own purpose or for the benefit of any person, firm, corporation or other entity (except the Employer) under any circumstances, during or after the term hereof, provided that after the term hereof these restrictions shall not apply to such secrets or information which are then in the public domain (provided that the Employee was not responsible, directly or indirectly, for such secrets or information entering the public domain without the consent of the Employer). 5.2 OWNERSHIP OF INVENTIONS. All of the Employee's right, title and interest in all developments or improvements devised or conceived by the Employee, alone or with others, during his working hours, as well as in all developments or improvements devised or conceived by the Employee, alone or with others, which relate to any business in which the Employer is then engaged or contemplating engaging in, regardless of when devised or conceived, is the exclusive property of the Employer. The Employee shall promptly disclose all such developments and improvements to the Employer. The Employee shall not use or disclose any such developments or improvements, other than in furtherance of the Employer's business, without the Employer's prior written consent 5.3 RETURN MEMORANDA. Employee hereby agrees to deliver promptly to the Employer on termination of his employment, or at any other time the Employer may so request, all memoranda, notes, records, reports, manuals, drawings and other documents (and all copies thereof) relating to the Employer's business and all property associated therewith, which he may then possess or have under his control. VI. INJUNCTIVE RELIEF 6.1 The Employee acknowledges that the remedy at law for any breach or threatened breach of Articles IV and V hereof by the Employee will be inadequate, and that, accordingly, the Employer shall, in addition to all other available remedies - 10 - (including without limitation , seeking such damages as it can be shown it has sustained by reason of such breach), be entitled to injunctive relief without being required to post bond or other security, and without having to prove the inadequacy of the available remedies at law. The Employee agrees not to plead or defend on grounds of adequate remedy at law or any similar defense in any action by the Employer against him, or injunctive relief, or for specific performance of any of his obligations pursuant to Articles IV and V hereof. Nothing herein shall be construed as prohibiting the Employer from pursuing any other remedies for such breach or threatened breach. VII. MISCELLANEOUS PROVISIONS 7.1 NOTICES AND COMMUNICATIONS. All notices and communications hereunder shall be in writing and shall be hand-delivered or sent postage prepaid by registered or certified mail, return receipt requested, to the address first above written or to such other address of which notice shall have been given in the manner herein provided. 7.2 ENTIRE AGREEMENT. All prior or contemporaneous agreements and understandings between the parties with respect to the subject matter of this Agreement are superseded by this Agreement, and this Agreement constitutes the entire understanding between the parties. This Agreement may not be modified, amended, changed or discharged except by a writing signed by both parties hereto, and then only to the extent therein set forth. 7.3 ASSIGNMENT. This Agreement may be assigned by the Employer and shall be binding upon and inure to the benefit of the Employer's assigns and successors. The services to be performed by the Employee pursuant to this Agreement may not be assigned by the Employee. 7.4 WAIVER. No waiver of any breach of this Agreement or of any objection to any act or omission connected herewith shall be implied or claimed by any party, or be deemed to constitute a consent to any continuation of such breach, act or omission, unless in a writing signed by the party against whom enforcement of such waiver or consent is sought, and then only to the extent therein set forth. 7.5 INDEMNIFICATION. The Employer will indemnify Employee, to the maximum extent permitted by applicable law and the By-laws of the Company, against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or other reason of his being an officer, director or employee of the Employer or any subsidiary or affiliate thereof. 7.6 SECTION HEADINGS. The Section headings of this Agreement are solely for the purpose of convenience and shall neither be deemed a part of this Agreement nor used in any interpretation thereof. - 11 - 7.7 GOVERNING LAW. This Agreement and the relationship of the parties shall be governed by, and construed in accordance with, the laws of the state of Delaware, or until such time as the Company's state of incorporation may be changed to another state within the United States, at which point the relationship of the parties would then be governed by, and construed in accordance with, the laws of the new state of incorporation. - 12 - IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the day and year first above written. MICROTEL INTERNATIONAL, INC. Dated: By: /s/ ROBERT B. RUNYON ------------------------ ----------------------------------------- Robert B. Runyon, Chairman, Executive Compensation and Management Development Committee, Board of Directors Dated: By: /s/ CARMINE T. OLIVA ------------------------ ----------------------------------------- Carmine T. Oliva, Employee EX-10.6 19 a2034174zex-10_6.txt EXHIBIT 10.6 EXHIBIT 10.6 EMPLOYMENT AGREEMENT This agreement is made as of this 1st day of May, 1998, by and between Microtel International, Inc., a Delaware corporation with offices at 4290 E. Brickell Street, Ontario, California, 91761-1511 (the "Employer" or the "Company"), and Graham Jefferies, who resides at 7 Shepherds Close, Fen Ditton, Cambs, CB5 8XJ, United Kingdom, (the "Employee"). WITNESSETH WHEREAS, the Employee desires to be employed by the Employer, and the Employer desires to employ the Employee upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and agreements hereinafter contained the parties hereto agree as follows: I. EMPLOYMENT 1.1 EMPLOYMENT. Subject to the provisions for termination as hereinafter provided, the terms of this agreement shall begin on the date first written above and shall terminate on May 1, 2000 (the "Employment Period"). 1.2 RENEWAL. Subject to the provisions for termination as hereinafter provided, this agreement shall be automatically renewed for two (2) successive one (1) year terms commencing on May 1, 2000, (the "Renewal Periods") unless, during the following periods, either party to this Agreement shall notify the other party in writing of its desire not to renew this Agreement; provided, however, any action required to be taken with respect to this Employment Agreement by the Employer shall only be taken after the Executive Compensation and Management Development Committee of the Board of Directors of the Employer approves such action. The required notice periods in order to prevent an automatic renewal of this Agreement shall be as follows:
Period During Which Notice Of Non-Renewal Must Be Given Renewal Period - ------------------------- -------------- 3/1/99 to 5/1/99 5/1/00 to 5/1/01 3/1/00 to 5/1/00 5/1/01 to 5/1/02
1.3 DUTIES. Subject to Section 1.4, the Employee hereby promises to perform and discharge well and favorably the duties of Managing Director of XCEL Corporation, Ltd., headquartered in the United Kingdom, and to perform services in such additional capacities as may be directed by the Chairman and Chief Executive Officer, Microtel International, Inc., and concurred in by the company's Board of Directors (the "Board") in accordance herewith. As Managing Director, the Employee's duties shall consist of the usual and customary duties of his position and he shall be subject to the direction and control of the Chairman and Chief Executive Officer, and shall at all times have the authority as shall reasonably be required to enable him to discharge such duties in an efficient manner. 1.4 REDESIGNATION. The Chairman and Chief Executive Officer may, in his discretion, with the concurrence of the Board, elect or appoint the Employee to offices or positions other than, or in addition to, Managing Director (hereinafter the "Redesignation") by providing the Employee with prompt written notice of the Redesignation. If any Redesignation and related addition to and/or reduction of Employee's duties results in a substantial net change in the scope of the Employee's responsibilities, the Employee may elect, in his sole discretion, not to accept such Redesignation and to resign upon providing written notice of his resignation to the Employer not less than thirty (30) days after the Employee has been provided with written notice of the Redesignation. In such event, if such Redesignation occurs during the Employment Period, the Employer shall pay the Employee his annual salary, as provided herein, for one (1) year following the effective date of such resignation or until May 1, 2000, whichever is the longer period. In the event that the Redesignation shall occur at any time after the Employment Period, and during one of the Renewal Periods, the Employer shall pay the Employee his annual salary, as provided herein, for one (1) year following the effective date of such resignation. All sums owing hereunder in the event of a Redesignation and a subsequent resignation by the Employee shall be due and payable within thirty (30) days of the effective date of such resignation. 1.5 OTHER BUSINESS ACTIVITIES. The Employee shall devote his full time, attention and energies to the business of the Company and shall not, so long as he remains in the employ of the Company, be engaged in any other employment or business of substantial nature, whether or not such business activity is pursued for gain and profit, without the written consent of the Company. Nothing contained herein, however, shall be construed as preventing the Employee from (i) making passive investments of his assets in such form or manner as he desires, providing such investments: (a) do not require the Employee to render services in the operations or affairs of the firms, corporations or other entities in which such investments are made, and (b) are not made in any business directly or indirectly competing with the Employer or its subsidiaries or affiliated corporations, if any, -2- unless the stock of such company is listed on a national stock exchange and the Employee owns less than three percent (3%) of the outstanding voting securities, or (ii) becoming a member of the Board of Directors of any other corporation that the Employee desires, provided that the corporation upon whose Board the Employee is a member of is not, in the sole discretion of the Employer's Board of Directors, in competition with the business of the Employer. The Company shall provide the Employee with adequate office and support staff to accomplish the objectives for which he is employed and in order to perform the duties as set forth herein. II. COMPENSATION 2.1 ANNUAL SALARY. The Employer shall pay to the Employee in compensation for Employee's services hereunder, a base salary at an annual rate of 63,000 English pounds in equal periodic installments in accordance with the customary payroll policy of the Employer. The Employee shall also be eligible to receive merit or promotional increases in accordance with the Employer's annual review, or other general review of its officer compensation. 2.2 EXPENSES. The Employer agrees to reimburse the Employee against his receipts for all reasonable business expenses incurred by him during the Employment Period or Renewal Periods in connection with the performances of his services hereunder. 2.3 BONUSES. The Employer agrees that the Employee will be entitled to partici- pate in any bonus or similar plan approved by the Employer's Board of Directors. 2.4 STOCK OPTIONS AND OTHER INCENTIVE PLANS. The Employee shall continue to be eligible to participate in any Incentive Stock Option or Non-Qualified Stock Option Plan or other incentive plans duly approved by the Board of Directors for implementation within the Company. 2.5 ADDITIONAL BENEFITS. The Employee shall be entitled to the customary and usual vacation, medical insurance, and other fringe benefits made available to the Employer's employees generally, and specifically within the United Kingdom.. III. TERMINATION 3.1 TERMINATION DUE TO DEATH. If during the Employment Period or Renewals thereof, Employee shall die, this Agreement shall terminate, except that the compensation or other amounts payable hereunder, to or for the benefit of Employee shall be paid for one (1) year following the death of the Employee to such person or persons as Employee may designate by notice to the Employer from time to time or, in the absence of such designation, to his legal representatives. -3- 3.2 TERMINATION DUE TO DISABILITY. If during the Employment Period, or Renewals thereof, Employee shall become physically or mentally disabled, whether totally or partially, so that he is unable substantially to perform his services hereunder (i) for a period of 180 consecutive days, or (ii) for shorter periods aggregating 180 days during any period of eighteen consecutive months , the Employer may at any time after the last day of the 180 consecutive days of disability or the day on which the shorter periods of disability shall have equalled an aggregate of 180 days, by 10 days written notice to Employee (but before Employee has recovered from such disability), terminate this Agreement. Notwithstanding such disability, the Employer shall continue to pay Employee compensation or other amounts payable hereunder, to or for the benefit of Employee up to and including the date one (1) year after the effective date of such termination. 3.3 TERMINATION FOR CAUSE. The Employer may at any time during the Employment Period and any Renewals thereof, by notice, terminate this Agreement and discharge the Employee for cause, whereupon the Employer's obligation to pay any compensation, severance allowance, or other amounts payable hereunder to or for the benefit of Employee shall terminate on the date of such discharge, notwithstanding anything herein contained to the contrary. As used herein, the term "for cause" shall be deemed to mean and include chronic alcoholism, drug addiction; misappropriation of any money or other assets or properties of the Employer or its subsidiaries; wilful violation of specific and lawful written directions from his superiors or from the Board of Directors of the Employer; failure or refusal to perform the services required of Employee under this Agreement; wilful disclosure of trade secrets or other confidential information resulting in substantial detriment to the Company as documented by the Employer under oath or affirmation; conviction in a court of competent jurisdiction of any crime involving the funds or assets of the Company including, but not limited to, embezzlement and larceny; any civil or criminal conduct or personal misbehavior which is detrimental to the image, reputation, welfare or security of the Employer where such misconduct or misbehavior and judgment have been documented by the Employer under oath or affirmation; and any other acts or omissions that constitute grounds for cause under the laws of the States of Delaware, California, Massachusetts or Illinois, or such other States or locations wherein the Company may have operations. 3.4 TERMINATION WITHOUT CAUSE. The Employer may terminate this Agreement without cause at any time upon sixty (60) days written notice to the Employee. In the event the Employer does terminate this Agreement without it being "for cause", the Employee, if requested in writing by the Employer, shall continue to render services at full compensation until the effective date of such termination. Thereafter, during the Employment Period, Employee shall be paid his annual salary for one (1) year following the effective date of such termination, or until May 1, 2000, whichever is the longer -4- period. In the event such termination pursuant to this Section 3.4 occurs during any of the Renewal Periods, the Employee shall be paid his Annual Salary through the expiration of the particular Renewal Term to which the Company is obligated under Section 1.2, as well as all other amounts payable hereunder. Termination "without cause" shall include the ceasing of operations due to bankrupcy and/or the general inability of the Employer to meet the Employer's obligations as they become due. 3.5 TERMINATION WITHOUT CAUSE FOLLOWING A CHANGE IN CONTROL. This Agreement may be terminated by Employer, or successor to Employer, upon thirty (30) days written notice to Employee upon the happening of any of the following events: a. Sale by Employer of substantially all of its assets; b. Sale, exchange or other disposition of two-thirds or more of the outstand-ing capital stock of the Employer; c. Merger or reorganization in which shareholders of the Employer immed- iately prior to such merger or reorganization receive less than fifty percent (50%) of the outstanding voting shares of the successor corporation. In the event that the Employee's employment is terminated without cause within two years following a change of control, the Employer or successor to Employer shall: a. Pay to Employee, in a lump sum within thirty (30) days from date of termination, or, at Employee's election, in installments, the Employee's Annual Salary and all other amounts payable hereunder for one and one- half (1 1/2) years following the effective date of such termination or until May 1, 2000, whichever is the longer period. b. In the event such termination occurs during any of the Renewal Periods, pay to Employee his Annual Salary to the expiration of that particular Renewal Period, his Annual Salary for a period of one year following the end of such Renewal Period, plus all other amounts payable hereunder c. Pay to Employee the average of the Annual Executive Bonuses awarded to him in the three years preceding his termination over the same time span and under the same conditions as Annual Salary. d. Pay to Employee any Executive Bonus awarded but not yet paid. e. Continue Employee's coverage in all benefit programs in which he was participating on the date of his termination of employment until the earlier of (1) the end of the Employment Period or Renewal Period, -5- or (2) the date he receives equivalent coverage and benefits under plans and programs of a subsequent employer. IV. COVENANTS NOT TO COMPETE 4.1 The Employee agrees that (i) during the Employment Period and any Renewals thereof, or in the event of a termination pursuant to Section 3.3 and, thereafter for a period of two (2) years or (ii) in the event of a termination pursuant to Sections 3.4 or 3.5 and for the period from the effective date of such termination until the expiration of a period of twelve months following his resignation upon Redesignation for the Interim Period as defined in Section 1.4, he will not act as a principal, agent, employee, employer, consultant, control person, stockholder, director or co-partner of any person, firm, business entity other than the Employer, or in any individual representative capacity whatsoever, directly or indirectly, without the express consent of the Employer: (a) engage or participate or be employed in any business whose products or services are competitive with those of the Employer in the world; provided, however, that the ownership by the Employee of not more than three percent (3%) of a corporation or similar business venture shall not be deemed to be a violation of this covenant as long as the Employee does not become a controlling person or actively involved in the management of such corporation or business venture; (b) approach, solicit business from, or otherwise do business or deal with any customer of the Employer in connection with any product or service competitive with any provided by the Employer; provided, however, the Employee may approach, solicit business from, or otherwise do business or deal with any subsidiary or division of any customer of the Employer provided that such customer's division or subsidiary does not provide a product or service competitive with any provided by the Employer. (c) approach, counsel, solicit, assist to solicit or attempt to induce any person who is then in the employ of the Employer, its affiliates or subsidiaries to leave the employ of the Employer, or employ, or attempt to employ on behalf of any person or entity any such person or persons who at any time during the preceding six months was in the employ of the Employer; (d) aid or counsel any other person, firm, corporation or business entity to do any of the above. For purposes of this Section 4.1, the term "customer" shall mean (i) any person or entity who was a customer of the Employer at any time during the last two months of the Employee's employment by the Employer; (ii) any prospective customer to -6- whom the Employer had made a presentation, or similar offering of product(s) during the last year of the Employee's employment by the Employer. The Employee acknowledges (i) that his position with the Employer requires performance of services which are special, unique, extraordinary and intellectual in character and places him in a position of confidence and trust with the customers and employees of the Employer, through which, among other things, he shall obtain knowledge of such organization's "technical information" and "know how" and become acquainted with their customers, in which matters such organizations have substantial proprietary interests, (ii) that the restrictive covenants set forth above are necessary in order to protect and maintain such proprietary interests and other legitimate business interests of the Company, and (iii) that the Employer would not have entered into this agreement unless such covenants were included herein. The Employee also acknowledges that the business of the Employer presently extends throughout the world, that he has personally supervised or engaged in such business on behalf of the Employer, or will do so pursuant to the terms of this Agreement, and, accordingly, it is reasonable that the restrictive covenants set forth above are not more limited as to geographic area than is set forth therein. The Employee also represents to the Employer that the enforcement of such covenants will not prevent the Employee from earning a livelihood. If any of the provisions of this Section, or any part thereof, is hereinafter construed to be invalid or unenforceable, the same shall not affect the remainder of such provision or provisions, which shall be given full effect, without regard to the invalid portions. If any of the provisions of this Section, or any part thereof, is held to be unenforceable because of the duration of such provision, the area covered thereby or the type of conduct restricted therein, the parties agree that the court making such determina- tion shall have the power to modify the duration, geographic area and/or other terms of such provision and, as so modified, said provision shall then be enforceable. In the event that the courts of any one or more jurisdictions shall hold such provisions wholly or partially unenforceable by reason of the scope thereof or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the Employer's right to the relief provided for herein in the courts of any other jurisdictions as to breaches or threatened breaches of such provisions in such other jurisdictions, the above provisions as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. V. CONFIDENTIAL INFORMATION 5.1 DISCLOSURE OF INFORMATION. The Employee recognizes and acknowledges that the financial information, trade secrets, technical information, and confidential or proprietary information of the Employer, including such information as may exist from -7- time to time, and information as to the identity of customers or prospective customers of the Employer and other similar items, are valuable, special and unique assets of the Employer's business, access to and knowledge of which are essential to the performance of the duties of the Employee hereunder. The Employee will not, during or after the term hereof, in whole or in part, disclose such secrets or confidential, technical or proprietary information to any person, firm, corporation, association or other entity for any reason or purpose whatsoever, nor shall the Employee make use of any such property or information for his own purpose or for the benefit of any person, firm, corporation or other entity (except the Employer) under any circumstances, during or after the term hereof, provided that after the term hereof these restrictions shall not apply to such secrets or information which are then in the public domain (provided that the Employee was not responsible, directly or indirectly, for such secrets or information entering the public domain without the consent of the Employer). 5.2 OWNERSHIP OF INVENTIONS. All of the Employee's right, title and interest in all developments or improvements devised or conceived by the Employee, alone or with others, during his working hours, as well as in all developments or improvements devised or conceived by the Employee, alone or with others, which relate to any business in which the Employer is then engaged or contemplating engaging in, regardless of when devised or conceived, is the exclusive property of the Employer. The Employee shall promptly disclose all such developments and improvements to the Employer. The Employee shall not use or disclose any such developments or improvements, other than in furtherance of the Employer's business, without the Employer's prior written consent 5.3 RETURN MEMORANDA. Employee hereby agrees to deliver promptly to the Employer on termination of his employment, or at any other time the Employer may so request, all memoranda, notes, records, reports, manuals, drawings and other documents (and all copies thereof) relating to the Employer's business and all property associated therewith, which he may then possess or have under his control. VI. INJUNCTIVE RELIEF 6.1 The Employee acknowledges that the remedy at law for any breach or threatened breach of Articles IVand V hereof by the Employee will be inadequate, and that, accordingly, the Employer shall, in addition to all other available remedies (including without limitation , seeking such damages as it can be shown it has sustained by reason of such breach), be entitled to injunctive relief without being required to post bond or other security, and without having to prove the inadequacy of the available remedies at law. The Employee agrees not to plead or defend on grounds of adequate remedy at law or any similar defense in any action by the Employer against him, or injunctive relief, or for specific performance of any of his obligations pursuant to Articles IV and V hereof. Nothing herein shall be construed as prohibiting the Employer from pursuing any other remedies for such breach or threatened breach. -8- VII. MISCELLANEOUS PROVISIONS 7.1 NOTICES AND COMMUNICATIONS. All notices and communications hereunder shall be in writing and shall be hand-delivered or sent postage prepaid by registered or certified mail, return receipt requested, to the address first above written or to such other address of which notice shall have been given in the manner herein provided. 7.2 ENTIRE AGREEMENT. All prior or contemporaneous agreements and under- standings between the parties with respect to the subject matter of this Agreement are superseded by this Agreement, and this Agreement constitutes the entire understanding between the parties. This Agreement may not be modified, amended, changed or discharged except by a writing signed by both parties hereto, and then only to the extent therein set forth. 7.3 ASSIGNMENT. This Agreement may be assigned by the Employer and shall be binding upon and inure to the benefit of the Employer's assigns and successors. The services to be performed by the Employee pursuant to this Agreement may not be assigned by the Employee. 7.4 WAIVER. No waiver of any breach of this Agreement or of any objection to any act or omission connected herewith shall be implied or claimed by any party, or be deemed to constitute a consent to any continuation of such breach, act or omission, unless in a writing signed by the party against whom enforcement of such waiver or consent is sought, and then only to the extent therein set forth. 7.5 INDEMNIFICATION. The Employer will indemnify Employee, to the maximum extent permitted by applicable law and the By-laws of the Company, against all costs, charges and expenses incurred or sustained by him in connection with any action, suit or other reason of his being an officer, director or employee of the Employer or any subsidiary or affiliate thereof. 7.6 SECTION HEADINGS. The Section headings of this Agreement are solely for the purpose of convenience and shall neither be deemed a part of this Agreement nor used in any interpretation thereof. 7.7 GOVERNING LAW. This Agreement and the relationship of the parties shall be governed by, and construed in accordance with, the laws of the state of Delaware, or until such time as the Company's state of incorporation may be changed to another state within the United States, at which point the relationship of the parties would then be governed by, and construed in accordance with, the laws of the new state of incorporation. -9- IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the day and year first above written. MICROTEL INTERNATIONAL, INC. Dated: 3/15/98 By: /s/Carmine T. Oliva ---------------------------------------------- Carmine T. Oliva, Chairman, President and Chief Executive Officer Dated: 3/1/98 By: /s/Robert B. Runyon ---------------------------------------------- Robert B. Runyon, Chairman, Executive Compensation and Management Development Committee, Board of Directors Dated: 3/5/98 By: /s/Graham Jefferies ---------------------------------------------- Graham Jefferies, Employee -10- EX-21.1 20 a2034174zex-21_1.txt EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
Names Under Which State or Jurisdiction of Subsidiary Name Subsidiary Does Business Incorporation Relationship --------------- ------------------------ ------------- ------------ XIT Corporation XIT Corporation; New Jersey 100% owned by MicroTel Digitran Division - in International, Inc. California CXR Telcom Corporation CXR Telcom Corporation Delaware 100% owned by MicroTel International, Inc. XCEL Corporation Ltd. XCEL Corporation Ltd. United Kingdom 100% owned by MicroTel International, Inc. XCEL Power Systems Ltd. XCEL Power Systems Ltd. United Kingdom 100% owned by XCEL Corporation Ltd. CXR, S.A. CXR, S.A. France 100% owned by MicroTel International, Inc. CXR-Anderson Jacobson Inc. CXR-Anderson Jacobson Inc. California 100% owned by CXR, S.A. XCEL Japan Ltd. XCEL Japan Ltd. Japan 100% owned by XIT Corporation Belix Power Conversions Ltd. Belix Power Conversions Ltd. United Kingdom 100% owned by The Belix Company Ltd. Belix Wound Components Ltd. Belix Wound Components Ltd. United Kingdom 100% owned by Belix Power Conversions Ltd. The Belix Company Ltd. The Belix Company Ltd. United Kingdom 100% owned by XCEL Corporation Ltd.
EX-23.1 21 a2034174zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS MicroTel International, Inc. Rancho Cucamonga, California We hereby consent to the use in the prospectus constituting a part of this Amendment No. 1 to Registration Statement on Form S-1 of our report dated March 3, 2000, except as to the penultimate paragraph of Note 9 which is as of November 17, 2000, relating to the consolidated financial statements and financial statement schedule of MicroTel International, Inc., which are contained in that prospectus. Our report contains an explanatory paragraph regarding the Company's ability to continue as a going concern. We also consent to the reference to us under the caption "Experts" in the prospectus. /s/ BDO SEIDMAN, LLP Orange County, California December 29, 2000 -----END PRIVACY-ENHANCED MESSAGE-----