-----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, TD0UAOrlen/l9IHr/Nbu0PHsy4Mqq49UtMaGUfIBWNTethSp/8pDuVJsUw2+XNKr vgewgMZBxjfJ2DhAPbbBQQ== 0001019687-01-000523.txt : 20010411 0001019687-01-000523.hdr.sgml : 20010411 ACCESSION NUMBER: 0001019687-01-000523 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000922 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20010410 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: 8-K/A SEC ACT: SEC FILE NUMBER: 001-10346 FILM NUMBER: 1599681 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 8-K/A 1 0001.txt MICROTEL INTERNATIONAL, INC. AMEND #3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 AMENDMENT NO. 3 TO FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): September 22, 2000 MICROTEL INTERNATIONAL, INC. (Exact Name of Registrant as Specified in Its Charter) DELAWARE 1-10346 77-0226211 - ------------------------------------------------------------------------------- (State or other jurisdiction of (Commission File (IRS Employer) incorporation or organization) Number) Identification No.) 9485 HAVEN AVENUE, SUITE 100, CALIFORNIA 91730 - ------------------------------------------------------------------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (909) 987-9220 NOT APPLICABLE ------------------------------------------------------------- (Former name or former address, if changed since last report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS. MicroTel International, Inc. (the "Company") has acquired substantially all of the assets of T-Com, LLC, a Delaware limited liability company, and assumed certain liabilities of T-Com, LLC. The primary assets acquired include accounts receivable, inventory and fixed assets. The liabilities assumed consist mostly of accounts payable, accrued payroll expenses and accrued commissions. The assets purchased are valued at approximately $1,240,000, and the liabilities assumed are valued at approximately $605,000. T-Com, LLC was 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, LLC. The acquisition of the assets closed on September 22, 2000 and has an effective date of August 1, 2000. The Company paid to T-Com, LLC 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 shares each on March 20, 2001, September 20, 2001 and March 20, 2002. Each Series B Share will be convertible into ten shares of common stock. 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 to the extent the Series B Shares are subject to a lock-up, to the extent the Company receives a conversion notice covering the Series B Shares prior to the redemption date, or if there is an insufficient number of authorized and reserved shares of common stock to permit conversion of the Series B Shares during the 20-day notice period. 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. The certificate of designations, preferences and rights relating to the Series B Shares provides that in the event the authorized number of shares of the Company's common stock is not sufficient as of March 20, 2001 to permit the conversion of the Series B Shares into shares of common stock as provided for in such certificate, then each Series B Share then outstanding would become entitled to such number of votes as would provide the aggregate number of Series B Shares then outstanding with voting rights equal to ten percent of the then outstanding shares of common stock for any matter upon which stockholders are entitled to vote. In January 2001, the Company obtained stockholder approval for a proposal that increased the number of shares of the Company's authorized common stock from 25,000,000 to 50,000,000. Consequently, as of March 20, 2001, the Company had authorized a sufficient number of shares of common stock to allow for conversion or redemption of the Series B Shares, and the potential voting rights of the holders of Series B Shares did not become effective. 2 - Warrants to purchase up to 250,000 shares of the Company's common stock at an exercise price of $1.25 per share, which warrants 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 preferred shares based on a value of $0.6253 per common share (which was the closing market price of the Company's common stock on the date of the original letter of intent, July 27, 2000) 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. The acquisition is being accounted for using the purchase method of accounting, with the assets acquired and the liabilities assumed recorded at their fair values as of the date of acquisition and resulted in approximately $365,000 of goodwill which is being amortized on a straight-line basis over ten years. In determining the purchase price for the acquisition, the tangible net worth and anticipated earnings potential as consolidated under one roof with our CXR Telcom operation in Fremont, California and the addition of central office test equipment to our field test equipment product range were major factors. Also, the Company took into account the value of companies of similar industry and size to T-Com, LLC, the proprietary technology of T-Com, LLC, comparable transactions and the market for such companies generally. The closing of the acquisition was reported under "Item 5 - Other Events" on a Form 8-K filed with the Securities and Exchange Commission on October 5, 2000. After filing the Form 8-K, the Company determined that its acquisition of T-Com, LLC was a significant acquisition that should have been reported under "Item 2 - Acquisition or Disposition of Assets." Consequently, Amendment No. 1 to Form 8-K was filed with the Securities and Exchange Commission on December 6, 2000 to discuss the T-Com, LLC acquisition under Item 2 and contained financial statements under Item 7. Amendment No. 2 to Form 8-K was filed on April 2, 2001 to include additional financial statements under Item 7. This Amendment No. 3 to Form 8-K is being filed to amend the pro forma information under Item 7. 3 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (a) Financial Statements of Businesses Acquired: (i) Unaudited financial statements of T-COM, LLC at June 30, 2000 and for the six months ended June 30, 2000 and 1999 are set forth at pages F-1 to F-17 attached to this Current Report. (ii) Audited financial statements of T-COM, LLC at and for the year ended December 31, 1999 are set forth at pages F-1 to F-17 attached to this Current Report. (iii) Audited financial statements of T-COM, LLC as of and for the period from June 1, 1998 (date of inception) to December 31, 1998 are set forth at pages F-18 to F-29 attached to this Current Report. (b) Unaudited Pro Forma Condensed Combined Financial Information: Unaudited pro forma condensed combined financial information giving effect to MicroTel's acquisition of substantially all of the assets and certain liabilities of T-COM, LLC are set forth at pages F-30 to F-32 attached to this Current Report. (c) Exhibits Exhibit Number Description ------- ----------- 2.1 Asset Purchase Agreement effective September 1, 2000 by and among the Registrant, CXR Telcom Corporation and T-Com, LLC* 2.2 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* 2.3 Bill of Sale and Assignment and Assumption Agreement dated as of September 22, 2000 between T-Com, LLC and CXR Telcom Corporation* 4.1 Certificate of Designations, Preferences and Rights of Series B Preferred Stock of the Registrant* 23.1 Consent of BDO Seidman, LLP, Independent Certified Public Accountants 23.2 Consent of Ireland San Fillipo, LLP, Independent Certified Public Accountants - ------------ * Filed with the Securities and Exchange Commission on November 20, 2000 as an exhibit to Registrant's Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference. 4 T-COM, LLC ---------- INDEX TO FINANCIAL STATEMENTS PAGE ---- Financial Statements Of And For The Year Ended December 31, 1999 And Related Unaudited Pro Forma Information - ----------------------------------------------------------------- Report of Independent Certified Public Accountants.....................F-2 Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)...F-3 Statements of Operations for the year ended December 31, 1999 and the six months ended June 30, 2000 (unaudited) and 1999 (unaudited).........................................................F-4 Statements of Members' Deficit for the years ended December 31, 1999 and June 30, 2000 (unaudited).......................................F-5 Statements of Cash Flows for the year ended December 31, 1999 and the six months ended June 30, 2000 (unaudited) and 1999 (unaudited).........................................................F-6 Notes to Financial Statements..........................................F-7 Financial Statements of T-Com, LLC As Of And For The Period From June 1, 1998 (Date of Inception) to December 31, 1998 - ---------------------------------------------------------------- Independent Auditors' Report...........................................F-18 Balance Sheet as of December 31, 1998..................................F-19 Statement of Income and Expense for the period from June 1, 1998 (Date of Inception) to December 31, 1998............................F-21 Statement of Members' Equity for the period from June 1, 1998 (Date of Inception) to December 31, 1998............................F-22 Statement of Cash Flows for the period from June 1, 1998 (Date of Inception) to December 31, 1998............................F-23 Notes to Financial Statements..........................................F-25 Schedule of Cost of Goods Sold for the period from June 1, 1998 (Date of Inception) to December 31, 1998............................F-28 Schedule of General and Administrative Expense for the period from June 1, 1998 (Date of Inception) to December 31, 1998..........F-29 Unaudited Pro Forma Condensed Combined Financial Information...........F-30 - ------------------------------------------------------------ F-1 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. /S/ BDO Seidman, LLP Costa Mesa, California December 4, 2000 F-2 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-3 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-4 T-COM, LLC ---------- STATEMENTS OF MEMBERS' DEFICIT
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-5 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-6 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-7 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-8 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-9 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-10 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-11 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-12 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-13 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 Exercise Exercise Per 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-14 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-15 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-16 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-17 INDEPENDENT AUDITORS' REPORT ---------------------------- To the Members T-COM, LLC Mountain View, California We have audited the accompanying balance sheet of T-COM, LLC (A Delaware Limited Liability Company) as of December 31, 1998, and the related statements of income and expense, members' equity, and cash flows for the period from June 1, 1998 (date of inception) to December 31, 1998. 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 aspects, the financial position of T-COM, LLC as of December 31, 1998, and the results of its operations and its cash flows for the initial period then ended in conformity with generally accepted accounting principles. Our audit was conducted for the purpose of forming an opinion on the financial statements taken as a whole. The schedules of cost of goods sold and general and administrative expense are presented for the purpose of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. /S/ Ireland San Filippo, LLP February 4, 1999 F-18 T-COM, LLC ---------- BALANCE SHEET DECEMBER 31, 1998 ASSETS ------ Current assets: Cash and cash equivalents $ 520,609 Accounts receivable 553,631 Inventories 673,019 Prepaid expenses 6,210 ----------- Total current assets 1,753,469 ----------- Fixed assets: Computers 154,913 Software 7,664 Equipment 36,443 Furniture and fixtures 62,927 ----------- 261,947 Less accumulated depreciation 54,028 ----------- 207,919 ----------- Other assets: Deposits 26,031 Goodwill, net of amortization of $143,545 3,547,606 ----------- 3,573,637 ----------- $5,535,025 =========== The accompanying footnotes are an integral part of these financial statements. F-19 T-COM, LLC ---------- BALANCE SHEET DECEMBER 31, 1998 LIABILITIES AND MEMBERS' EQUITY ------------------------------- Current liabilities: Note payable $ 90,000 Line of credit 493,595 Accounts payable 158,638 Accrued expenses: Salaries and commissions 103,099 Payroll and sales taxes 24,030 Other 44,355 Warranty reserve 50,000 Income taxes 3,800 ----------- Total current liabilities 967,517 Long-term liability: Note payable 1,963,333 ----------- Total liabilities 2,930,850 ----------- Commitment Members' equity 2,604,175 ----------- $5,535,025 =========== The accompanying footnotes are an integral part of these financial statements. F-20 T-COM, LLC ---------- STATEMENT OF INCOME AND EXPENSE FOR THE PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 Sales $ 1,978,534 Costs of goods sold 695,726 ------------ Gross profit 1,282,808 General and administrative expense 1,560,987 ------------ Loss from operations (278,179) ------------ Other income and (expense): Interest expense (139,865) Interest income 540 ------------ (139,325) ------------ Loss before provision for income taxes (417,504) Provision for income taxes, all current 3,800 ------------ Net loss $ (421,304) ============ The accompanying footnotes are an integral part of these financial statements. F-21 T-COM, LLC ---------- STATEMENT OF MEMBERS' EQUITY FOR THE PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 Balance, beginning of period $ -- Member contributions 3,025,479 Net loss (421,304) ------------ Balance, end of period $ 2,604,175 ============ The accompanying footnotes are an integral part of these financial statements. F-22 T-COM, LLC ---------- STATEMENT OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 Cash flows from operating activities: Net loss $ (421,304) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 197,573 Decrease (increase) in operating assets: Accounts receivable (18,486) Inventories 172,599 Prepaid expenses (6,210) Increase (decrease) in operating liabilities: Accounts payable 102,277 Accrued expenses (53,979) Income taxes payable 3,800 ------------ Net cash used by operating activities (23,731) ------------ Cash flows from investing activities: Payment for acquisition of business (5,000,000) Deposits (26,031) Acquisition of fixed assets (2,036) ------------ Net cash used by investing activities (5,028,067) ------------ The accompanying footnotes are an integral part of these financial statements. F-23 T-COM, LLC ---------- STATEMENT OF CASH FLOWS (CONTINUED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 Cash flows from financing activities: Proceeds from note payable $ 2,200,000 Proceeds from line of credit, net 493,595 Principal payments on note payable (146,667) Proceeds from members' capital 3,025,479 ------------ Net cash provided by financing activities 5,572,407 ------------ Increase in cash and cash equivalents 520,609 Cash and cash equivalents, beginning of period -- ------------ Cash and cash equivalents, end of period 520,609 ============ Supplemental disclosure of cash flow information ------------------------------------------------ Cash paid during the period for: Interest $ 137,743 Income taxes -- The accompanying footnotes are an integral part of these financial statements. F-24 T-COM, LLC ---------- NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 1 - ORGANIZATION AND OPERATIONS: - ------------------------------------- T-Com, LLC (the "Company"), a Delaware corporation formed on June 1, 1998, designs, develops, manufactures, and markets telecommunications test equipment for telephony applications. The Company has sales nationwide with locations in four states, and manufacturer's representatives in other states. The term of the Company has been set at approximately 20 years and will continue until December 31, 2018. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - ---------------------------------------------------- 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 reported period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS - For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. CONCENTRATION OF CREDIT RISK - The Company has cash on deposit with a federally insured bank in excess of the $100,000 maximum amount insured by the Federal Deposit Insurance Corporation. ACCOUNTS RECEIVABLE - The Company extends credit to its customers in the normal course of business and performs ongoing credit evaluations of its customers, maintaining allowances for potential credit losses which, when realized, have been within management's expectations. The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. INVENTORIES - Inventories are stated at the lower of cost or market with cost being determined on the first-in, first out (FIFO) method. FIXED ASSETS - Fixed assets are stated at cost and depreciated over their estimated useful lives using accelerated methods for both financial and income tax reporting purposes. INTANGIBLE ASSETS - On June 1, 1998, the Company purchased substantially all of the assets of T-COM Corporation for $5,000,000. The company recorded $3,691,151 of goodwill as part of the acquisition. Goodwill is being amortized over 15 years using the straight-line method. INCOME TAXES - The Company has been organized as a Limited Liability Company ("LLC"). As such, the Company pays no federal income taxes but is taxed at the state level using the statutory rates in effect for an LLC. Additionally, the members are individually taxed on their proportionate share of the Company's taxable income. ADVERTISING - Advertising costs are charged to operations as they are incurred. Advertising expense for the period ended December 31, 1998 was approximately $93,000. F-25 T-COM, LLC ---------- NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 3 - INVENTORIES: - --------------------- Inventories at December 31, 1998 consisted of the following: Raw materials $ 194,038 Work in process 103,258 Finished goods 375,723 --------------- $ 673,019 =============== NOTE 4 - LINE OF CREDIT: - ------------------------ The Company has a line of credit agreement, expiring in June 1999, with Imperial Bank. Borrowings under the agreement are secured by substantially all assets of the Company, bear interest at the bank's index rate plus 2.0% (9.75% at December 31, 1998), and are limited to the lesser of $800,000 or 80% of eligible accounts receivable and 40% of net inventory. The agreement requires the Company to comply with various financial covenants. At December 31, 1998, the Company was not in compliance with the cash flow coverage ratio. Subsequent to year-end, the Company has obtained a forbearance agreement from the bank which provides that the bank will not require immediate payment in full. NOTE 5 - NOTE PAYABLE: - ---------------------- At December 31, 1998, note payable consisted of the following: Imperial Bank; secured by substantially all assets $ 2,053,333 Less current portion (90,000) -------------- $ 1,963,333 ============== At December 31, 1998, future principal payments are due as follows: Year Ending December 31, Amount -------------- ------------- 1999 $ 90,000 2000 440,000 2001 440,000 2002 1,083,333 ------------- $ 2,053,333 ============= The note payable requires the Company to comply with various financial covenants. At December 31, 1998, the Company was not in compliance with the cash flow coverage ratio. Subsequent to year-end the Company obtained a forbearance agreement from the bank, expiring on January 5, 2000, which provides that the bank will not require immediate payment in full. The forbearance agreement requires that the Company make future monthly interest payments at the bank's index rate plus 2.5% (10.25% at December 31, 1998) and principal payments based on quarterly net earnings. Subsequent to January 5, 2000, the note calls for monthly principal installments of $36,667, plus annual interest at the bank's index rate plus 2.5% per annum through June 2002. F-26 T-COM, LLC ---------- NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 6 - EMPLOYEE BENEFIT PLANS: - -------------------------------- 401(k) PROFIT SHARING PLAN - The Company has a 401(k) Profit Sharing Plan (the "Plan") in which employees who have met certain service and eligibility requirements may participate. Each eligible employee may elect to contribute to the Plan, and the Company may make discretionary matching contributions. The Company made matching contributions of approximately $6,000 during the period ended December 31, 1998. NOTE 7 - COMMITMENT: - -------------------- The Company has entered into a long-term, non-cancelable operating lease agreement for its facility. The lease currently requires monthly payments of approximately $16,900 and expires in September 2003. Rent expense paid under this lease for the period ended December 31, 1998, was approximately $87,000. Future minimum annual lease payments required under this agreement are as follows: Year Ending December 31, Building --------------- ---------------- 1999 $ 204,309 2000 212,482 2001 220,981 2002 229,820 2003 177,485 ---------------- $ 1,045,077 ================ F-27 T-COM, LLC ---------- SCHEDULE OF COST OF GOODS SOLD FOR THE PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 Beginning inventory $ 845,618 Material 317,603 Labor 188,031 Payroll taxes 14,963 Supplies 721 Equipment rental 686 Travel 504 Education 420 Postage 199 ----------- 1,368,745 Less ending inventory 673,019 ----------- $ 695,726 =========== F-28 T-COM, LLC ---------- SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSE FOR THE PERIOD FROM JUNE 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998 Salaries $ 676,884 Commissions 110,741 Payroll taxes 42,273 Amortization 143,545 Consultants 93,908 Advertising 92,965 Rent 87,434 Travel 63,032 Depreciation 54,028 Insurance 44,541 Recruiting 38,238 Telephone and utilities 28,898 Legal and accounting 21,164 Office expense 14,619 Meals and entertainment 10,742 Outside services 7,401 Education and training 6,408 Trade shows 6,117 Employee benefits 5,676 Taxes and licenses 4,749 Equipment rental 3,375 Postage and freight 3,075 Small tools and supplies 1,099 Repairs and maintenance 75 ----------- $1,560,987 =========== F-29 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. The fair value of the net assets acquired was approximately $635,000 resulting in goodwill of approximately $365,000. 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-30 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 10,584 1,606 36 (c) 12,226 Engineering and product development 1,841 1,001 -- 2,842 Write-down of goodwill - 3,425 3,425 -------------- ------------ -------------- --------------- Loss from operations (3,578) (4,235) (36) (7,849) Other income (expense): Interest expense (411) (280) -- (691) Other, net (81) 15 -- (66) -------------- ------------ -------------- --------------- Loss from continuing operations before income taxes (4,070) (4,500) (36) (8,606) Income taxes 128 4 (4)(b) 128 ============== ============ ============== =============== Loss from continuing operations $ (4,198) $ (4,504) $ (32) $ (8,734) ============== ============ ============== =============== Basic and diluted earnings per share from continuing operations $ (0.25) $ (0.52) ============== =============== Basic and diluted weighted average shares outstanding 16,638 16,638 ============== =============== See notes to pro forma condensed combined income statements on pages F-30 and F-32.
F-31 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 7,566 627 -- 8,193 -------------- -------------- -------------- --------------- Gross profit 5,122 803 -- 5,925 Operating expenses: Selling, general and administrative 4,395 602 18 (c) 5,015 Engineering and product development 496 525 -- 1,021 -------------- -------------- -------------- --------------- Income (loss) from operations 231 (324) (18) (111) Other income (expense): Interest expense (195) (149) -- (344) Other, net 205 9 -- 214 -------------- -------------- -------------- --------------- Income (loss) from continuing operations before income taxes 241 (464) (18) (241) Income taxes 11 5 (5)(b) 11 ============== ============== ============== =============== Income (loss) from continuing operations $ 230 $ (469) $ (13) $ (252) ============== ============== ============== =============== Earnings per share from continuing operations: Basic $ 0.01 $ 0.01 ============== =============== Diluted $ 0.01 $ 0.01 ============== =============== Weighted average shares outstanding: Basic 18,443 18,443 ============== =============== Diluted 20,693 18,443 ============== =============== See notes to pro forma condensed combined income statements on page F-30.
(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. (c) To record goodwill amortization related to acquisition of T-Com. F-32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. MICROTEL INTERNATIONAL, INC. By: /s/ Randolph D. Foote ----------------------------- Randolph D. Foote Chief Financial Officer Date: April 6, 2001 F-33 EXHIBITS Exhibit Number Description ------- ----------- 23.1 Consent of BDO Seidman, LLP, Independent Certified Public Accountants 23.2 Consent of Ireland San Fillipo, LLP, Independent Certified Public Accountants F-34 EX-23.1 2 0002.txt CONSENT OF BDO SEIDMAN EXHIBIT 23.1 CONSENT OF BDO SEIDMAN, LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors MicroTel International, Inc. We hereby consent to the incorporation by reference in the Registration Statements (Nos. 333-74281, 333-71035, 333-69571, 333-12567, 333-22518, 33-27454, 33-77926, 33-32271 and 33-32771) on Form S-8 of our report dated December 4, 2000, relating to the financial statements of T-Com, LLC appearing in Amendment No. 3 to the Company's Current Report on Form 8-K for September 22, 2000. Our report contains an explanatory paragraph regarding T-Com, LLC's ability to continue as a going concern. /S/ BDO SEIDMAN, LLP Orange County, California April 6, 2001 EX-23.2 3 0003.txt CONSENT OF IRELAND SAN FILLIPO CONSENT OF IRELAND SAN FILIPPO, LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors MicroTel International, Inc. We hereby consent to the incorporation by reference in the Registration Statements of MicroTel International, Inc. on Forms S-8 (Nos. 333-74281, 333-71035, 333-69571, 333-12567, 33-22518, 33-27454, 33-77926, 33-32271 and 33-32771) of our report dated February 4, 1999, with respect to the financial statements of T-Com, LLC as of December 31, 1998, and for the period then ended appearing in Amendment No. 3 to the Current Report on Form 8-K of MicroTel International, Inc. for September 22, 2000. /s/ IRELAND SAN FILIPPO, LLP IRELAND SAN FILIPPO, LLP Palo Alto, California April 6, 2001 -----END PRIVACY-ENHANCED MESSAGE-----