-----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, DT3OsIXGa5DzGQhG/q/JCe8wI1JNgJmwew8uSoCKE6Ovf3voGmXnKtoG/AQw/N5N xNtwr9eTm4rahLw0d4bhsA== 0001019687-02-000515.txt : 20020415 0001019687-02-000515.hdr.sgml : 20020415 ACCESSION NUMBER: 0001019687-02-000515 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-10346 FILM NUMBER: 02597196 BUSINESS ADDRESS: STREET 1: 9485 HAVEN AVENUE STREET 2: STE 100 CITY: ONTARIO STATE: CA ZIP: 91730 BUSINESS PHONE: 9099879220 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 10-K 1 microtel_10k-123101.txt ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2001. OR | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number: 1-10346 MICROTEL INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0226211 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9485 HAVEN AVENUE, SUITE 100 RANCHO CUCAMONGA, CA 91730 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (909) 987-9220 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.0033 PAR VALUE (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by nonaffiliates of the registrant computed by reference to the closing price of such stock, was approximately $4,732,408 at March 18, 2002. The number of shares of the registrant's common stock, $0.0033 par value, outstanding as of March 18, 2002 was 20,670,703. DOCUMENTS INCORPORATED BY REFERENCE: NONE. ================================================================================ 1 PART I PAGE ITEM 1. BUSINESS............................................................. 3 ITEM 2. PROPERTIES...........................................................23 ITEM 3. LEGAL PROCEEDINGS....................................................23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................24 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................................................24 ITEM 6. SELECTED FINANCIAL DATA..............................................25 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........45 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................................46 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................47 ITEM 11. EXECUTIVE COMPENSATION...............................................49 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......56 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......61 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE......F-1 INDEX TO EXHIBITS....................................................62 SIGNATURES...........................................................67 EXHIBITS FILED WITH THIS REPORT......................................68 2 PART I ITEM 1. 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 field and central office 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, XET Corporation (formerly, XIT Corporation). XET 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 XET Corporation occurred in the form of a merger of a newly formed and wholly-owned subsidiary of MicroTel with and into XET Corporation. The merger involved an exchange by the former shareholders of XET Corporation of all of the outstanding shares of XET Corporation for newly issued shares of MicroTel representing a majority ownership interest in MicroTel. Because the merger resulted in a change in control of MicroTel, the merger was accounted for as a reverse acquisition, and historical financial information of XET Corporation is used as the historical financial information of MicroTel. We previously organized our operations in the following three business segments: o Instrumentation and Test Equipment; o Components and Subsystem Assemblies; and o 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. Effective August 1, 2000, we acquired the assets and business operations of T-Com, LLC, or T-Com. T-Com was a privately-held telecommunications test instruments manufacturer located in Sunnyvale, California. T-Com produced central office equipment, which is equipment that is typically used in telephone switching centers and network operating centers. Prior to the T-Com acquisition, our telecommunications test instruments product line was limited to equipment used in remote field locations. One of our main purposes for the T-Com acquisition was to acquire rights to central office equipment products and access to customers who purchase those products. We believed that on a long-term basis, telecommunications companies and other purchasers of telecommunications test instruments may attempt to enhance their efficiency by increasing reliance upon central office equipment and decreasing reliance upon field equipment to the extent technology 3 and circumstances allow. We also believed that we may be able to take advantage of cross-marketing opportunities for our central office and field equipment. Further, we anticipated and achieved initial success in increasing the capacity of CXR Telcom Corporation's Fremont, California plant without increasing our overhead by integrating T-Com's operations with those of CXR Telcom Corporation. 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 XET Corporation. We intend to retain our Monrovia, California circuit board manufacturing facility as a small captive supplier of circuit boards to XET Corporation's Digitran Division in our electronic components segment. Consequently, through our three direct wholly-owned operating subsidiaries, XET 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: o 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) o Electronic Components -- Digital Switches -- Electronic Power Supplies Our sales are primarily in North America, Europe and Asia. In 2001, 53.9% of our sales were to customers in the telecommunications industry, and the remainder of our sales were to aerospace customers, military contractors and industrial customers. Our objective in our telecommunications test instruments and transmission and network access products 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 become the supplier of choice for harsh environment switches and custom power supplies. 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: o 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 4 businesses to implement e-commerce strategies, to access the Internet for a variety of purposes and to provide employees with telecommuting capabilities; o 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 o 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 demand for communications services and increased competitive pressures, telecommunications companies and other businesses that rely heavily on information technology have devoted 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. 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. ELECTRONIC COMPONENTS 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, aerospace, military, commercial, industrial and other environments, each of which places constraints that define 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 and telecommunications segments. To support the myriad industrial, commercial and 5 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. The Digitran Division of our subsidiary XET Corporation, which was acquired by XET 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. 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 knowledge and understanding of our customers' needs, together with 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 a T-1 line, which is a type of digital carrier system that transmits voice and data at high speed and is the standard for digital transmission in North America used by large businesses for broadband access. This product 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 designed to operate in extended temperatures and harsh environments and generally exceed the surge 6 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 with 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 are 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. For example, 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 objectives are 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 becoming the supplier of choice for harsh environment switch and customer power supplies 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. 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. 7 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. 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. 8 PRODUCTS AND SERVICES Our products and services currently are divided into the following two main business segments: o 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) o Electronic Components -- Digital Switches -- Electronic Power Supplies During the years ended December 31, 2001, 2000 and 1999, our total sales were $27,423,000, $28,050,000 and $25,913,000, 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 2001 2000 1999 ------------------------ ---- ---- ---- Telecommunications Test Instruments 26.7% 28.2% 19.2% Transmission and Network Access Products 24.7% 26.2% 39.3% Other Products and Services 2.5% 1.5% 1.9% ---------------- ----------------- ----------------- 53.9% 55.9% 60.4% ================ ================= ================= Electronic Components Digital Switches 23.1% 28.6% 20.5% Electronic Power Supplies 20.0% 14.8% 15.8% Other Products and Services 3.0% 0.7% 3.3% ---------------- ----------------- ----------------- 46.1% 44.1% 39.6% ---------------- ----------------- ----------------- 100.0% 100.0% 100.0% ================ ================= =================
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 years ended December 31, 2001, 2000 and 1999, the sale of telecommunications products, equipment and related services accounted for 53.9%, 55.9% and 60.4% of our total revenues, respectively. These products, many of which are described below, are 9 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: o Traditional telephone services, such as modems and plain old telephone service, or POTS o Competitive local exchange carriers, or CLECs o Bite error rate test, or BERT o Dial tone multi-frequency, or DTMF o Transmission impairment measurement, or TIMS o 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 o 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 megabits, or millions of bits, per second, or 44 Mbps, with 672 channels -- Digital signal level 0, or DS0, which is 64 kilobits, or thousands of bits, 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 -- STS/SONET, which is an acronym for synchronous transport signal/synchronous optical networks or fiber optic networks 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 TELECOMMUNICATIONS TEST INSTRUMENTS Our primary field test instruments, built by our CXR Telcom subsidiary in Fremont, California, 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, 10 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, or OEMs, 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: o 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; o load-coil analysis, which identifies the presence of voice coils that prevent high-speed digital access; o installation and testing of DS3, which is a very high-speed digital transmission service that is equivalent to 28 T-1 circuits; and o 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 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 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; 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 11 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 T-COM 440B T-ACE This is a high-performance integrated digital communications test instrument. -- used to monitor and assure service reliability of high-density digital test nodes and switch centers -- provides comprehensive digital test measurements ranging from STS/SONET, DS3, through T-1, FT-1, DSO and DDS services T-COM 324A+ This is a versatile, low-cost, full-function handheld T-1 test instrument. -- suited for field technician applications for the installation and maintenance of T-1 and FT-1 services -- provides high-end T-1 test functions, including all major BERT stress patterns, loop codes, alarm monitoring and detection, DS0 tone insertion, DTMF digit capture and drop & insert measurements T-COM SENTINEL This is a high-performance, cost-effective T-1, T-3 and STS centralized test system. -- operates in conjunction with the T-Com 440B T-ACE test head -- provides total remote surveillance of unmanned test centers -- provides cost savings, service reliability and quality benefits for medium-size central offices that could not otherwise justify the cost of high-end test systems
TRANSMISSION AND NETWORK ACCESS PRODUCTS Our subsidiary, CXR, S.A., develops, markets and sells 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 we believe 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. 12 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. 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 is 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 13 PRODUCT NAME KEY USES, FEATURES AND FUNCTIONS 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 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. 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 as analog modems, ISDN terminal adapters, ISDN digital modems and high-speed MSDSL modems. The optional 14 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 years ended December 31, 2001, 2000 and 1999, this segment accounted for 46.1%, 44.1% and 39.6%, respectively, of our net sales. DIGITAL SWITCHES XET Corporation's Digitran Division, based in Rancho Cucamonga, California, manufactures, assembles and sells digital switch products serving aerospace, military and industrial applications. Digital switches are manually operated electromechanical devices used for routing electronic signals. 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: o 8, 10, 11, 12, 16 or a special number of dial positions; o special markings and dial characters; o 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; o available with radio frequency interference shielding; o 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; o provision for mounting components on output terminals on special personal computer boards; o wire wrap terminals, pin terminals or special terminations; and o 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, 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. 15 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 December 31, 2001 and 2000, our backlog of firm, unshipped orders was approximately $14.4 million and $12.5 million, respectively. Our December 31, 2001 backlog is related approximately 95% 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 5% 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 70% of our electronic components orders and 100% 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. During 2001, our top five telecommunications test instruments and transmission and network access products customers in terms of revenues were Verizon, Southeast Datacom Incorporated, France Telecom, SBC Communications Inc. and Siemens. None of our telecommunications test instruments, transmission or network access products customers represented more than ten percent of our revenues during 2001. 16 Because we currently derive a significant portion of our revenues from sales to RBOCs, we have experienced and will continue to experience for the foreseeable future a significant impact on our quarterly operating results due to the budgeting cycles of the RBOCs. RBOCs generally obtain approval for their annual budgets during the first quarter of each calendar year. If an RBOC's annual budget is not approved early in the calendar year or is insufficient to cover its desired purchases for the entire calendar year, we are unable to sell products to the RBOC during the period of the delay or shortfall. Due to a general downturn in business activity in the telecommunications market during 2001, several RBOCs reduced their capital expenditures, which negatively impacted our 2001 sales of test instruments and transmission products. We anticipate that capital expenditure levels of RBOCs and other telecommunications carriers will be at reduced levels in 2002, which will cause a continued and perhaps more severe negative impact on our sales of test instruments and transmission products. 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. The general downturn in business activity in the telecommunications market during 2001 also seriously impacted communications equipment manufacturers, particularly following the collapse of many dotcom companies. As a result, sales of our telecommunications central office equipment to telecommunications carriers and communications equipment manufacturers have been seriously impacted. ELECTRONIC COMPONENTS We sell our components primarily to OEMs in the electronics industry, including manufacturers of aerospace and military systems, communications equipment, industrial instruments and test equipment. During 2001, our top five electronic components customers in terms of revenues were the BAE Systems companies, Electrical Maintenance, Inc., Temura Denki, Litton Corporation and Raytheon Systems Company. Sales to the BAE Systems companies represented approximately ten percent of our total revenues during 2001. Currently we are experiencing an increase in our electronic components business due primarily to the war on terrorism and a general expansion of defense-related business in Europe, the United States and Asia. 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. 17 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 centers. 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 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 generally 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 XET Corporation's Digitran Division, based in Rancho Cucamonga, California, XCEL Corporation Ltd., a wholly-owned subsidiary of XET 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 XET 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. We sell our electronic components primarily to OEMs in the electronics industry, including manufacturers of aerospace and military systems, communications equipment, 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 some third-party-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 OEMs have designed many of our switches into their product specifications has frequently resulted in customers seeking us out to manufacture for them unique as well as our 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 18 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: o quality of product offerings; o adaptability to evolving technologies and standards; o ability to address and adapt to individual customer requirements; o price and financing terms; o strength of distribution channels; o ease of installation, integration and use of products; o system reliability and performance; and o 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, Sunrise Telecom, Inc. and Electrodata, Inc. for test instruments. The reputation in the telecommunications industry of our subsidiary, CXR Telcom, spans over 35 years. We believe this reputation aids us in establishing and maintaining both distribution channels and customers for our products. The design of many of our data transmission products enables us to offer numerous different product combinations to our customers and to serve both central site data communications needs and remote access and transmission sites on both the enterprise-wide and single location level. We believe that this design flexibility helps us to excel at many of the above competitive factors by enabling us to offer quality products that meet and are adaptable to evolving customer requirements, technologies and government and industry standards. We currently derive a significant portion of our revenues from sales to RBOCs. We believe we derive a competitive advantage from efforts we expended to establish many of our telecommunications products as approved products for nearly all of the RBOCs and for other key customers in the United States and abroad. Our products' approved status facilitates the ability of our customers to order additional products from us as their needs arise without the long delays that might otherwise be needed to obtain the approval of our customers' upper management or governing body prior to each purchase. Some of our competitors have greater sales, marketing, technological, research and financial resources than we do. Our competitors' advantage with regard to these resources may reduce our ability to obtain or maintain market share for our products in cases where our competitors are better able than us to satisfy the above competitive factors. ELECTRONIC COMPONENTS The market for our components is highly fragmented and composed of a diverse group of OEMs, 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: o capability and quality of product offerings; o status as qualified products; and o compliance with government and industry standards. 19 We have made substantial investments in machinery and equipment tooling. In addition, our Digitran Division has a reputation spanning over 40 years in the electronic components industry, and major OEMs have designed many of our digital switches into their product specifications. These factors have acted 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 and causing some customers to seek us out to manufacture for them unique as well as our standard digital switches. 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 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 one- 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 network access 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. 20 Accordingly, for the years ended December 31, 2001, 2000 and 1999, our engineering and product development costs were approximately $1.08 million, $1.17 million and $1.84 million, respectively. The decline in engineering expenses in 2000 as compared to 1999 was primarily due to the termination of engineering services at our Fremont, California facility and the consolidation of engineering activities in our St. Charles, Illinois facility. The decline in these expenses in 2001 as compared to 2000 was primarily due to the closure of our St. Charles, Illinois engineering office in August 2001 and the layoff of the four engineers who worked at that facility. We hired an engineering director at the Fremont, California facility in December 2001 and intend to develop engineering capability at that facility primarily through the use of services provided by outside contractors. Our product development costs in 2001, 2000 and 1999 were related primarily to development of new telecommunications test equipment and voice, data and video transmission 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 these 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 offer custom designs for OEM 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 21 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 March 18, 2002, we employed a total of 218 persons in our various divisions and subsidiaries. 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. 22 ITEM 2. PROPERTIES. As of March 18, 2002, we leased or owned approximately 110,000 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. (corporate headquarters) Rancho Cucamonga, California Administrative XET Corporation/Digitran Rancho Cucamonga, California (electronic components) Monrovia, California Manufacturing XCEL Power Systems, Ltd. and XCEL Corporation Ltd. Ashford, United Kingdom Administrative/ (electronic components) Wales, United Kingdom Manufacturing Belix Power Conversion Ltd. (electronic components) Newtown, Wales, United Kingdom Manufacturing XCEL Japan, Ltd. Higashi-Gotanda (electronic components) Tokyo, Japan Sales CXR, S.A (telecommunications test instruments, transmission and network access products) Paris, France Administration/Sales CXR, S.A (telecommunications test instruments, transmission and network access products) Abondant, France Manufacturing/Engineering CXR Telcom Corporation (telecommunications test instruments, Administrative/Engineering/ transmission and network access products) Fremont, California Manufacturing
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 expired in February 2002, and we anticipate renewing that lease. 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. We believe the listed facilities are adequate for our current business operations. ITEM 3. LEGAL PROCEEDINGS. We are not a party to any material pending legal proceedings. 23 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Price ------------ Our common stock has been traded on the NASD's OTC Electronic Bulletin Board under the symbol "MCTL" since May 13, 1999. The table below shows for each fiscal quarter indicated the high and low bid prices per share of our common stock. This information has been obtained from the Historical Research Department of The Nasdaq Stock Market, Inc. and from Pink Sheets LLC. The prices shown reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. PRICE RANGE ----------- 2000: LOW HIGH --- ---- First Quarter (January 1 - March 31)............ $0.42 $2.8125 Second Quarter (April 1 - June 30).............. 0.4375 1.25 Third Quarter (July 1 - September 30)........... 0.4375 0.8438 Fourth Quarter (October 1 - December 31)........ 0.20 0.56 2001: First Quarter................................... 0.34 0.5625 Second Quarter.................................. 0.35 0.59 Third Quarter................................... 0.26 0.45 Fourth Quarter.................................. 0.23 0.40 As of March 18, 2002, we had 20,670,703 shares of common stock outstanding held of record by approximately 3,600 stockholders, and the closing bid price of our common stock on the OTC Bulletin Board was $0.29. Dividend Policy --------------- We have not paid dividends on our common stock to date. Our line of credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash dividends on our common stock. We currently intend to retain future earnings to fund the development and growth of our business and, therefore, do not anticipate paying cash dividends on our common stock within the foreseeable future. Any future payment of dividends on our common stock will be determined by our board of directors and will depend on our financial condition, results of operations, contractual obligations and other factors deemed relevant by our board of directors. Recent Sales of Unregistered Securities --------------------------------------- In October 2001, we issued 100,000 shares of common stock valued at $30,000 to an investor relations consultant in consideration for services rendered to us. In October 2001, we issued a warrant to purchase up to 50,000 shares of common stock at an exercise price of $0.31 per share to one individual in consideration for employee relations services rendered. 24 In October 2001, we issued a warrant to purchase up to 15,000 shares of common stock at an exercise price of $0.25 per share to one individual in consideration for investment banking services rendered. 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. ITEM 6. SELECTED FINANCIAL DATA. The following selected consolidated historical financial data 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 document. The consolidated statements of operations and comprehensive income data with respect to the years ended December 31, 1999, 2000 and 2001 and the consolidated balance sheet data at December 31, 2000 and 2001 are derived from, and are qualified by reference to, the consolidated audited financial statements included elsewhere in this document. The historical results are not necessarily indicative of results to be expected for any future periods.
YEARS ENDED DECEMBER 31, CONSOLIDATED STATEMENTS OF OPERATIONS AND --------------------------------------------------------- COMPREHENSIVE INCOME DATA: 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- Net sales........................................ $ 27,251 $ 30,100 $ 25,913 $ 28,050 $ 27,423 Cost of sales.................................... 18,069 17,353 17,066 15,529 15,456 --------- --------- --------- --------- --------- Gross profit..................................... 9,182 12,747 8,847 12,521 11,967 Selling, general and administrative expenses..... 8,608 10,202 10,584 9,827 10,129 Engineering and product development expenses..... 1,797 2,202 1,841 1,167 1,076 Write-down of goodwill........................... 5,693 -- -- -- -- --------- --------- --------- --------- --------- Income (loss) from operations.................... (6,916) 343 (3,578) 1,527 762 Total other income (expense)..................... (627) (804) (492) 207 (414) --------- --------- --------- --------- --------- Income (loss) from continuing operations before income taxes................................... (7,543) (461) (4,070) 1,734 348 Income tax expense............................... 97 101 128 31 77 --------- --------- --------- --------- --------- Income (loss) from continuing operations......... (7,640) (562) (4,198) 1,703 271 Discontinued operations: Loss from operations of discontinued segment........................ (2,053) (1,203) (847) (212) 56 Gain (loss) on disposal of discontinued segment including provision for phase out period of $122 in 2000....................... -- 580 449 (487) -- --------- --------- --------- --------- --------- Net income (loss)................................ (9,693) (1,185) (4,596) 1,004 327 Foreign currency translation adjustment.......... (260) 206 (325) (505) (312) --------- --------- --------- --------- --------- Total comprehensive income (loss)................ $ (9,953) $ (979) $ (4,921) $ 499 $ 15 ========= ========= ========= ========= ========= Basic earnings (loss) per share from continuing operations..................................... $ (0.76) $ (0.05) $ (0.26) $ 0.09 $ 0.01 ========= ========= ========= ========= ========= Diluted earnings (loss) per share from continuing operations..................................... $ (0.76) $ (0.05) $ (0.26) $ 0.07 $ 0.01 ========= ========= ========= ========= ========= Basic earnings (loss) per share from discontinued operations..................................... $ (0.20) $ (0.05) $ (0.02) $ (0.04) $ 0.00 ========= ========= ========= ========= ========= Diluted earnings (loss) per share from discontinued operations........................ $ (0.20) $ (0.05) $ (0.02) $ (0.03) $ 0.00 ========= ========= ========= ========= ========= Basic earnings (loss) per share.................. $ (0.96) $ (0.10) $ (0.28) $ 0.05 $ 0.02 ========= ========= ========= ========= ========= Diluted earnings (loss) per share................ $ (0.96) $ (0.10) $ (0.28) $ 0.04 $ 0.01 ========= ========= ========= ========= ========= Weighted average shares outstanding, basic....... 10,137 11,952 16,638 19,504 20,594 Weighted average shares outstanding, diluted..... 10,137 11,952 16,638 23,027 23,782
25
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Cash and cash equivalents........... $ 1,571 $ 450 $ 480 $ 756 $ 604 Working capital..................... 4,625 4,999 1,080 2,780 3,686 Total assets........................ 20,129 20,352 16,489 19,484 17,688 Long-term debt, net of current portion.......................... 2,012 1,175 143 282 763 Stockholders' equity................ 6,011 5,482 3,801 5,807 5,862 Convertible redeemable preferred stock.................. 1 1,516 588 259 270
No cash dividends on our common stock were declared during any of the periods presented above. In October 2000, we decided to discontinue our circuits segment's operations. Accordingly, all current and prior financial information related to the circuits segment operations have been presented as discontinued operations in historical financial data above. ITEM 7. 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 to financial statements included elsewhere in this document. This report and our consolidated financial statements and notes to financial statements contain forward-looking statements, which generally include the plans and objectives of management for future operations, including plans and objectives relating to our future economic performance and our current beliefs regarding revenues we might earn if we are successful in implementing our business strategies. The forward-looking statements and associated risks may include, relate to or be qualified by other important factors, including, without limitation: o the projected growth in the telecommunications and electronic components markets; o our business strategy for expanding our presence in these markets; o anticipated trends in our financial condition and results of operations; and o our ability to distinguish ourselves from our current and future competitors. We do not undertake to update, revise or correct any forward-looking statements. The information contained in this document is not a complete description of our business or the risks associated with an investment in our common stock. Before deciding to buy or maintain a position in our common stock, you should carefully review and consider the various disclosures we made in this report, and in our other materials filed with the Securities and Exchange Commission that discuss our business in greater detail and that disclose various risks, uncertainties and other factors that may affect our business, results of operations or financial condition. Any of the factors described above or in the "Risk Factors" section below could cause our financial results, including our net income (loss) or growth in net income (loss) to differ materially from prior results, which in turn could, among other things, cause the price of our common stock to fluctuate substantially. 26 OVERVIEW We previously organized our operations in the following three business segments: o Instrumentation and Test Equipment; o Components and Subsystem Assemblies; and o 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. Effective August 1, 2000, we acquired the assets and business operations of T-Com, a telecommunications test instruments manufacturer located in Sunnyvale, California. T-Com produced central office equipment, which is equipment that is typically employed in switching centers and network operating centers. 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 our wholly-owned subsidiary, XET Corporation. We intend to retain our Monrovia, California circuit board manufacturing facility as a captive supplier of circuit boards to XET Corporation's Digitran Division in our electronic components segment. Through our three direct wholly-owned operating subsidiaries, XET Corporation, CXR Telcom Corporation, or CXR Telcom, 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 material business segments: o 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) o Electronic Components -- Digital Switches -- Electronic Power Supplies Our sales are primarily in North America, Europe and Asia. In 2001, 53.9% of our sales were to customers in the telecommunications industry, and the remainder of our sales were to aerospace customers, military contractors and industrial customers. Revenues are recorded when products are shipped if shipped FOB shipping point or when received by the customer if shipped FOB destination. 27 CRITICAL ACCOUNTING POLICIES Our significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of this Form 10-K. We believe our most critical accounting policies include inventory valuation, goodwill impairment and foreign currency translation. INVENTORIES We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. Demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. In addition, the telecommunications equipment industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Also, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize such costs in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued, we may have over-reported our costs of goods sold in previous periods and would be required to recognize additional operating income at the time of sale. Therefore, although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. IMPAIRMENT OF GOODWILL We periodically evaluate acquired businesses for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. In assessing potential impairment for goodwill, we consider these factors as well as forecasted financial performance of the acquired businesses. If forecasts are not met, we may have to record additional impairment charges not previously recognized. In assessing the recoverability of our goodwill and other intangibles, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of those respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets that were not previously recorded. On January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," and will be required to analyze our goodwill for impairment issues during the first six months of 2002, and then periodically after that time. During 2001, we did not record any impairment losses related to goodwill and other intangible assets. FOREIGN CURRENCY TRANSLATION We have foreign subsidiaries that together accounted for 54.6% of our net revenues, 66.3% of our assets and 68.4% of our total liabilities as of December 31, 2001. In preparing our consolidated financial statements, we are required to translate the financial statements of our foreign subsidiaries from the currencies in which they keep their accounting records into United States 28 dollars. This process results in exchange gains and losses which, under relevant accounting guidance, are either included within our statement of operations or as a separate part of our net equity under the caption "cumulative translation adjustment." Under relevant accounting guidance, the treatment of these translation gains or losses depends upon our management's determination of the functional currency of each subsidiary. This determination involves consideration of relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billings, financing, payroll and other expenditures, would be considered the functional currency. However, management must also consider any dependency of the subsidiary upon the parent and the nature of the subsidiary's operations. If our management deems any subsidiary's functional currency to be the local currency, then any gain or loss associated with the translation of that subsidiary's financial statements is included in a cumulative translation adjustment. However, if our management deems the functional currency to be United States dollars, then any gain or loss associated with the translation of these financial statements would be included within our statement of operations. If we dispose of any of our subsidiaries, any cumulative translation gains or losses would be realized into our statement of operations. If we determine that there has been a change in the functional currency of a subsidiary to United States dollars, then any translation gains or losses arising after the date of the change would be included within our statement of operations. Based on our assessment of the factors discussed above, we consider the functional currency of each of our international subsidiaries to be each subsidiary's local currency. Accordingly we had cumulative translation losses of $1,043,000 and $731,000 that were included as part of accumulated other comprehensive loss within our balance sheets at December 31, 2001 and 2000, respectively. During 2001, 2000 and 1999, we included translation adjustments of approximately $312,000, $505,000 and $325,000, respectively, under accumulated other comprehensive loss. If we had determined that the functional currency of our subsidiaries was United States dollars, these losses would have increased our loss for each of the years presented. The magnitude of these gains or losses depends upon movements in the exchange rates of the foreign currencies in which we transact business as compared to the value of the United States dollar. These currencies include the Japanese yen, the euro and the British pound. Any future translation gains or losses could be significantly higher than those we recorded for 2001, 2000 and 1999. Also, if we determine that a change in the functional currency of one of our subsidiaries has occurred, we would be required to include in our statement of operations any translation gains or losses from the date of change. 29 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected statement of operations data expressed as a percentage of total net sales.
YEARS ENDED DECEMBER 31, ------------------------ 1999 2000 2001 ---- ---- ---- Net sales.......................................... 100.0% 100.0% 100.0% Cost of sales...................................... 65.9 55.4 56.4 ------ ------ ------ Gross profit....................................... 34.1 44.6 43.6 Selling, general and administrative expenses....... 40.8 35.0 36.9 Engineering and product development expenses....... 7.1 4.2 3.9 ------ ------ ------ Operating income (loss)............................ (13.8) 5.4 2.8 Interest expense................................... (1.6) (1.5) (1.4) Other income (expense)............................. (0.3) 2.3 (0.1) ------ ------ ------ Income (loss) from continuing operations before income taxes.............................. (15.7) 6.2 1.3 Income taxes....................................... 0.5 0.1 0.3 ------ ------ ------ Income (loss) from continuing operations........... (16.2) 6.1 1.0 Income (loss) from discontinued operations......... (3.2) (0.8) 0.2 Gain (loss) on disposal of discontinued segment.... 1.7 (1.7) 0.0 ------ ------ ------ Net income (loss).................................. (17.7)% 3.6% 1.2% ====== ====== ======
YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000 CONTINUING OPERATIONS NET SALES. Net sales for the year ended December 31, 2001 decreased by $627,000 (2.2%) to $27,423,000, as compared to $28,050,000 for the year ended December 31, 2000. Net sales of our telecommunications products and services for 2001 declined by $881,000 (5.6%) to $14,777,000, as compared to $15,658,000 for 2000. Test equipment net sales for 2001 decreased by $586,000 (7.4%) to $7,320,000, as compared to $7,906,000 for 2000. The primary reason for this sales decline was a $458,000 reduction in sales of test equipment by CXR, S.A., our French subsidiary, due to a generally weak market for telecommunications equipment in Europe. Also, the exclusive distribution agreement that our French subsidiary had with Sunrise Telecom, Inc. terminated as of November 1, 2001. Our French subsidiary will continue to distribute Sunrise products under an exclusive arrangement for select customers and under a non-exclusive arrangement for other customers and also will continue to distribute other manufacturers' products. Based on this revised relationship with Sunrise Telecom, Inc., management estimates that net sales of Sunrise products will be approximately $400,000 in 2002, as compared to $1,384,000 in 2001. Consequently, during the first quarter of 2002, we began to implement personnel and other cost reductions. Net sales of our CXR HALCYON 704 series field test equipment increased by $131,000 (3.5%) to $3,849,000, as compared to $3,718,000 for 2001. Net sales of our T-Com central office test equipment product line that we acquired in August 2000 declined by $212,000 (15.2%) to $1,186,000 for 2001, as compared to $1,398,000 for the last five months of 2000, primarily due to a weakening market in central office test equipment. 30 Our French subsidiary produces all of our transmission products and networking equipment. Net sales of transmission products and networking equipment produced by our French subsidiary decreased by $559,000 (7.6%) to $6,778,000 for 2001, as compared to $7,337,000 for 2000, primarily because of the closure of that subsidiary's networking division in 2000. Total net sales by our French subsidiary, including both test equipment and transmission and networking equipment, decreased by $1,271,000 (13.9%) to $7,847,000 for 2001, as compared to $9,118,000 for 2000. The decrease in our French subsidiary's net sales would have been 11.0% rather than 13.9% if there had not been a decline in 2001 in the value of the French franc in relation to the value of the U.S. dollar. Net sales of our electronic components for 2001 increased by $254,000 (2.0%) to $12,646,000, as compared to $12,392,000 for the prior year, primarily due to a $1,284,000 (27.1%) increase in sales of our U.K. subsidiary, to $6,029,000 in 2001 from $4,745,000 in 2000. This increase in net sales was primarily due to an increase in deliveries under outstanding contracts for power supplies. In addition, our Japanese subsidiary increased its sales in 2001 by $144,000 (15.3%) to $1,085,000, as compared to $941,000 for the prior year. These increases were offset by a $1,128,000 (17.3%) decrease in XET's sales to $5,405,000, as compared to $6,533,000 for the prior year, that resulted primarily because of the completion in the first quarter of 2001 of XET's major digital switch contract with BAE Systems, Canada. GROSS PROFIT. Gross profit as a percentage of total net sales decreased to 43.6% for 2001, as compared to 44.6% for 2000. In dollar terms, total gross profit decreased by $554,000 (4.4%) to $11,967,000 for 2001, as compared to $12,521,000 for 2000. Gross profit for our telecommunications segment decreased in dollar terms by $46,000 (0.7%) to $6,462,000 for 2001, as compared to $6,508,000 for 2000. Gross profit increased as a percentage of net sales from 41.6% in 2000 to 43.7% in 2001. The higher gross margin percentage in 2001 was due to a larger proportion of sales of high margin products in France and also due to labor cost reductions in California. Also, during the fourth quarter of 2001, we recorded both an $85,000 reduction in warranty expense as a result of a reevaluation of our warranty reserve and a $41,000 reduction to our reserve for obsolete inventory. Provisions for inventory obsolescence are recorded as necessary to reduce obsolete inventory to estimated net realizable value or to specifically reserve for obsolete inventory that we intend to dispose of. Upon disposal of obsolete inventory, the inventory is written off and the allowance for inventory obsolescence is reduced. Gross profit for our electronic components segment decreased in dollar terms by $508,000 (8.4%) to $5,505,000 for 2001, as compared to $6,013,000 for 2000, and decreased as a percentage of related net sales from 48.5% in 2000 to 43.3% in 2001. This decrease was primarily the result of the completion of the BAE Systems, Canada contract in the first quarter of 2001, which contract had provided for sales of higher margin products and contributed to higher sales for XET in the prior year and the first quarter of 2001. This decrease was partially offset by the improved profit margins in connection with higher production volumes and a higher margin product mix at our U.K. subsidiary, which contributed to a $600,000 increase in gross profit at that subsidiary. Also, our Japanese subsidiary's gross profit increased by $33,000. In addition, during the fourth quarter of 2001, we recorded a $134,000 reduction to XET's reserve for obsolete inventory as a result of a reevalution of that reserve. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by $302,000 (3.1%) to $10,129,000 for 2001, as compared to $9,827,000 for 2000. The increase was primarily due to an increase from approximately $187,000 in 2000 to approximately $608,000 in 2001 of legal and accounting fees that we incurred in connection with a securities registration statement and amendments to various prior periodic reports. Selling expenses declined by $332,000, primarily due to the cost savings that resulted from the closure of the networking division of our French subsidiary in the fourth quarter of 2000. Also, during the fourth quarter of 2001, we recorded a $78,000 reduction of expense to reflect a reduction in California sales tax liability that occurred as a result of a favorable audit settlement. 31 ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our telecommunications segment. These expenses decreased by $91,000 (7.8%) to $1,076,000 for 2001, as compared to $1,167,000 for the prior year, reflecting the cost savings from the closure of our St. Charles, Illinois engineering facility in August 2001 and the relocation, consolidation and downsizing of that engineering function into our Fremont, California facility. OTHER INCOME (EXPENSE). Interest expense decreased to $396,000 for 2001 from $424,000 in 2000 due to lower interest rates. We recorded other expense of $18,000 in 2001 as compared to other income of $631,000 in 2000. This difference occurred primarily because in 2000 we recorded a $197,000 gain on the sale of stock of Wi-LAN, Inc., the reversal of a warranty reserve of $116,000 for a warranty settlement related to sales made by HyComp, Inc., our former subsidiary that we sold in April 1999, and $90,000 for reductions in accruals for settlements related to leased equipment. INCOME TAXES. Income taxes consist primarily of foreign taxes because we are in a loss carryforward position for U.S. federal income tax purposes. Income tax expense for the year ended December 31, 2001 was $77,000 as compared to $31,000 in 2000. A total of $67,000 of the $77,000 income tax expense for 2001 was for foreign income taxes as compared to $8,000 of the $31,000 income tax expense for 2000. 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 income of $56,000 in 2001 as a result of reversal of excess accruals and a loss from discontinued operations of $699,000 for 2000. Net sales, gross profit and selling, general and administrative expenses for our circuits business for the year ended December 31, 2000 were $2,257,000, $10,000 and $375,000, respectively. YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 CONTINUING OPERATIONS NET SALES. Net sales for the year ended December 31, 2000 increased by $2,137,000 (8.2%) to $28,050,000 as compared to $25,913,000 for the year ended December 31, 1999. Net sales of our telecommunications products and services during 2000 declined slightly to $15,658,000 from $15,666,000 during 1999. Test equipment sales during 2000 increased by $2,923,000 (58.7%) to $7,906,000 as compared to $4,983,000 for 1999. This increase in sales of test equipment was primarily due to the positive market acceptance of our CXR HALCYON 704 series product line which accounted for $1,125,000 of the increase. The remaining $1,798,000 of this increase was substantially attributable to additional test equipment sales as a result of our acquisition of the business of T-Com in August 2000. We have not provided or discussed pro forma information because there was not a material change in revenues of T-Com from 1999 to 2000. This increase in net sales of test equipment was offset by a reduction in sales of transmission and networking equipment produced by our French subsidiary, which sales declined $2,931,000 (37.8%) from $10,683,000 during 1999 to $7,752,000 for 2000. The decline in the net sales of these products was primarily due to the conversion of sales amounts from French francs to U.S. dollars. The average U.S. dollar value of the French franc declined approximately 15% from 1999 to 2000. In addition, budget delays and reductions within the French public sector contributed to the reduction in transmission equipment sales. 32 Net sales of electronic components for 2000 increased by $2,145,000 (20.9%) to $12,392,000 as compared to $10,247,000 for 1999. This increase was primarily due to a $2,905,000 (63%) increase in XET's digital switch sales to $7,508,000 for 2000, from $4,603,000 for 1999. Contributing to this increase was a large order for switches placed by BAE Systems, Canada, which accounted for $1,656,000 of net sales in 2000 and was completed during the first quarter of 2001. The increase in net sales of electronic components for 2000 was offset by the termination of our subsystem assembly business that had accounted for $670,000 of sales in 1999. GROSS PROFIT. Gross profit as a percentage of net sales increased to 44.6% for 2000 as compared to 34.1% for 1999. In dollar terms, gross profit increased by $3,674,000 (41.5%) to $12,521,000 for 2000 as compared to $8,847,000 for 1999. For 2000 and 1999, cost of sales included provisions for inventory obsolescence of $893,000 and $1,144,000, respectively. Gross profit for our telecommunications segment increased in dollar terms by $1,292,000 (24.8%) to $6,508,000 for 2000 as compared to $5,216,000 for 1999, and increased as a percentage of related net sales from 33.4% in 1999 to 41.5% in 2000. This increase in gross profit was primarily due to an increase in 2000 of the portion of telecommunications segment sales that involved higher margin test equipment such as our CXR HALCYON 704 series test equipment and our central office test equipment. These products generated a higher gross profit margin than our older model test equipment and generally contributed a higher margin than our transmission products. Gross profit of our electronic components segment increased in total dollar terms by $2,382,000 (65.6%) to $6,013,000 for 2000 from $3,631,000 in 1999 and increased as a percentage of related net sales from 35.2% in 1999 to 48.5% in 2000. The increase in gross profit margin in 2000 as compared to 1999 was primarily due to XET's improved profit margins that resulted from manufacturing efficiencies, reduced overhead in connection with the move from our 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 that occured due to lower sales volumes of that subsidiary. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses decreased by $757,000 (7.2%) to $9,827,000 for 2000 as compared to $10,584,000 for 1999 and decreased as a percentage of net sales from 40.8% in 1999 to 35.0% in 2000. This decrease was attributable to a $291,000 reduction in selling expenses and a $466,000 reduction in general and administrative expenses. The decrease in general and administrative expenses was primarily due to continued cost cutting efforts in 2000 and to certain expenses we incurred in 1999 that we did not incur in 2000, such as a $452,000 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. However, we incurred certain general and administrative expenses in 2000 that we did not incur in 1999, including approximately $187,000 of legal and accounting fees that we incurred in connection with a securities registration statement and amendments to various prior periodic reports. ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES. Engineering and product development expenses consist primarily of research and product development activities of our telecommunications segment. These expenses decreased by $674,000 (36.6%) to $1,167,000 for 2000 as compared to $1,841,000 for 1999. The majority of this reduction resulted from our elimination of our test instruments engineering function in Fremont, California and our concentration of our engineering efforts in our St. Charles, Illinois facility, and the transfer of transmission and network access product engineering to our French subsidiary without adding staffing in France. 33 OTHER INCOME (EXPENSE). Interest expense increased slightly to $424,000 for 2000 as compared to $411,000 for 1999. Other income was $631,000 for 2000 as compared to an expense of $81,000 for 1999. Other income in 2000 included $197,000 of gain on the sale of common stock of Wi-LAN, Inc., $137,000 reduction in a warranty reserve, $90,000 for reductions in accruals for settlements related to leased equipment and a $94,000 gain on foreign currency exchange. INCOME TAXES. Income taxes, while nominal in both respective periods, consist primarily of foreign taxes and U.S. alternative minimum tax because we were in a loss carryforward position for federal income tax purposes. At December 31, 2000 we had total net deferred income tax assets of approximately $16,321,000. 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 these assets is not more likely than not in light of our recurring losses from operations. DISCONTINUED OPERATIONS As a result of our October 2000 decision to discontinue our last remaining material circuits business, which operated as the XCEL Etch Tek Division of our XET Corporation subsidiary, our circuits segment is accounted for as discontinued operations. We reported a net loss from discontinued operations of $699,000 for 2000 as compared to a net loss of $398,000 for 1999. The 2000 net loss included a loss of $487,000 from the disposal of our discontinued operations, including $122,000 for phase out period as compared to a gain of $449,000 for 1999 relating to the sale of HyComp, Inc. and the separate sale of its corporate shell. Net sales for our circuits business decreased by $131,000 (5.5%) to $2,257,000 for 2000 as compared to $2,388,000 for 1999 primarily due to the sale of our circuits segment facility in November 2000, which resulted in 10 1/2 months of circuits segment sales during 2000. Selling, general and administrative expenses related to our discontinued operations declined by $288,000 (43.4%) to $375,000 for 2000 as compared to $663,000 for 1999 primarily due to the sale of HyComp, Inc. in 1999 and cost reductions at Etch Tek. LIQUIDITY AND CAPITAL RESOURCES During 2001, we funded our operations primarily through revenue generated from our operations and through our lines of credit with Wells Fargo Business Credit, Inc. and various foreign banks. As of December 31, 2001, we had working capital of $3,686,000, an accumulated deficit of $18,459,000 and an accumulated other comprehensive loss of $1,043,000. As of December 31, 2001, we had $604,000 in cash and cash equivalents and $5,627,000 of accounts receivable. As of December 31, 2000, we had working capital of $2,780,000, an accumulated deficit of $18,775,000, $756,000 in cash and cash equivalents and $7,440,000 of accounts receivable. Cash used in our operating activities totaled $100,000 for 2001 as compared to $201,000 in 2000. This decrease in cash used in operations during 2001 primarily resulted from collections of accounts receivable in excess of payments of various liabilities. Cash used in our investing activities totaled $38,000 for 2001 as compared to cash provided by our investing activities of $909,000 for 2000. We have acquired computer hardware and software to implement an enterprise resource planning system designed to improve efficiencies at an aggregate cost of $175,000, of which $134,000 was acquired in 2001 under capital leases. Included in the 2000 results are cash inflows of $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 common stock we held in Wi-LAN, Inc. and usages of $592,000 and $82,000 for the purchases of the Belix Ltd. companies in the U.K. and T-Com in California, respectively. 34 Cash provided by financing activities totaled $342,000 for 2001, as compared to $73,000 for 2000, primarily due to increased borrowings by XCL in the U.K. to finance XCL's increased business volume. On August 16, 2000, our subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting as guarantor, obtained a credit facility from Wells Fargo Business Credit, Inc. The 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. On December 31, 2001, the interest rate was the prime rate (then 4.75%) plus 1%, subject to a minimum interest charge of $13,500 per month. Due to the minimum interest charge, the effective interest rate we paid during 2001 was 13.2%. Effective April 1, 2001, the annual interest rate was reduced from the prime rate plus 2% and the minimum interest charge was reduced from $15,000 per month because we met or exceeded certain performance-based goals for 2000. The balance outstanding at December 31, 2001 was $1,420,000 on the revolving loan and $232,000 on the term loan, and we had available to us $91,000 of additional borrowings. The credit facility contains restrictive financial covenants that are set by mutual agreement of us and our lender each year. At December 31, 2001, we were out of compliance with a financial covenant and had obtained a waiver from our lender. As of February 25, 2002, the covenants for 2002 had not yet been set. The credit facility expires August 16, 2003. Our foreign subsidiaries have 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. The balances outstanding under our U.K., France and Japan credit facilities were $1,665,000, $533,000 and $5,000, respectively, on December 31, 2001. Our U.K. subsidiary was out of compliance with a financial covenant at December 31, 2001. The lender has indicated its intention to issue a waiver for any covenant breach. However, if the waiver is not issued, the lender may pursue any and all available remedies, including acceleration of the maturity date of the loan. Our backlog is substantial and had increased to $14,385,000 as of December 31, 2001, an increase of 15.1%, as compared to $12,500,000 as of December 31, 2000. Our backlog as of December 31, 2001 is related approximately 95% to our electronic components business, which business tends to provide us with long lead times for our manufacturing processes due to the custom nature of the products, and 5% to our telecommunications business, which business tends to deliver standard products from stock as orders are received. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. However, there can be no assurance that we will be successful in fulfilling such orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog. During 2001, 53.9% of our sales were to customers in the telecommunications industry. We experienced a 5.6% decline in our telecommunications segment sales in 2001, particularly during the latter part of the year. We believe this decline primarily was due to a general decline in sales made by many of our telecommunications customers. We anticipate a further decline in our telecommunications segment sales in the first two quarters of 2002 as compared to recent quarters. Although the decline in our telecommunications segment sales for 2001 was relatively modest, we cannot predict the duration or severity of the telecommunications market downturn or the extent to which the downturn will continue to negatively affect our ability to sell our products and services to customers in the telecommunications industry. A further reduction in sales would reduce our accounts receivable balances, which in turn would have an adverse effect on our financial position by reducing the amount of cash available under our lines of credit. 35 We took various actions to reduce costs in 2001 and are reducing costs further through staff reductions in the first half of 2002. These actions are intended to reduce the cash outlays of our telecommunications segment to match its revenue rate. If these actions are not sufficient to reduce cash outlays below revenue levels, then we may restructure or divest all or part of our telecommunications operations. The following table outlines payments due from us or our subsidiaries under our lines of credit and other significant contractual obligations over the next five years, exclusive of interest: PAYMENTS DUE BY PERIOD ---------------------- (IN THOUSANDS)
CONTRACTUAL OBLIGATIONS 2002 2003 2004 2005 2006 THEREAFTER TOTAL AT DECEMBER 31, 2001 ---- ---- ---- ---- ---- ----------- ----- -------------------- Line of Credit (Domestic) $ 1,420 $ $ $ $ $ $ 1,420 Line of Credit (U.K.) 1,665 1,665 Overdraft (France) 533 533 Term Loan (Domestic) 137 95 232 Term Loan (U.K.) 146 146 146 146 81 665 Term Loan (France) 30 30 30 90 Term Loan (Japan) 5 5 Capitalized Lease Obligations 83 56 33 172 Other Promissory Notes 149 149 Operating Leases 785 158 97 1 1,041 --------- --------- ---------- --------- ---------- ---------- -------- $ 4,953 $ 485 $ 306 $ 147 $ 81 $ $ 5,972 ========= ========= ========== ========= ========== ========== ========
In conjunction with our cost reductions, we believe that current and future available capital resources, revenues generated from operations, and other existing sources of liquidity, including the credit facilities we and our subsidiaries have, will be adequate to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. If, however, our capital requirements or cash flow vary materially from our current projections or if unforeseen circumstances occur, we may require additional financing. Deteriorating global economic conditions and the effects of ongoing military actions against terrorists may cause prolonged declines in investor confidence in and accessibility to capital markets. Our failure to raise capital, if needed, could restrict our growth, limit our development of new products or hinder our ability to compete. 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. 36 IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board, or the FASB, finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No. 142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that we recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires upon adoption of SFAS 142 that we reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that we identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires us to complete a transitional goodwill impairment test six months from the date of adoption. We are also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. Our previous business combinations were accounted for using the purchase method. As of December 31, 2001, the net carrying amount of goodwill was $2,389,000. Amortization expense related to goodwill during 2001 was $345,000. Currently, we are assessing but have not yet determined how the adoption of SFAS 141 and SFAS 142 will impact our financial position and results of operations. In October 2001, the FASB issued FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," or SFAS 144. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. EURO CONVERSION Our operating subsidiaries located in France and the U.K. have combined net sales from operations approximating 50.6% of our total net sales for the year ended December 31, 2001. Net sales from the French subsidiary participating in the euro conversion were 28.6% of our net sales for the year ended December 31, 2001. We continue to review the impact of the euro conversion on our operations. Our European operations took steps to ensure their capability of entering into euro transactions. No material changes to information technology and other systems are necessary to accommodate these multiple currency transactions because such systems already were capable of using multiple currencies. 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. 37 RISK FACTORS AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE DECIDING TO INVEST OR MAINTAIN AN INVESTMENT 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. THE ECONOMIC DOWNTURN IN THE TELECOMMUNICATIONS EQUIPMENT MARKET CONTINUES TO NEGATIVELY AFFECT OUR TELECOMMUNICATIONS SEGMENT SALES, WHICH SALES ACCOUNTED FOR A MAJORITY OF OUR REVENUES IN 2001. During 2001, 53.9% of our sales were to customers in the telecommunications industry. We experienced a 5.6% decline in our telecommunications segment sales in 2001, particularly during the latter part of the year. We believe this decline primarily was due to a general decline in sales made by many of our telecommunications customers. We anticipate a decline in our telecommunications segment sales in 2002 as compared to 2001. Although the decline in our telecommunications segment sales for 2001 was relatively modest, we cannot predict the duration or severity of the telecommunications market downturn or the extent to which the downturn will continue to negatively affect our ability to sell our products and services to customers in the telecommunications industry. A further reduction in sales would reduce our accounts receivable balances, which in turn would have an adverse effect on our financial position by reducing cash availability under our lines of credit. We are taking various actions, including staff reductions, to reduce cash outlays of our telecommunications segment. However, if the downturn is long-lasting and severe, we may need to continue to downsize or to restructure, sell or discontinue all or part of our telecommunications operations, which would negatively impact our business, prospects, financial condition, results of operations and cash flows. OUR LACK OF LONG-TERM PURCHASE ORDERS OR COMMITMENTS MAY ADVERSELY AFFECT OUR BUSINESS IF DEMAND IS REDUCED. During the year ended December 31, 2001, the sale of telecommunications equipment and related services accounted for 53.9% of our total sales and the sale of electronic components accounted for 46.1% of our total sales. In many cases we have long-term contracts with our telecommunications and electronic components customers that cover the general terms and conditions of our relationships with them but that do not include long-term purchase orders or commitments. Rather, our customers issue purchase orders requesting the quantities of telecommunications equipment they desire to purchase from us, and if we are able and willing to fill those orders, then we fill them under the terms of the contracts. Accordingly, we cannot rely on long-term purchase orders or commitments to protect us from the negative financial effects of a reduced demand for our products that could result from a general economic downturn, from changes in the telecommunications and electronic components industries, including the entry of new competitors into the market, from the introduction by others of new or improved technology, from an unanticipated shift in the needs of our customers, or from other causes. 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, we currently obtain some components used in our products from single or limited sources. Some modem chipsets used in our data communications products have been in short supply and are frequently on 38 allocation by semiconductor manufacturers. We have, from time to time, experienced difficulty in obtaining some components. We do not have guaranteed supply arrangements with any of our suppliers, and there can be no assurance that our suppliers will continue to meet our requirements. Further, disruption in transportation services as a result of the terrorist attacks in the United States on September 11, 2001 and further enhanced security measures in response to the attacks may cause some increases in costs and timing for both our receipt of components and shipment of products to our customers. If our existing suppliers are unable to meet our requirements, we could be required to alter product designs to use alternative components or, if alterations are not feasible, we could be required to eliminate products from our product line. Shortages of components could not only limit our product line and production capacity but also could result in higher costs due to the higher costs of components in short supply or the need to use higher cost substitute components. Significant increases in the prices of components could have a material adverse effect on our results of operations because our products compete on price, and therefore we may not be able to adjust product pricing to reflect the increases in component costs. Also, an extended interruption in the supply of components or a reduction in their quality or reliability would have a material adverse effect on our financial condition and results of operations by impairing our ability to timely deliver quality products to our customers. Delays in deliveries due to shortages of components or other factors may result in cancellation by our customers of all or part of their orders. Although customers who purchase from us products, such as many of our digital switches and all of our custom power supplies, that are not readily available from other sources would be less likely than other customers of ours to cancel their orders due to production delays, we cannot assure you that cancellations will not occur. WE RELY HEAVILY ON OUR MANAGEMENT, 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, our Executive Vice President, Graham Jefferies and our Senior Vice President and Chief Financial Officer, Randolph Foote. Mr. Oliva co-founded XET Corporation and has developed personal contacts and other skills that we rely upon in connection with our financing, acquisition and general business strategies. Mr. Jefferies is a long-time employee of MicroTel who we have relied upon in connection with our United Kingdom acquisitions and who fulfills significant operational responsibilities in connection with our foreign and domestic operations. Mr. Foote joined us over two years ago, and we have relied upon his skills in financial reporting, accounting and tax matters in addition to his skills in the analysis of potential acquisitions and general corporate administration. Consequently, the loss of Mr. Oliva, Mr. Jefferies, Mr. Foote 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 each of our executive officers, those agreements are of limited duration and are subject to early termination by the officers under some circumstances. 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. MANY OF OUR COMPETITORS HAVE GREATER RESOURCES THAN US. IN ORDER TO COMPETE SUCCESSFULLY, WE MUST KEEP PACE WITH OUR COMPETITORS IN ANTICIPATING AND RESPONDING TO THE RAPID CHANGES INVOLVING THE ELECTRONIC COMPONENTS AND TELECOMMUNICATIONS INDUSTRIES. 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 telecommunications and electronic components markets in which we compete, encompass evolving customer requirements, provide a broad range of products and 39 achieve market acceptance of our products. Many of our existing and potential competitors have larger technical staffs, more established and larger marketing and sales organizations and significantly greater financial resources than we do. Our lack of resources relative to our competitors may cause us to fail to anticipate or respond adequately to technological developments and customer requirements or to experience significant delays in developing or introducing new products and services. These failures or delays could cause us to reduce our competitiveness, revenues, profit margins or market share. IF WE ARE UNABLE TO FULFILL BACKLOG ORDERS DUE TO CIRCUMSTANCES INVOLVING US OR ONE OR MORE OF OUR SUPPLIERS OR CUSTOMERS, OUR ANTICIPATED RESULTS OF OPERATIONS AND CASH FLOWS WILL SUFFER. As of December 31, 2001, we had $14,385,000 in backlog orders for our products, which orders were due in large part to the long lead times associated with our electronic components products. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. However, we cannot assure you that we will be successful in fulfilling orders and commitments in a timely manner or that we will ultimately recognize as revenue the amounts reflected as backlog. FINANCIAL STATEMENTS OF OUR FOREIGN SUBSIDIARIES ARE PREPARED USING THE RELEVANT FOREIGN CURRENCY THAT 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. Sales of our products and services to customers located outside of the United States accounted for approximately 55% of our net sales for the year ended December 31, 2001. We currently anticipate that foreign sales will account for a similar proportion of our net sales for the year ended December 31, 2002. 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. IF WE ARE UNABLE TO SUCCESSFULLY IDENTIFY OR MAKE STRATEGIC ACQUISITIONS OR ALLIANCES, OUR LONG-TERM COMPETITIVE POSITIONING MAY SUFFER. Our business strategy includes growth through acquisitions, strategic alliances and OEM resale agreements, among other arrangements, that we believe will improve our competitive capabilities or provide additional market penetration or business opportunities in areas that are consistent with our business plan. Identifying and pursuing strategic acquisition or other opportunities and integrating acquired products and businesses requires a significant amount of management time and skill. Acquisitions and alliances may also require us to expend a substantial amount of cash or other resources, not only as a result of the direct expenses involved in the acquisition transaction or the creation of the alliance, but also as a result of ongoing research and development activities that may be required to maintain or enhance the long-term competitiveness of acquired products, particularly those products marketed to the rapidly evolving telecommunications industry. If we are unable to make strategic acquisitions, alliances or other arrangements due to our inability to identify appropriate targets, allies or arrangements, to raise the necessary funds, particularly while our stock price is low, or to manage the difficulties or costs involved in the acquisitions, alliances or arrangements, our long-term competitive positioning could suffer. 40 OUR STOCK PRICE HAS BEEN VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES OF OUR COMMON STOCK. The market prices of securities of technology-based companies, especially telecommunications electronics companies, currently are highly volatile. The market price of our common stock has fluctuated significantly in the past. In fact, during the quarter ended December 31, 2001, the high and low closing bid prices of a share of our common stock were $0.40 and $0.23, respectively. 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: o changes in market valuations of similar companies and stock market price and volume fluctuations generally; o economic conditions specific to the telecommunications electronics industry; o 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; o regulatory developments; o additions or departures of key personnel; and o future sales of our common stock or other securities. The price at which you purchase shares of common stock 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. THE UNPREDICTABILITY OF OUR QUARTERLY OPERATING RESULTS MAY CAUSE THE PRICE OF OUR COMMON STOCK TO FLUCTUATE OR DECLINE. Our quarterly operating results have varied significantly in the past and will likely continue to do so in the future due to a variety of factors, many of which are beyond our control. Fluctuations in our operating results may result from a variety of factors. For example, the recent general decline in telecommunications market activity and other changes affecting the telecommunications industry, including consolidations and restructuring of United States and foreign telephone companies, causes our sales to decrease or increase. Our sales may increase if we obtain new customers as a result of the consolidations or restructurings. However, our sales may decrease, either temporarily or permanently to the extent our customers are acquired by or combined with companies that are and choose to remain customers of our competitors. In addition, the cyclical nature of the telecommunications business due to the budgetary cycle of RBOCs has had and will continue to have for the foreseeable future a significant impact on our quarterly operating results. RBOCs generally obtain approval for their annual budgets during the first quarter of each calendar year. If an RBOC's annual budget is not approved early in the calendar year or is insufficient to cover its desired purchases for the entire calendar year, we are unable to sell products to the RBOC during the period of the delay or shortfall. 41 Due to these factors and other factors, including changes in general economic conditions, we believe that period-to-period comparisons of our operating results will not necessarily be meaningful in predicting future performance. If our operating results do not meet the expectations of investors, our stock price may fluctuate or decline. 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 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. BECAUSE WE BELIEVE THAT PROPRIETARY RIGHTS ARE MATERIAL TO OUR SUCCESS, MISAPPROPRIATION OF THESE RIGHTS 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. Our financial condition would be adversely impacted if we were to lose our competitive position due to our inability to adequately protect our proprietary rights as our technology evolves. 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 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 suit is not determinable and may have a material adverse affect on us. 42 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, our 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 future taxable income, which will negatively impact our results of operations and cash flows. BECAUSE WE MAY HAVE INADVERTENTLY FAILED TO COMPLY WITH THE FEDERAL TENDER OFFER RULES, WE COULD FACE SIGNIFICANT LIABILITIES WHICH, IN TURN, COULD ADVERSELY IMPACT OUR FINANCIAL CONDITION. During 1998 and 1999 we modified the terms of some of our outstanding warrants and the terms of our Series A Preferred Stock. These transactions may have been subject to the federal tender offer rules which would have required us to make filings with the Securities and Exchange Commission and to conduct our activities in a manner prescribed by the tender offer rules. We did not make any of these filings nor did we comply with the other requirements of the tender offer rules. Although we believe that our activities surrounding the modifications to our warrants and Series A Preferred Stock are not subject to the federal tender offer rules, the Securities and Exchange Commission, as well as those security holders who participated in the modification transactions, may disagree with us. If that were to happen, we may be subject to fines by the Securities and Exchange Commission and may be required by the Securities and Exchange Commission and/or the security holders to rescind the transactions. The dollar amount of any fines and the costs associated with rescission, including the related legal and accounting costs, are difficult for us to quantify, yet they could be significant. If they are significant, our financial condition would be adversely impacted. WE ARE UNABLE TO PREDICT THE IMPACT THAT THE CONTINUING THREAT OF TERRORISM AND THE RESPONSES TO THAT THREAT BY MILITARY, GOVERNMENT, BUSINESS AND THE PUBLIC MAY HAVE ON OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS. The recent terrorist attacks in the United States, which have brought devastation to many people and shaken consumer confidence, have disrupted commerce throughout the world. The continuing threat of terrorism in the United States and other countries and heightened security measures, as well as current and any future military action in response to such threat, may cause significant disruption to the global economy, including widespread recession. To the extent that such disruptions result in a general decrease in spending that could decrease demand for our current and planned products and services, in our inability to effectively market, manufacture or ship our products and services, or in financial or operational difficulties for various vendors on which we rely, our business and results of operations could be materially and adversely affected. We are unable to predict whether the continuing threat of terrorism or the responses to such threat will result in any long-term commercial disruptions or whether such terrorist activities or responses will have any long-term material adverse effect on our business, prospects, financial condition, results of operations and cash flows. 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 some national securities exchanges or quoted on Nasdaq). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not 43 otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and 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 TO US ON ACCEPTABLE TERMS, OR AT ALL. IF WE OBTAIN FINANCING THROUGH THE ISSUANCE OF EQUITY SECURITIES, FURTHER DILUTION TO EXISTING STOCKHOLDERS MAY RESULT. WE MAY BE REQUIRED TO OBTAIN FINANCING THROUGH ARRANGEMENTS THAT MAY REQUIRE US TO RELINQUISH RIGHTS OR CONTROL TO SOME OF OUR PROPRIETARY TECHNOLOGIES. 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 additional financing will be available to us on acceptable terms, or at all. Deteriorating global economic conditions and the effects of ongoing military actions against terrorists may cause prolonged declines in investor confidence in and accessibility to capital markets. If we raise additional funds 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 portions of our operations and product development and marketing efforts or to obtain funds through arrangements with partners or others that may require us to relinquish rights to some of our technologies or potential products, services or other assets. Accordingly, the inability to obtain financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect our ability to fund our continued operations and our product development and marketing efforts that historically have contributed significantly to our competitiveness. SHARES OF OUR COMMON STOCK ELIGIBLE OR TO BECOME ELIGIBLE FOR PUBLIC SALE COULD ADVERSELY AFFECT OUR STOCK PRICE AND MAKE IT DIFFICULT FOR US TO RAISE ADDITIONAL CAPITAL THROUGH SALES OF EQUITY SECURITIES. As of March 18, 2002, we had outstanding 20,670,703 shares of common stock, 20,570,703 of which shares were either unrestricted, registered for resale under the Securities Act of 1933, or eligible for resale without registration under Rule 144 of the Securities Act of 1933. As of March 18, 2002, we also had outstanding options, warrants and preferred stock that were exercisable for or convertible into 6,453,955 shares of common stock, nearly all of which shares of common stock were registered for resale by the holders of the options, warrants and preferred stock. 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. Any adverse effect on the market price for our common stock could make it difficult for us to sell equity securities at a time and at a price that we deem appropriate. 44 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 NASD's 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. OUR PREFERRED STOCK MAY DELAY OR PREVENT A TAKEOVER OF MICROTEL, 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, 200 have been designated as Series A Preferred, of which 25 were outstanding as of March 18, 2002. In addition, 150,000 shares have been designated as Series B Preferred Stock, all of which 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, which would delay, defer or prevent a change in control of MicroTel. Furthermore, preferred stock may have other rights, including economic rights senior to the common stock, and, as a result, the issuance of preferred stock 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 business combinations with interested stockholders, as defined by statute. These provisions may have the effect of delaying or preventing a change in control of MicroTel without action by our stockholders, even if a change in control would be beneficial to our stockholders. Consequently, these provisions could adversely affect the price of our common stock. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We have established and acquired international subsidiaries that prepare their balance sheets in the relevant foreign currency. In order to be included in our consolidated financial statements, these balance sheets are converted, at the then current exchange rate, into United States dollars, and the statements of operations are converted using weighted average exchange rates for the applicable period. Accordingly, fluctuations of the foreign currencies relative to the United States dollar could have an effect on our consolidated financial statements. Our exposure to fluctuations in currency exchange rates has increased as a result of the growth of our international subsidiaries. However, because historically the majority of our currency exposure has related to financial statement translation rather than to particular transactions, we do not intend to enter into, nor have we historically entered into, forward currency contracts or hedging arrangements in an effort to mitigate our currency exposure. A substantial portion of our notes payable and long-term debt have variable interest rates based on the prime interest rate and/or the lender's base rate, which exposes us to risk of earnings loss due to changes in such interest rates. 45 The following table provides information about our debt obligations that are sensitive to changes in interest rates. All dollars are in thousands. The symbol "P" represents the prime rate. The symbol "B" represents lender's base rate. The symbol "E" represents Euribor plus a variable margin. Balances are as of December 31, 2001.
FAIR VALUE LIABILITIES 2002 2003 2004 2005 2006 THEREAFTER TOTAL 12/31/01 ----------- ---- ---- ---- ---- ---- ---------- ----- -------- Line of Credit (Domestic) $1,420 $1,420 $1,420 Average Interest Rate P+ 1% Line of Credit (U.K.) $1,665 $1,665 $1,665 Average Interest Rate B+ 2.5% Overdraft (France) $ 533 $ 533 $ 533 Average Interest Rate E Term Loan (Domestic) $ 137 $ 95 $ 232 $ 232 Average Interest Rate P+ 1% P+ 1% Term Loan (U.K.) $ 146 $ 146 $ 146 $ 146 $ 81 $ 665 $ 665 Average Interest Rate B+ 2.5% B+ 2.5% B+ 2.5% B+ 2.5% B+ 2.5% Term Loan (France) $ 30 $ 30 $ 30 $ 90 $ 90 Average Interest Rate 7.25%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to the financial statements included in this report, which begin at page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 46 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS The names, ages and positions held by our directors and executive officers as of March 18, 2002 are as follows:
NAME AGE TITLES ---- --- ------ Carmine T. Oliva 59 Chairman of the Board, President, Chief Executive Officer and Director Graham Jefferies 44 Executive Vice President and Chief Operating Officer of our Telecommu- nications Group and Managing Director of various subsidiaries Randolph D. Foote 53 Senior Vice President, Chief Financial Officer and Assistant Secretary Robert B. Runyon (1)(2) 76 Secretary and Director Laurence P. Finnegan, Jr. (1)(3) 64 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 MicroTel since March 26, 1997 and of our subsidiary, XET Corporation, since he founded XET Corporation in 1983. Mr. Oliva is Chairman of the Board of XCEL Corporation Ltd since 1985, and Chairman and Chief Executive Officer of CXR Telcom Corporation since March 1997. From January 1999 to January 2000, Mr. Oliva served as a director of Digital Transmission Systems Inc. (DTSX), a publicly held company, based in Norcross, Georgia. 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 in 1966 from The Ohio State University. 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 MicroTel 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, and has experience in mergers and acquisitions. Mr. Jefferies is a citizen and resident of the United Kingdom. 47 RANDOLPH D. FOOTE was appointed as our Senior Vice President and Chief Financial Officer on October 4, 1999 and as our Assistant Secretary on February 12, 2001. Mr. Foote has been Vice President and Chief Financial Officer of CXR Telcom Corporation and XET 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 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 and an M.B.A. degree in Tax/Business from Golden Gate University. ROBERT B. RUNYON has served as a Class III director since March 26, 1997 and was appointed as our Secretary on that date. 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 Senior Vice President 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 XET Corporation, Mr. Runyon served XET 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. LAURENCE P. FINNEGAN, JR. has served as a Class II director since March 26, 1997. In addition to being a director of XET Corporation from 1985 to March 1997, Mr. Finnegan was XET 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, Executive Vice President and Chief Operating Officer, 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 a director and the President of GA Pipe, Inc., a manufacturing company based in Langhorne, Pennsylvania. From September 1997 to January 2001, Mr. Finnegan served as Vice President Finance and Chief Financial Officer of QuestOne Decision Sciences, an efficiency consulting firm based in Pennsylvania. Since August 2001, Mr. Finnegan has served as a director and the Vice President and Chief Financial Officer of VerdaSee Solutions, Inc., a consulting and software company based in Pennsylvania. Mr. Finnegan earned a B.S. degree in Accounting from St. Joseph's University. 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 2004, 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. 48 COMPLIANCE WITH BENEFICIAL OWNERSHIP REPORTING RULES Section 16(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our common stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission. These officers, directors and stockholders are required by the Securities and Exchange Commission regulations to furnish MicroTel with copies of all reports that they file. Based solely upon a review of copies of the reports furnished to us during our fiscal year ended December 31, 2001 and thereafter, or any written representations received by us from directors, officers and beneficial owners of more than 10% of our common stock ("reporting persons") that no other reports were required, we believe that, during 2001, all Section 16(a) filing requirements applicable to our reporting persons were met. ITEM 11. EXECUTIVE COMPENSATION. COMPENSATION OF EXECUTIVE OFFICERS The following table provides information concerning the annual and long-term compensation for the years ended December 31, 2001, 2000 and 1999 earned for services in all capacities as an employee by 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 2001: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARD ANNUAL COMPENSATION SECURITIES ------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION --------------------------- ---- ------ ----- ------- ------------ Carmine T. Oliva.................. 2001 $250,010 $40,000 100,000 $4,821 (1) President and Chief Executive 2000 $207,395 $80,000 -- $4,821 (1) Officer 1999 $198,872 -- -- $4,821 (1) Graham Jefferies.................. Executive Vice President and Chief 2001 $142,639 $20,000 -- $7,697 (3) Operating Officer of Telecommuni- 2000 $128,775 $35,000 -- $6,869 (3) cations Group (2) 1999 $114,192 -- 60,000 $5,116 (3) Randolph D. Foote................. 2001 $130,005 $15,000 -- -- Senior Vice President, Chief 2000 $103,754 $20,000 -- -- Financial Officer (4) 1999 $ 23,267 -- 50,000 --
- --------------- (1) Represents the dollar value of insurance premiums we paid with respect to term life insurance for the benefit of Mr. Oliva's spouse. (2) 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. (3) Represents contributions to Mr. Jefferies' retirement plan. (4) Randolph D. Foote was appointed Senior Vice President and Chief Financial Officer on October 4, 1999 and Assistant Secretary on February 21, 2001. 49 OPTION GRANTS IN LAST FISCAL YEAR The following table provides information regarding options granted in the year ended December 31, 2001 to the executive officers named in the summary compensation table. We did not grant any stock appreciation rights in the year ended December 31, 2001. This information includes hypothetical potential gains from stock options granted in 2001. These hypothetical gains are based entirely on assumed annual growth rates of 5% and 10% in the value of our common stock price over the ten-year life of the stock options granted in 2001. These assumed rates of growth were selected by the Securities and Exchange Commission for illustrative purposes only and are not intended to predict future stock prices, which will depend upon market conditions and our future performance and prospects.
POTENTIAL REALIZABLE VALUE PERCENTAGE AT ASSUMED RATES NUMBER OF OF TOTAL OF STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(3) GRANT OPTIONS EMPLOYEES IN PRICE EXPIRATION ----------------- NAMED OFFICER DATE GRANTED(1) FISCAL YEAR(2) PER SHARE DATE 5% 10% ------------- ---- ----------- ------- --------- ------------ ---- ----- Carmine T. Oliva...... 02/01/01 100,000 29.0% $0.50 01/31/11 $28,495 $72,212 Randolph D. Foote..... -- -- -- -- -- -- -- Graham Jefferies...... -- -- -- -- -- -- -- - ------------------------- (1) Options vested in two equal semi-annual installments on July 31, 2001 and January 31, 2002. (2) Based on options to purchase 345,000 shares granted to our employees during the year ended December 31, 2001. (3) Calculated using the potential realizable value of each grant.
OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table provides information regarding option exercises in the year ended December 31, 2001 by the named executive officers and the value of unexercised options held by the named executive officers as of December 31, 2001. None of the named executives acquired shares through the exercise of options during 2001.
NUMBER OF SECURITIES UNDERLYING VALUE ($) OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 2001 DECEMBER 31, 2001(1) ----------------- -------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Carmine T. Oliva..... 180,633 50,000 -- -- Randolph D. Foote.... 50,000 -- 5,500 -- Graham Jefferies..... 126,287 -- 6,600 -- - -------------- (1) Based on the last reported sale price of our common stock of $0.31 on December 31, 2001 (the last trading day during fiscal 2001) as reported on the OTB Bulletin Board, less the exercise price of the options.
50 EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS CARMINE T. OLIVA Under an employment agreement dated January 1, 1996, Carmine T. Oliva was employed as Chairman, President and Chief Executive Officer of XET 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 XET Corporation's salary abatement program then in effect. On May 6, 1997, our board of directors voted to assume the obligations of XET 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 MicroTel 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 was subject to automatic renewal for three successive two-year terms beginning 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 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. As of January 1, 2001, we entered into a new employment agreement with Mr. Oliva. The agreement is subject to automatic renewal for consecutive two-year terms beginning on January 1, 2006, unless, during the required notice periods (which run from September 1 to November 1 of the second 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 for a base salary of $250,000 per year and states that Mr. Oliva is eligible to receive merit or promotional increases and to participate in other benefit and incentive programs we may offer. 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 or the value of his annual salary that would have been due through January 1, 2006, whichever is greater. 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 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 December 31, 2005, Mr. Oliva will be entitled to be paid his annual salary for three years following the termination or until December 31, 2005, whichever is the longer period. 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 or for two years, whichever is the longer 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 51 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: o if the termination occurs prior to the expiration of the initial term of the agreement on December 31, 2005, Mr. Oliva will be entitled to be paid his annual salary and all other amounts payable under the agreement for three years following the termination or until December 31, 2005, whichever is the longer period, which amounts shall be payable at his election in a lump sum within 30 days after the termination or in installments; o if the termination occurs during a renewal period, Mr. Oliva will be entitled to be paid his annual salary through the period ending two years after the expiration of the particular renewal period, and to be paid all other amounts payable under the agreement; o 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; o Mr. Oliva will be entitled to receive any executive bonus awarded but not yet paid; o Mr. Oliva will be entitled to receive a gross up of all compensatory payments listed above so that he receives those payments substantially free of federal and state income taxes; and o 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 two years 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. However, 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: o 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; o all loan collateral pledged by Mr. Oliva has been returned to Mr. Oliva; and o all personal guarantees given by Mr. Oliva or his family on our behalf are voided. 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 and any renewals 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. 52 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. The agreement contains non-competition provisions that prohibit Mr. Oliva from engaging or participating in a competitive business or soliciting our customers or employees during the initial term and any renewal terms and for two years afterward if termination is for cause or for one year afterward if termination is without cause or following a change of control. The agreement also contains provisions that restrict disclosure by Mr. Oliva of our confidential information and assign ownership to us of inventions created by Mr. Oliva in connection with his employment. RANDOLPH D. FOOTE On July 2, 2001, we entered into an employment agreement with Randolph D. Foote at an initial annual salary of $130,000 that is subject to automatic renewal for two successive one-year terms beginning on July 2, 2004, unless, during the required notice periods (which run from May 2 to July 2 of the year preceding the year in which the renewal period is to begin), either party gives written notice of its desire not to renew. Mr. Foote is to act as Senior Vice President and Chief Financial Officer and is 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. Foote's duties, Mr. Foote 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. Foote the value of one year of his annual salary or the value of his salary through July 1, 2004, whichever is greater, within 30 days after the effective date of the resignation. If we terminate Mr. Foote for cause, our obligation to pay any further compensation, severance allowance, or other amounts payable under the agreement terminates on the date of termination. If we terminate Mr. Foote 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. Foote will be entitled to be paid his annual salary for one year following termination or through July 2, 2004, whichever is longer, if termination occurs during the initial term, or otherwise 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. Foote is terminated without cause within two years following a change of control, then: o Mr. Foote will be entitled to be paid in installments or, at his election in a lump sum within 30 days after termination, his annual salary and other amounts payable under the agreement for 1-1/2 years following termination or until July 2, 2004, whichever is longer, if termination occurs during the initial term, or otherwise to be paid through the expiration of the current renewal period plus one additional year; o Mr. Foote 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; 53 o Mr. Foote will be entitled to receive any executive bonus awarded but not yet paid; and o Mr. Foote 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 or current renewal term and the date he receives equivalent coverage and benefits under plans and programs of a subsequent employer. If Mr. Foote dies during the term of the agreement, amounts payable under the agreement to or for the benefit of Mr. Foote will continue to be payable to Mr. Foote' designee or legal representatives for one year following his death. If Mr. Foote 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. Foote 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. Foote for one year following the effective date of the termination. The agreement contains non-competition provisions that prohibit Mr. Foote from engaging or participating in a competitive business or soliciting our customers or employees during the initial term and any renewal terms and for one year afterward. The agreement also contains provisions that restrict disclosure by Mr. Foote of our confidential information and assign ownership to us of inventions created by Mr. Foote in connection with his employment. GRAHAM JEFFERIES On July 2, 2001, we entered into an employment agreement with Graham Jefferies at an initial annual salary of 100,000 British pounds (approximately $141,000 at the then current exchange rates) that is subject to automatic renewal for two successive one-year terms beginning on July 2, 2004, unless, during the required notice periods (which run from May 2 to July 2 of the year preceding the year in which the renewal period is to begin), either party gives written notice of its desire not to renew. Mr. Jefferies is to act as Managing Director of XCEL Corporation, Ltd. and as Executive Vice President and Chief Operating Officer of our Telecom Group and is to perform additional services as may be approved by our board of directors. This agreement replaces a substantially similar agreement that had been effective since May 1, 1998. 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 or the value of his salary through July 1, 2004, whichever is greater, within 30 days after the effective date of the resignation. 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 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 for one year following termination or through July 2, 2004, whichever is longer, if termination occurs during the initial term, or otherwise to be paid his annual salary through the expiration of the current renewal period plus one additional year, 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 54 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: o Mr. Jefferies will be entitled to be paid in installments or, at his election in a lump sum within 30 days after termination, his annual salary and other amounts payable under the agreement for 1-1/2 years following termination or until July 2, 2004, whichever is longer, if termination occurs during the initial term, or otherwise to be paid through the expiration of the current renewal period plus one additional year; o 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; o Mr. Jefferies will be entitled to receive any executive bonus awarded but not yet paid; and o 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 initial or 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. The agreement contains non-competition provisions that prohibit Mr. Jefferies from engaging or participating in a competitive business or soliciting our customers or employees during the initial term and any renewal terms and for two years afterward if termination is for cause or for one year afterward if termination is without cause or following a change of control. The agreement also contains provisions that restrict disclosure by Mr. Jefferies of our confidential information and assign ownership to us of inventions created by Mr. Jefferies in connection with his employment. 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 independent auditors and reviews our financial statements for each interim period and for our year end. 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. Since June 26, 1999, this committee has consisted of Robert B. Runyon and Laurence Finnegan. 55 The nominating committee selects nominees for the board of directors. Beginning in 2000, the nominating committee has consisted of Robert B. Runyon. COMPENSATION OF DIRECTORS Beginning January 1, 2001, each non-employee director has been entitled to receive $12,000 per year 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. Mr. Runyon acts as a consultant to MicroTel in the areas of strategy development, business and organization planning, human resources recruiting and development and administrative systems. For 2001, Mr. Runyon became entitled to receive $28,574 in consulting fees and reimbursement of expenses. During 2001, we also paid premiums of $3,656 for Mr. Runyon's health insurance. On February 1, 2001, Mr. Oliva received an option to purchase 100,000 shares of common stock at $0.50 per share under our 1997 Stock Incentive Plan, which option vested in two equal semi-annual installments on July 31, 2001 and January 31, 2002 and expires on January 31, 2011. 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. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of March 18, 2002, a total of 20,670,703 shares of our common stock were outstanding. The following table sets forth information as of March 18, 2002 regarding the beneficial ownership of our common stock by: o 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; o each of our directors; o each named executive officer in the Summary Compensation Table contained elsewhere in this report; and o 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 shareholder possesses sole voting and investment power with respect to all of the shares of common stock owned by that shareholder, subject to community property laws where applicable. In computing the number of shares beneficially owned by a shareholder and the percentage ownership of that shareholder, 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. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person or group. 56
AMOUNT AND NATURE NAME AND ADDRESS OF BENEFICIAL OWNERSHIP PERCENT OF OF BENEFICIAL OWNER(1) TITLE OF CLASS OF CLASS CLASS ---------------------- -------------- -------- ----- Orbit II Partners, L.P...................... Common 3,015,685 (2) 14.59% Carmine T. Oliva............................ Common 1,547,438 (3) 7.33% Fortune Fund Ltd. Seeker III................ Common 1,260,600 (4) 5.75% Robert B. Runyon............................ Common 338,206 (5) 1.62% Laurence P. Finnegan, Jr.................... Common 202,231 (6) * Graham Jefferies............................ Common 129,563 (7) * Randolph D. Foote........................... Common 55,000 (8) * All executive officers and directors as a group (5 persons)................... Common 2,272,438 (9) 10.52% - ---------------
* Less than 1.00% (1) Unless otherwise indicated, the address of each person in this table is c/o MicroTel International, Inc., 9485 Haven Avenue, Suite 100, Rancho Cucamonga, CA 91730. Messrs. Oliva, Jefferies and Foote are executive officers of MicroTel. Messrs. Oliva, Runyon and Finnegan are directors of MicroTel. (2) 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. Excludes 7,500 shares of common stock held directly by Mr. MacKenzie. The address for Orbit II Partners, L.P. is 2 Rector Street, 16th Floor, New York, New York 10006. (3) Includes 81,889 shares of common stock held individually by Mr. Oliva's spouse, 230,633 shares of common stock underlying options, 162,500 shares of common stock underlying warrants and 50,530 shares of common stock underlying Series A Preferred Stock. (4) Includes 250,000 shares of common stock underlying warrants and 1,010,600 shares of common stock underlying Series A Preferred Stock. Patrick Siaretta, as fund manager, and Greg Fenlon, as fund administrator, each have voting power and investment power over the shares of common stock beneficially owned by Fortune Fund Ltd. Seeker III. The address for Mr. Siaretta is Avenida Republica do Libano, 331, 04501-000, Sao Paulo, SP Brazil. The address for Mr. Fenlon is Kaya Flamboyan #9, Willenstad, Curacao, Netherlands Antilles. (5) Includes 158,060 shares of common stock underlying options. (6) Includes 158,060 shares of common stock underlying options. (7) Includes 126,287 shares of common stock underlying options. (8) Includes 50,000 shares of common stock underlying options. (9) Includes 162,500 shares of common stock underlying warrants, 723,040 shares of common stock underlying options, 81,889 shares of common stock held individually by Mr. Oliva's wife and 50,530 shares of common stock issuable upon conversion of Series A Preferred Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. SERIES A PREFERRED STOCK AND WARRANT TRANSACTIONS We sold an aggregate of 200 shares of Series A Preferred Stock for $10,000 per share to Fortune Fund Ltd. Seeker III, or Fortune Fund, Rana General Holding, Ltd., or Rana, and Resonance, Ltd., or Resonance. Fortune Fund, Rana and Resonance, or the Series A Original Holders, were institutional investors who participated in a private offering that had closings on June 29, 1998 and July 9, 1998. At the time of the closings, 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 $10,000 divided by $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. The 200 shares of Series A Preferred Stock 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. 57 Between June 29, 1998 and November 3, 1998, the prices at which shares of our common stock were trading on the Nasdaq SmallCap Market generally had declined. Specifically, the closing bid price of a share of common stock on June 29, 1998 was $0.90625, and the closing bid price of a share of common stock on November 3, 1998 was $0.4375. Due to the decline in the prices at which shares of our common stock were trading, the number of shares into which a share of Series A Preferred Stock was convertible increased from 10,667 and 11,429 shares at June 29, 1998 and July 9, 1998, respectively, to 24,615 shares at November 3, 1998. To avoid further significant dilution to our common stockholders that could result from a continued decline in the trading prices of a share of our common stock, we entered into an agreement with the Series A Original Holders on November 3, 1998 that attempted to fix the conversion price of the Series A Preferred Stock so that each share of Series A Preferred Stock would be convertible into 20,000 shares of common stock. The November 3, 1998 agreement provided that we would revise the certificate of designations relating to the Series A Preferred Stock to provide that: (i) the conversion price would be fixed at $10,000 divided by $0.50 for so long as our common stock continued to be traded on the Nasdaq SmallCap Market and we did not conduct a reverse split of our outstanding common stock; and (ii) we would not exercise our redemption rights for the outstanding shares of Series A Preferred Stock for six months. The agreement also provided that the existing restriction on each Series A Original Holder's right to convert more than 20% of the aggregate number of shares of Series A Preferred Stock originally purchased by such holder in any 30-day period would be eliminated. Also, the agreement provided that we would replace the existing warrants, which warrants had an exercise price of $1.25 per share, with warrants that had an exercise price of $0.75 per share. We inadvertently failed to obtain the required approval of our common stockholders and to file an amended certificate of designations to effectuate the amendments to the certificate of designations that were contained in the November 3, 1998 agreement. However, between November 18, 1998 and March 26, 1999, the Series A Original Holders converted shares of Series A Preferred Stock into shares of common stock at the rate of 20,000 shares of common stock per share of Series A Preferred Stock, as agreed to in the November 3, 1998 agreement. Use of the $10,000 divided by $0.50 conversion price in four of the conversions resulted in the Series A Original Holders receiving an aggregate of 46,437 more shares of common stock than they would have received under the original conversion price formula that was contained in the certificate of designations. We have determined, however, that the excess shares were in fact validly issued under Delaware law. In May 1999, our common stock was delisted from the Nasdaq SmallCap Market due to a failure to meet Nasdaq's minimum closing bid price listing requirement, and our common stock began trading on the OTC Electronic Bulletin Board. Based upon the terms of the November 3, 1998 agreement, the conversion price of the Series A Preferred Stock reverted back to the floating conversion price shown in the certificate of designation, which conversion price was $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 a conversion. Following the delisting of our common stock from the Nasdaq SmallCap Market, the trading prices of our common stock declined. We became concerned that continued use of the floating conversion price for the Series A Preferred Stock would cause substantial additional dilution to our common stockholders and that resale of a large volume of shares received upon conversion at the floating conversion price of the Series A Preferred Stock would result in further declines in the trading prices of shares of our common stock. Fortune Fund had informally indicated to us its willingness to establish a fixed conversion price and to hold its shares of Series A Preferred Stock as a long-term investment. On December 15, 1999, we entered into an agreement with Fortune Fund. Under the agreement, we and Fortune Fund agreed to 58 the establishment of a fixed conversion price of $10,000 divided by $0.20 for the 20 shares of Series A Preferred Stock held by Fortune Fund. On December 15, 1999, the floating conversion price would have been $10,000 divided by $0.19 under the terms of the certificate of designation that was then in effect. Rana and Resonance had not indicated to us that they would be willing to continue to hold their shares of Series A Preferred Stock or their shares of common stock issued upon conversion of Series A Preferred Stock. Orbit II Partners, L.P., or Orbit, an institutional investor that had acquired 4.9% of our outstanding common stock, indicated to us that Orbit would be willing to purchase 34.5 of the shares of Series A Preferred Stock held by Rana and Resonance and hold any shares received upon conversion of those shares as a long-term investment, provided that Carmine T. Oliva, Samuel J. Oliva and Samuel G. Oliva would purchase and hold for investment the remaining five shares of Series A Preferred Stock held by Rana and Resonance. 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. On December 23, 1999, we entered into agreements with Rana, Resonance, Orbit and the Olivas. Under the December 23, 1999 agreements, Rana and Resonance sold their respective remaining 12.5 and 27 shares of Series A Preferred Stock and accompanying warrants to purchase an aggregate of 197,500 shares of common stock to Orbit and the Olivas for an aggregate consideration of approximately $400,000 in cash. The agreements also provided for the establishment of a fixed conversion price of $10,000 divided by $0.1979, so that each share of Series A Preferred Stock was to be convertible into 50,530 shares of common stock. On December 23, 1999, 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 $10,000 divided by $0.19 if the December 23, 1999 modification to the conversion price had not occurred. In addition, the December 23, 1999 agreements provided that all of the outstanding warrants that had been issued to Rana and Resonance, including the Series A Warrants that were being transferred from Rana and Resonance to Orbit and the Olivas, would be replaced with warrants that had a per share exercise price that was reduced from $0.75 per share to $0.25 per share and an expiration date that was extended from May 22, 2001 to December 22, 2002. On December 23, 1999, our board of directors resolved by unanimous written consent that the warrant for the purchase of up to 250,000 shares of common stock that had been issued to Fortune Fund upon its purchase from us of shares of Series A Preferred Stock in the 1998 private placement would be replaced with a warrant that had a per share exercise price that was reduced from $0.75 per share to $0.25 per share and an expiration date that was extended from May 22, 2001 to December 22, 2002. This replacement was intended to provide Fortune Fund with warrants that had the same terms as the replacement warrants received by Rana, Resonance, Orbit and the Olivas under the December 23, 1999 agreements. We filed an amended certificate of designation with the Delaware Secretary of State to give effect to the December 1999 agreements by fixing the conversion price of the Series A Preferred Stock at $10,000 divided by $0.1979. However, because we inadvertently failed to obtain approval of our common stockholders for the amendment to the certificate of designation, the amendment was invalid under the Delaware General Corporation Law. However, on June 30, 2000, Orbit converted 34.5 shares of Series A Preferred Stock into 1,743,285 shares of common stock based upon the $10,000 divided by $0.1979 per share conversion price that we, Orbit and the other present and former holders of Series A Preferred Stock believed to be in effect. This conversion resulted in the issuance of 1,048,654 more shares of common stock than would otherwise have been issued upon conversion of the 34.5 shares of Series A Preferred Stock under the certificate of designation that was then in effect. We have determined, however, that the excess shares were in fact validly issued under Delaware law. 59 In November 2000, we realized that the modifications to the conversion price of the Series A Preferred Stock were invalid because we had inadvertently failed to obtain common stockholder approval for the modifications to the certificate of designations and had also inadvertently failed to file an amendment reflecting the November 1998 modifications. Our board of directors distributed proxy materials requesting that holders of our common stock and Series A Preferred Stock approve an amendment to the certificate of designations that provided for a fixed conversion price of $10,000 divided by $0.1979 and an amendment to the certificate of incorporation that increased the authorized shares of common stock from 25,000,000 to 50,000,000. Our common and Series A Preferred stockholders approved the amendments at a special meeting that was held on January 16, 2001. We filed the amendments with the Delaware Secretary of State on January 22, 2001, so that after that date, each outstanding share of Series A Preferred Stock was convertible into 50,530 shares of common stock. 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 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 and paid Mr. Oliva special bonuses totalling an aggregate of $35,000. On January 26, 2001, Wells Fargo Business Credit, Inc. released the guarantee. 60 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. (a)(1), (a)(2) and (d) Financial Statements and Financial Statement Schedules ------------------------------------------------------ Reference is made to the financial statements and financial statement schedule listed on and attached following the Index to Financial Statements and Financial Statement Schedule contained at page F-1 of this report. (a)(3) and (c) Exhibits -------- Reference is made to the exhibits listed on the Index to Exhibits that follows the financial statements and financial statement schedule. (b) Reports on Form 8-K ------------------- None. 61 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page ---- Financial Statements - -------------------- Report of Independent Certified Public Accountants............................................ F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000.................................. F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 ... F-4 Consolidated Statements of Comprehensive Income for the years ended December 31, 2001, 2000 and 1999 ............................................................................ F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 ............................................................................ F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 ................................................................................. F-7 Notes to Consolidated Financial Statements for years ended December 31, 2001, 2000 and 1999.................................................................................. F-9 Financial Statement Schedule - ---------------------------- Consolidated Schedule II Valuation and Qualifying Accounts for the years ended December 31, 2001, 2000 and 1999.......................................................... F-40
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, 2001 and 2000, and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. We have also audited the information for each of the years in the three-year period ended December 31, 2001 in the consolidated financial statement schedule listed in the accompanying index. These consolidated financial statements and the consolidated 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 consolidated financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule referred to above presents fairly, in all material respects, the information set forth therein. /S/ BDO Seidman, LLP BDO Seidman, LLP Orange County, California February 25, 2002 F-2 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS (NOTES 7 AND 8) 2001 2000 ---- ---- Current assets: Cash and cash equivalents $ 604 $ 756 Accounts receivable, net of allowance for doubtful accounts of $226 and $111, respectively 5,627 7,440 Notes Receivable (Note 3) 48 130 Inventories (Note 4) 7,433 6,298 Prepaid and other current assets 396 750 --------- --------- Total current assets 14,108 15,374 Property, plant and equipment, net (Note 5) 758 809 Goodwill, net of accumulated amortization of $1,060 and $715, respectively (Notes 2 and 3) 2,389 2,737 Other assets 433 564 --------- --------- $ 17,688 $ 19,484 ========= ========= LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable (Note 7) $ 3,618 $ 3,661 Current portion of long-term debt (Note 8) 550 614 Accounts payable 3,783 5,222 Accrued expenses 2,471 3,082 Net liabilities of discontinued operations (Note 15) -- 15 --------- --------- Total current liabilities 10,422 12,594 Long-term debt, less current portion (Note 8) 763 282 Other liabilities 371 542 --------- --------- Total liabilities 11,556 13,418 Commitments and contingences (Note 13) Convertible redeemable Series A Preferred Stock, $10,000 unit value Authorized 200 shares; issued and outstanding 25 shares (aggregate liquidation preference of $250) (Note 9) 270 259 Stockholders' equity (Notes 2, 3, 9, 10 and 13): Preferred stock, authorized 10,000,000 shares; Convertible Series B Preferred Stock, $0.01 par value, issued and outstanding 150,000 shares (aggregate liquidation preference of $960) 938 938 Common stock, $0.0033 par value. Authorized 50,000,000 shares; issued and outstanding 20,671,000 and 20,570,000 shares in 2001 and 2000, respectively 68 68 Additional paid-in capital 24,358 24,307 Accumulated deficit (18,459) (18,775) Accumulated other comprehensive loss (1,043) (731) --------- --------- Total stockholders' equity 5,862 5,807 --------- --------- $ 17,688 $ 19,484 ========= ========= See accompanying notes to consolidated financial statements.
F-3 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2001 2000 1999 ---- ---- ---- Net sales (Note 14) $ 27,423 $ 28,050 $ 25,913 Cost of sales 15,456 15,529 17,066 --------- --------- --------- Gross profit 11,967 12,521 8,847 Operating expenses: Selling, general and administrative 10,129 9,827 10,584 Engineering and product development 1,076 1,167 1,841 --------- --------- --------- Income (loss) from operations 762 1,527 (3,578) Other income (expense): Interest expense (396) (424) (411) Gain (loss) on sale of subsidiary/investment, net (Notes 3 and 6) -- 197 (90) Other, net (Note 3) (18) 434 9 --------- --------- --------- Income (loss) from continuing operations before income taxes 348 1,734 (4,070) Income taxes (Note 11) 77 31 128 --------- --------- --------- Income (loss) from continuing operations 271 1,703 (4,198) --------- --------- --------- Discontinued operations (Note 15): Income (loss) from discontinued operations 56 (212) (847) Gain (loss) on disposal of discontinued operations, including provision for phase out period of $122 in 2000 -- (487) 449 --------- --------- --------- Income (loss) from discontinued operations 56 (699) (398) --------- --------- --------- Net income (loss) $ 327 $ 1,004 $ (4,596) ========= ========= ========= Basic earnings (loss) per share from continuing operations $ 0.01 $ 0.09 $ (0.26) ========= ========= ========= Diluted earnings (loss) per share from continuing operations $ 0.01 $ 0.07 $ (0.26) ========= ========= ========= Basic earnings (loss) per share from discontinued operations $ 0.00 $ (0.04) $ (0.02) ========= ========= ========= Diluted earnings (loss) per share from discontinued operations $ 0.00 $ (0.03) $ (0.02) ========= ========= ========= Basic earnings (loss) per share (Note 12) $ 0.02 $ 0.05 $ (0.28) ========= ========= ========= Diluted earnings (loss) per share (Note 12) $ 0.01 $ 0.04 $ (0.28) ========= ========= ========= See accompanying notes to consolidated financial statements.
F-4 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
2001 2000 1999 ---- ---- ---- Net income (loss) $ 327 $ 1,004 $(4,596) Other comprehensive income (loss) net of tax: Foreign currency translation adjustment (312) (505) (325) -------- -------- -------- Comprehensive Income (loss) $ 15 $ 499 $(4,921) ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
Series B Convertible Accumulated Preferred Stock Common Stock Additional Other --------------- ------------ Paid-in Accumulated Comprehensive Shares Amount Shares Amount Capital Deficit Income (Loss) Total ------------- ------ ------ ------- ------- ------------- ----- Balance at December 31, 1998 -- $ -- 12,622 $ 42 $ 20,463 $ (15,122) $ 99 $ 5,482 Stock issued upon conversion of redeemable 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 13) -- -- 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 redeemable preferred stock (Note 9) -- -- -- -- 91 -- -- 91 Foreign currency translation adjustment -- -- -- -- -- -- (325) (325) Accretion of redeemable preferred stock -- -- -- -- -- (41) -- (41) Net loss -- -- -- -- -- (4,596) -- (4,596) ------------------------------------------------------------------------------ Balance at December 31, 1999 -- -- 18,152 60 23,726 (19,759) (226) 3,801 Stock issued upon conversion of redeemable preferred stock (Note 9) -- -- 1,743 6 343 -- -- 349 Warrant repricing offer (Note 10) -- -- -- -- 65 -- -- 65 Warrants issued for services -- -- -- -- 25 -- -- 25 Warrants issued with T-Com purchase (Note 3) -- -- -- -- 62 -- -- 62 Exercise of employee options -- -- 90 -- 18 -- -- 18 Warrants exercised -- -- 584 2 67 -- -- 69 Stock issued under stock purchase plan -- -- 1 -- 1 -- -- 1 Preferred Stock issued with T-Com purchase (Note 3) 150 938 -- -- -- -- -- 938 Foreign currency translation adjustment -- -- -- -- -- -- (505) (505) Accretion of redeemable preferred stock -- -- -- -- -- (20) -- (20) Net income -- -- -- -- -- 1,004 -- 1,004 ------------------------------------------------------------------------------ Balance at December 31, 2000 150 938 20,570 68 24,307 (18,775) (731) 5,807 Warrants issued for services -- -- -- -- 21 -- -- 21 Stock issued for services -- -- 100 -- 30 -- -- 30 Stock issued under stock purchase plan -- -- 1 -- -- -- -- -- Foreign currency translation adjustment -- -- -- -- -- -- (312) (312) Accretion of redeemable preferred stock -- -- -- -- -- (11) -- (11) Net income -- -- -- -- -- 327 -- 327 ------------------------------------------------------------------------------ Balance at December 31, 2001 150 $ 938 20,671 $ 68 $ 24,358 $ (18,459) $ (1,043) $ 5,862 ============================================================================== See accompanying notes to consolidated financial statements.
F-6 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
2001 2000 1999 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 327 $ 1,004 $(4,596) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 345 431 241 Amortization of intangible assets 370 352 540 Provision for doubtful accounts 216 47 42 Provision for inventory obsolescence 659 893 1,144 Gain on sale of fixed assets -- (43) -- Gain on sale of stock -- (197) -- Write off of uncollectible note receivable -- -- 452 Reversal of previously estimated accruals -- (399) -- Provision for impairment of investment -- -- 419 Equity in earnings of unconsolidated investments -- -- (653) Loss on the sale of subsidiary/investment -- -- 90 Stock and warrants issued for services 51 25 1,146 Repricing of warrants -- 65 91 Gain (loss) on disposal of discontinued operations -- 487 (449) Net change in operating assets of discontinued operations (15) 401 167 Changes in operating assets and liabilities net of businesses acquired: Accounts receivable 1,609 (428) 294 Inventories (1,755) (1,468) 791 Prepaids and other assets 458 274 567 Note receivable -- (130) 125 Accounts payable (1,439) (1,120) 651 Accrued expenses and other liabilities (926) (395) (333) ------------------------------------------- Cash provided by (used in) operating activities (100) (201) 729 ------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net purchases of property, plant and equipment (120) (158) (121) Cash received on sale of subsidiary/investment -- -- 118 Cash received from sale of stock - (DTS) -- 520 -- Cash received from sale of stock - (Wi-Lan) -- 918 -- Cash received from sale of discontinued operations -- 260 750 Cash received from sale of fixed assets -- 43 -- Cash paid, net of cash acquired in acquisition/Belix -- (592) -- Cash paid, net of cash acquired in acquisition/T-Com -- (82) -- Cash collected on notes receivable 82 -- 9 ------------------------------------------- Cash (used in) provided by investing activities (38) 909 756 ------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) of notes payable (34) 1,131 (970) Net proceeds (repayments) of long-term debt 392 -- (162) Repayment of notes payable -- (1,146) -- Proceeds from sale of common stock -- 88 2 ------------------------------------------- Cash provided by (used in) financing activities 358 73 (1,130) ------------------------------------------- Effect of exchange rate changes on cash (372) (505) (325) Net (decrease) increase in cash and cash equivalents (152) 276 30 Cash and cash equivalents at beginning of year 756 480 450 ------------------------------------------- Cash and cash equivalents at end of year $ 604 $ 756 $ 480 =========================================== See accompanying notes to consolidated financial statements.
F-7 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2001 2000 1999 ---- ---- ---- Cash paid during the year for: Interest $ 400 $ 372 $ 443 ============================================= Income taxes $ 45 $ 13 $ 124 ============================================= SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired under capital lease $ 150 $ -- $ -- ============================================= Common stock issued upon conversion of redeemable preferred stock $ -- $ 349 $ 969 ============================================= Accretion of redeemable preferred stock $ 11 $ 20 $ 41 ============================================= Issuance of common stock and warrants in connection with settlement of dispute $ -- $ -- $ 73 ============================================= Issuance of common stock in connection with acquisitions $ -- $ -- $ 1,000 ============================================= Issuance of preferred stock in connection with acquisition $ -- $ 938 $ -- ============================================= Issuance of warrants in connection with acquisition $ -- $ 62 $ -- ============================================= See accompanying notes to consolidated financial statements.
F-8 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (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 XET Corporation (formerly, XIT Corporation) ("XET"). CXR Telcom Corporation and CXR, S.A. design, manufacture and market electronic telecommunication test equipment and transmission and network access products. XET and its subsidiaries design, manufacture and market digital switches and power supplies. 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 electronic components. In October 2000, the Company decided to discontinue its circuits segment operations. (See Note 15.) At that time, the circuits segment operations consisted of XCEL Etch Tek, a wholly-owned subsidiary, and XCEL Circuits Division ("XCD"), a division of XET. XCEL Etch Tek was offered for sale and sold in November 2000. XCD, predominantly a captive supplier of printed circuit boards to the electronic components segment, has been retained and is now included in the electronic components segment. Accordingly, all current and prior financial information related to the circuits segment operations has been presented as discontinued operations in the accompanying consolidated financial statements. BASIS OF PRESENTATION The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and each of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. 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) were accounted for using the equity method. REVENUE RECOGNITION Revenues are recorded when products are shipped if shipped FOB shipping point or when received by the customer if shipped FOB destination. 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). F-9 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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. LONG-LIVED ASSETS AND GOODWILL The Company reviews the carrying amount of its long-lived assets and intangible assets, including goodwill, 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. 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 continuing through the date of commercial release. Amortization commences upon commercial release of the product and is calculated using the greater of the straight-line method over three years or the ratio of the products' current revenues divided by the anticipated total product revenues. The carrying value of capitalized software development costs aggregates $17,000 and $45,000 (net of accumulated amortization of $858,000 and $833,000) at December 31, 2001 and 2000, respectively, and is included in other assets in the accompanying consolidated balance sheets. Amortization relating to the capitalized software of $25,000, $70,000 and $346,000 was charged to cost of sales during 2001, 2000 and 1999, 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 2001, 2000 or 1999. 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. F-10 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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. During the fourth quarter of 2001, the Company performed a study of its warranty costs incurred over the previous two years. Based on the study, the Company determined that it was over accrued and, accordingly, reduced its warranty accrual by approximately $85,000, which amount is included in cost of sales in the accompanying 2001 consolidated statement of operations. During the second quarter of 2000, the Company settled certain warranty claims related to its former HyComp subsidiary, which was sold in March 1999 (see Note 3), for less than the amount originally accrued. Accordingly, the Company reversed warranty accruals totaling $137,000 that were no longer deemed to be necessary. 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 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 net income (loss) available to common stockholders 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 the Company. 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, 2001 and 2000, the fair value of all financial instruments approximated carrying value. F-11 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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 accounting principles generally accepted in the United States of America 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. In the fourth quarter of 2001, the Company finalized a sales tax audit, resulting in a final tax assessment at a lower amount than had been accrued for at December 31, 2000. The Company reversed the over accrual in the amount of approximately $78,000 in the fourth quarter of 2001, which amount is included in selling, general and administrative expenses in the accompanying 2001 consolidated statement of operations. During 2000, the Company reversed approximately $172,000 of previously estimated accruals related to sales commissions and other accrued expenses which were no longer deemed necessary. Of this amount, $90,000 relates to over-accrued commissions, $49,000 relates to over-accrued accounts payable and $33,000 relates to the settlement of a sales tax assessment. Throughout 2000, the Company reviewed its accrual for sales commissions and its accounts payable and contacted the appropriate vendors to verify the amounts outstanding. As outstanding amounts due were verified for amounts less than the amount recorded, the Company reversed the excess accrual. In the fourth quarter of 2000, the Company settled an outstanding disputed sales tax assessment and the assessment was canceled. The Company reversed the accrual for the sales tax assessment in the amount of approximately $33,000 in the fourth quarter. These amounts are included in other, net in the accompanying 2000 consolidated statement of operations. 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. Sales to various BAE Systems companies in the U.S. and Europe represented approximately ten percent of the Company's total revenues during 2001. At December 31, 2000, one customer accounted for ten percent of net accounts receivable. 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 F-12 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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. 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 currently operates in two reportable segments: telecommunications and electronic components. RECLASSIFICATIONS Certain reclassifications have been made to the 1999 financial statements to be consistent with the 2000 presentation. (2) MERGER WITH XET CORPORATION On March 26, 1997, privately-held XET merged with a wholly-owned, newly formed subsidiary of the Company, with XET as the surviving subsidiary. Pursuant to the transaction, the former stockholders of XET 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 XET 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 XET 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. The merger was accounted for as a purchase of the Company by XET. 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. F-13 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (3) ACQUISITIONS AND DISPOSITIONS OF BUSINESSES 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%. 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 15.) 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. (See Note 15.) 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, to Arnold Circuits, Inc., a company wholly owned by Robert Bertrand. Mr. Bertrand, the Trustee of The Bertrand Family Trust, was a beneficial owner of more than five percent (5%) of the Company's outstanding common stock as of December 31, 1998. On April 9, 1998, the Company completed the sale and received $1,350,000 in cash and a note receivable ("Note") aggregating $650,000, which was payable over three years. As security for the Note, XCEL Arnold Circuits, Inc. was granted a second lien on substantially all the assets of Arnold Circuits, Inc. As further security for the Note, XACI was granted a security interest in 250,000 warrants to purchase the Company's common stock, which were held by Mr. Bertrand. Payment of the Note was guaranteed by Mr. Bertrand and a related entity. The sale resulted in a gain of $580,000. (See Note 15.) 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 against the note receivable and then wrote-off the net unpaid balance of $452,000 which is included in selling, general and administrative expenses in the accompanying 1999 consolidated statement of operations. The warrants provided as collateral were cancelled and the Company attempted to recover the amount due under the guarantees executed by Mr. Bertrand and a related party. In order to avoid a potentially expensive lawsuit, the Company agreed to cancel the guarantee in exchange for a $40,000 payment from Mr. Bertrand, of which $20,000 was paid in December 1999 and the remainder in the first quarter of 2000. This amount has been included in selling, general and administrative expenses in the accompanying 1999 consolidated statement of operations. F-14 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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 wireless transmission products. 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 consolidated 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 (loss) $ 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 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 consolidated statement of operations for the year ended December 31, 1999. The Company was 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. F-15 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 On July 7, 2000, the Company sold all its shares of Wi-LAN common stock for net proceeds of $918,000. The sale resulted in a gain of approximately $197,000 which is included in gain (loss) on sale of subsidiary/investment in the accompanying consolidated statement of operations for the year ended December 31, 2000. BELIX COMPANY, LTD. 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, which totaled $252,000 at December 31, 2000. The Company incurred expenses of approximately $257,000 for severance and relocation costs and has accrued an additional estimate of $49,000 for certain severance and relocation costs related to Belix. The severance and relocation affected various manufacturing, administrative and accounting personnel and was substantially completed as of December 31, 2000. The Company also incurred approximately $107,000 of legal and other expenses related to the acquisition. The Company has included the expenses and accrual in the calculation of the cost of the acquisition. Subsequent to the closing date, the purchase price was reduced by $181,000 due to a shortfall in net assets per the purchase agreement. In 2001, the Company settled a lawsuit brought by the Company against the former owners of Belix, resulting in a final determination of the earn out provision and a reduction in certain liabilities assumed. In addition, the Company incurred additional legal costs. Net assets acquired totaled $223,000, after all such adjustments. The assets acquired and liabilities assumed are as follows: Cash $ 206,000 Accounts receivable 669,000 Inventory 881,000 Other assets 347,000 Fixed assets 181,000 ----------- Total assets acquired $2,284,000 =========== Accounts payable $1,472,000 Line of credit 419,000 Notes payable 170,000 ----------- Total liabilities assumed $2,061,000 =========== Net assets acquired $ 223,000 Accrual of severance and relocation costs (306,000) Accrual of legal and other costs (161,000) Goodwill 1,165,000 ----------- Adjusted purchase price $ 921,000 =========== Initial purchase price $ 790,000 Reduction due to shortfall in net assets (181,000) Earn-out accrual 312,000 ----------- Adjusted purchase price $ 921,000 =========== F-16 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The acquisition of Belix has been accounted for as a purchase by the Company and resulted in approximately $1.2 million of goodwill which is being amortized on a straight-line basis over ten years. 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 with the exception of the earn out amounts, which were converted at the conversion rate at December 31, 2000, and the adjustments related to the lawsuit settlement, which were converted at the conversion rate on the date the settlement was finalized. The Belix acquisition was not material to the financial statements and accordingly the pro forma effect of the transaction is not provided. T-COM, LLC 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 $1,322,000, and the liabilities assumed are approximately $687,000. The assets acquired and liabilities assumed are as follows: Accounts receivable $ 381,000 Inventory 787,000 Fixed assets 134,000 Other assets 20,000 ----------- Total assets acquired $1,322,000 =========== Bank overdraft $ 82,000 Accounts payable 338,000 Accrued compensation 122,000 Other accrued expenses 145,000 ----------- Total liabilities assumed $ 687,000 =========== Net assets acquired $ 635,000 Goodwill 365,000 ----------- Purchase price $1,000,000 =========== 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. F-17 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The Company paid to T-Com for the net assets consideration valued at approximately $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 to permit conversion by the holders of the Series B Shares during the 20-day notice period, 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 pricing model with the following assumptions: no dividend yield; expected volatility of 95%; a risk free rate of 6.3%; and an expected life of two years. The acquisition of T-Com has been accounted for as a purchase by the Company and resulted in approximately $365,000 of goodwill which is being amortized on a straight-line basis over ten years. Unaudited pro forma results of operations for the years ended December 31, 2000 and 1999, as if T-Com and the Company had been combined as of the beginning of the year, follow. The pro forma results include estimates and assumptions which management believes are reasonable. However, pro forma results do not include any anticipated cost savings or other effects of the planned integration of T-Com and the Company, and are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or that may result in the future. F-18 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 PRO FORMA YEAR ENDED DECEMBER 31 (thousands except per share data) 2000 1999 - -------------------------------------------------------------------------------- Net sales..................................... $29,680 $29,152 Income (loss) from continuing operations...... 1,255 (8,734) Net income (loss)............................. 556 (9,132) Net income per common share Basic...................................... 0.03 (0.55) Diluted.................................... 0.02 (0.55) - -------------------------------------------------------------------------------- XCEL ETCH TEK On November 15, 2000, the Company sold substantially all of the assets of XCEL Etch Tek ("Etch Tek"), a wholly owned subsidiary of XET, to a former employee in exchange for $260,000 in cash, a $50,000 note receivable and the assumption of $75,000 of liabilities. The note receivable bears interest at 8% per annum, and all principal and interest was due in November 2001. The balance due under the note receivable was approximately $34,000 and $50,000 at December 31, 2001 and 2000, respectively, and is included in notes receivable in the accompanying consolidated balance sheets. The Company expects the remaining balance of the note to be repaid during 2002. The Etch Tek transaction resulted in a loss of $365,000 which is included in gain (loss) on disposal of discontinued operations in the accompanying 2000 consolidated statement of operations. (See Note 15.) (4) INVENTORIES Inventories are summarized as follows: 2001 2000 ---- ---- Raw materials................................. $2,806,000 $2,777,000 Work-in-process............................... 2,879,000 1,914,000 Finished goods................................ 1,748,000 1,607,000 ----------- ----------- $7,433,000 $6,298,000 =========== =========== Included in the amounts above is an allowance for inventory obsolescence of $1,152,000 and $1,169,000 at December 31, 2001 and 2000, respectively. Allowances for inventory obsolescence are recorded as necessary to reduce obsolete inventory to estimated net realizable value or to specifically reserve for obsolete inventory that the Company intends to dispose of. The inventory items identified for disposal at each year end are generally discarded during the following year. During the fourth quarter of 2001, the Company evaluated its inventory reserves and reduced the reserves by $175,000. F-19 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (5) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following: 2001 2000 ---- ---- Land and buildings........................... $ 266,000 $ 279,000 Machinery, equipment and fixtures............ 3,508,000 3,223,000 Leasehold improvements....................... 449,000 451,000 ------------ ------------ 4,223,000 3,953,000 Accumulated depreciation..................... (3,465,000) (3,144,000) ----------- ------------ $ 758,000 $ 809,000 ============ ============ (6) INVESTMENT IN PARTNERSHIP On December 19, 1996, the Company's XET 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 XET's Digitran Division under a long-term lease from the partnership. Immediately following the formation of the partnership, XET obtained a loan from a bank for $750,000, 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. XET's original investment in the partnership is adjusted for the income (loss) attributable to XET's portion of the partnership's results of operations. 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, which is included in gain (loss) on sale of subsidiary/investment in the accompanying 1999 consolidated statement of operations. (7) NOTES PAYABLE A summary of notes payable is as follows: 2001 2000 ---- ---- Line of credit with a U.S. commercial lender... $1,420,000 $1,798,000 Lines of credit with foreign banks............. 2,198,000 1,863,000 ---------- ----------- $3,618,000 $3,661,000 =========== =========== 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 F-20 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 were paid in full at the closing. The credit line was collateralized by substantially all assets of the Company's domestic subsidiaries, bore interest at the lender's prime rate plus 1% and was payable on demand. The line of credit expired on June 23, 2000, but was extended to August 14, 2000. The Domestic Facility was replaced by a new credit facility on August 16, 2000. On August 16, 2000, the Company's subsidiaries, CXR Telcom and XET Corporation, together with MicroTel acting as guarantor, 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 Company's President and CEO provided a limited personal guarantee on these loans. As consideration for this guarantee, the President and CEO received a guarantee fee, approved by the board of directors, in the amount of $35,000. On January 26, 2001, Wells Fargo Business Credit Inc. released the guarantee. No further amounts are due in connection with this guarantee. The annual interest rate on both portions of the credit facility is the prime rate (4.75% at December 31, 2001) plus 1%, subject to a minimum interest charge of $13,500 per month. Due to the minimum interest charge, the effective interest rate the Company paid during 2001 was 13.2%. Effective April 1, 2001, the annual interest rate was reduced from the prime rate plus 2% to the prime rate plus 1%, and the minimum interest charge was reduced from $15,000 per month to $13,500 per month because the Company met or exceeded certain performance-based goals for 2000. On December 31, 2001, the balance outstanding under the revolving loan was $1,420,000, and there was $91,000 of additional borrowings available under the revolving loan. The credit facility contains restrictive financial covenants that are set by mutual agreement of the Company and its lender each year. At December 31, 2001, the Company was out of compliance with a financial covenant and had obtained a waiver from its lender. As of February 25, 2002, the covenants for 2002 had not yet been set. The credit facility expires August 16, 2003. The Company's foreign subsidiaries have obtained credit facilities with Lloyds Bank in England, Banc National de Paris, Societe Generale and Banque Hervet in France and Johan Tokyo Credit Bank in Japan. The Company's U.K. subsidiary has a bank line of credit expiring March 31, 2002, with totals of $1,665,000 and $1,377,000 outstanding at December 31, 2001 and 2000, respectively. Borrowings under the related agreement bear interest at the bank's base rate (4% at December 31, 2001) plus 2.5% and are based on eligible accounts receivable. No additional borrowings were available under the line at December 31, 2001. The Company's U.K. subsidiary was out of compliance with a financial covenant at December 31, 2001. The lender has indicated its intention to issue a waiver for any covenant breach and, accordingly, the long-term portion of the debt has not been reclassified as a current liability. However, if the waiver is not issued, the lender may pursue any and all available remedies, including acceleration of the maturity date of the loan. The Company's French subsidiary has four bank lines of credit with totals of $533,000 and $486,000 outstanding at December 31, 2001 and 2000, respectively. Borrowings under the related agreements bear interest at 5.9% to 8.9% at December 31, 2001 and are based on eligible accounts receivable. Approximately $542,000 of borrowings were available under the lines of credit at December 31, 2001. These lines of credit have no maturity date but are subject to cancellation upon 30 days' notice by the lenders. 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. F-21 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (8) LONG-TERM DEBT A summary of long-term debt follows: 2001 2000 ---- ---- Term notes payable to commercial lender (a)..... $ 232,000 $370,000 Term notes payable to foreign banks (b)......... 760,000 41,000 Capitalized lease obligations (c)............... 172,000 129,000 Other promissory notes.......................... 149,000 356,000 ---------- --------- 1,313,000 896,000 Current portion................................. (550,000) (614,000) ---------- --------- $ 763,000 $282,000 ========== ========= - --------------- (a) Two term notes payable to Wells Fargo Business Credit, Inc. bearing interest at the lender's prime rate (4.75% at December 31, 2001) plus 1%, subject to a minimum interest charge of $13,500 per month. The term notes payable are subject to the same provisions and covenants as the credit facility discussed in Note 7. The notes are collateralized by machinery and equipment and are payable in total monthly principal installments plus interest through the final maturity date of August 16, 2003. (b) The Company has agreements with several foreign banks that include term borrowings that mature at various dates from 2002 through 2006. Interest rates on the borrowings bear interest at rates ranging from 2.9% to 8.9% and are payable in monthly installments. Included in the term notes payable to foreign banks is a $101,000 note with a balance of $5,000 at December 31, 2001, which note 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. The Company's U.K. subsidiary was out of compliance with a financial covenant at December 31, 2001. The lender has indicated its intention to issue a waiver for any covenant breach and, accordingly, the long-term portion of the debt has not been reclassified as a current liability. However, if the waiver is not issued, the lender may pursue any and all available remedies, including acceleration of the maturity date of the loan. (c) Capital lease agreements are calculated using interest rates appropriate at the inception of the lease and range from 6% 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 2004. F-22 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 Principal maturities related to long-term debt as of December 31, 2001 are as follows: Year Ending December 31, Amount ------------------------ ------ 2002 $ 550,000 2003 327,000 2004 207,000 2005 146,000 2006 83,000 ------------- $ 1,313,000 ============= (9) REDEEMABLE PREFERRED STOCK CONVERTIBLE REDEEMABLE PREFERRED STOCK In June 1998, the Company sold 50 shares of convertible redeemable Series A Preferred Stock (the "Series A Shares") at $10,000 per share to one institutional investor. In July 1998, the Company sold an additional 150 Series A Shares at the same per share price to two other institutional investors. Included with the sale of such Series A Shares were warrants to purchase a total of 1,000,000 shares of 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. Under the original certificate of designation, the Series A Shares were 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 Series A 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. Also under the original certificate of designation, no more than 20% of the aggregate number of Series A Shares originally purchased and owned by any single entity could 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 Series A 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 Series A Share. Any unconverted Series A Shares may be redeemed at the option of the Company for cash at a per share price equal to $11,500 per Series A Share and any Series A 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. In November 1998, the holders of the Series A Shares agreed to revise the certificate of designations relating to the Series A Shares to provide that: (i) the conversion price would be fixed at $10,000 divided by $0.50 for so long as the Company's common stock continued to be traded on the Nasdaq SmallCap Market and the Company did not conduct a reverse split of its outstanding common stock; and (ii) the Company would not exercise its redemption rights for the outstanding shares of the Series A Shares for six months. The agreement also F-23 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 provided that the existing restriction on the right of each holder of the Series A Shares to convert more than 20% of the aggregate number of shares of the Series A Shares originally purchased by such holder in any 30-day period would be eliminated. Also, the agreement provided that the Company would replace the existing warrants, which warrants had an exercise price of $1.25 per share, with warrants that had an exercise price of $0.75 per share. The Company inadvertently failed to obtain the required approval of the Company's common stockholders and to file an amended certificate of designations to effectuate the amendments to the certificate of designations that were contained in the November 1998 agreement. However, between November 18, 1998 and March 26, 1999, the holders of the Series A Shares converted shares of the Series A Shares into shares of common stock at the rate of 20,000 shares of common stock per share of the Series A Shares, as agreed to in the November 1998 agreement. Use of the $10,000 divided by $0.50 conversion price in four of the conversions resulted in the stockholders receiving an aggregate of 46,437 more shares of common stock than they would have received under the original conversion price formula that was contained in the certificate of designations. The Company has determined, however, that the excess shares were in fact validly issued under Delaware law. In May 1999, the Company's common stock was delisted from the Nasdaq SmallCap Market due to a failure to meet Nasdaq's minimum closing bid price listing requirement, and the Company's common stock began trading on the OTC Electronic Bulletin Board (see Note 10). Based upon the terms of the November 1998 agreement, the conversion price of the Series A Shares reverted back to the floating conversion price shown in the certificate of designations, which conversion price was $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 a conversion. In December 1999, two institutional investors sold all of their outstanding Series A Shares and the prorated portion of warrants applicable to the then outstanding Series A Shares. The purchasers of such Series A 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 Series A Shares agreed to modify the conversion ratio to a fixed factor of $10,000 divided by $0.1979, or 50,530 shares of common stock per Series A Share, in exchange for a reduction in the exercise price of the warrants to $0.25 per share and an extension of the expiration date of the warrants to December 2002. In the event a holder of the Series A Shares had converted its Series A Shares to common stock immediately before the December 1999 agreement, each Series A Share would have been converted into approximately 52,632 shares of common stock at a per share conversion price of $10,000 divided by $0.19, based on the original conversion ratio. 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. The Company filed an amended certificate of designation with the Delaware Secretary of State to give effect to the December 1999 agreements by fixing the conversion price of the Series A Shares at $10,000 divided by $0.1979. However, because the Company inadvertently failed to obtain approval of the Company's common stockholders for the amendment to the certificate of designation, the amendment was invalid under the Delaware General Corporation Law. However, in June 2000, a holder of Series A Shares converted 34.5 shares of the Series A Shares into 1,743,285 shares of common stock based upon the $10,000 divided by $0.1979 per share conversion price that the Company and the holders of the Series A Shares believed to be in effect. This conversion resulted in the issuance of 1,048,654 more shares of common stock than would otherwise have been issued upon conversion of the 34.5 shares of the Series A Shares under the certificate of designations that was then in effect. The Company has determined, however, that the excess shares were in fact validly issued under Delaware law. F-24 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 In November 2000, the Company realized that the modifications to the conversion price of the Series A Shares were invalid because the Company had inadvertently failed to obtain common stockholder approval for the modifications to the certificate of designations and had also inadvertently failed to file an amendment reflecting the November 1998 modifications. The Company's board of directors distributed proxy materials requesting that holders of the Company's common stock and the Series A Shares approve an amendment to the certificate of designations that provided for a fixed conversion price of $10,000 divided by $0.1979 and an amendment to the certificate of incorporation that increased the authorized shares of common stock from 25,000,000 to 50,000,000. The amendments were approved at a special meeting of stockholders that was held on January 16, 2001. The Company filed the amendments with the Delaware Secretary of State on January 22, 2001, so that after that date, each outstanding Series A Share was convertible into 50,530 shares of common stock. The following table reflects the convertible redeemable preferred stock activity: Number of Shares Amount --------- ------ Balance at December 31, 1998 161.0 $ 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 Conversion to common stock (34.5) (349,000) Accretion of preferred stock -- 20,000 ---------- ------------- Balance at December 31, 2000 25.0 259,000 Conversion to common stock -- -- Accretion of preferred stock -- 11,000 ---------- ------------- Balance at December 31, 2001 25.0 $ 270,000 ========== ============= (10) STOCKHOLDERS' EQUITY STOCK OPTIONS AND WARRANTS The Company has four stock option plans: o Employee Stock and Stock Option Plan, effective July 1, 1994, providing for non-qualified stock options as well as restricted and non-restricted stock awards to both employees and outside consultants. Up to 520,000 shares were authorized for issuance under this plan. Terms of related grants under the plan are at the discretion of the Board of Directors. The Board of Directors does not intend to issue any additional options or make any additional stock grants under this plan. o 1993 Stock Option Plan, providing for the grant of up to 300,000 incentive and non-qualified 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 Board of Directors does not intend to issue any additional options under this plan. F-25 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 o 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 administering the 1997 Plan may permit. Up to 1,600,000 stock options were authorized to be granted under the 1997 Plan. All outstanding options of former optionholders under the XET 1987 Employee Stock Option Plan were converted to options under the 1997 Plan as of the date of the merger between the Company and XET at the exchange rate of 1.451478. (See Note 2). The Board of Directors does not intend to issue any additional options under this plan. o The 2000 Stock Option Plan was adopted by the Board of Directors in November 2000 and approved by the stockholders on January 16, 2001. The Board of Directors adopted the Amended and Restated 2000 Stock Option Plan ("2000 Plan") effective as of August 3, 2001. Under the 2000 Plan, options granted may be either qualified or nonqualified options. Qualified options must have an exercise price of not less than the fair market value of a share of common stock on the date of grant. Nonqualified options must have an exercise price of not less than 85% of the fair market value of a share of common stock on the date of grant. Up to 2,000,000 options may be granted under the 2000 Plan. No option may be exercised more than ten years after the date of grant. 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, 2001, 2000 and 1999:
Weighted 2001 Average Exercise 2000 1999 Shares Price Shares Shares ------ ----- ------ ------ Outstanding at beginning of year 1,454,000 $1.34 1,602,000 2,069,000 Granted 345,000 0.41 235,000 430,000 Exercised -- -- (90,000) -- Canceled (81,000) 0.64 (293,000) (897,000) ------------------------------------------------------------------- Outstanding at end of year 1,718,000 $1.18 1,454,000 1,602,000 ===================================================================
F-26 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The following table summarizes information with respect to stock options at December 31, 2001:
Options Outstanding Options Exercisable ------------------------------------------ ----------------------------- Number Weighted Average Number Range of Outstanding Remaining Weighted Exercisable Weighted Exercise December 31, Contractual Life Average December 31, Average Price 2001 (Years) Price 2001 Price ----------- ---------------- ----------------------- ----------- ---------------- -------- $0.20 to $1.00 835,000 8.6 $0.35 625,000 $0.34 $1.01 to $2.00 761,000 3.5 $1.80 761,000 $1.80 $2.01 to $3.00 35,000 3.8 $2.79 35,000 $2.79 $3.01 to $4.00 87,000 3.2 $3.16 87,000 $3.16 ------------------ ----------------- $0.20 to $4.00 1,718,000 6.0 $1.18 1,508,000 $1.20 ================== =================
The fair value of options granted during 2001 was $115,000, at a weighted average value of $0.41 per share. The fair value of options granted during the years ended December 31, 2000 and 1999 were $113,000 and $63,000, at weighted average prices of $0.48 and $0.15 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 2001, 2000 and 1999 has been estimated based on a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 89% to 95% in 2001, 101% in 2000 and 85% in 1999, based on historical results; risk-free interest rate of 5.0% to 6.0%; and average expected lives of approximately seven to ten years. The following table sets forth the net income (loss), net income (loss) available for common stockholders and earnings (loss) per share amounts for the periods presented as if the Company had elected the fair value method of accounting for stock options.
2001 2000 1999 ---- ---- ---- NET INCOME (LOSS) As reported $ 327 $ 1,004 $ (4,596) Pro forma $ 211 $ 909 $ (4,628) NET INCOME (LOSS) AVAILABLE FOR COMMON STOCKHOLDERS As reported $ 316 $ 984 $ (4,637) Pro forma $ 200 $ 889 $ (4,669) BASIC EARNINGS (LOSS) PER SHARE As reported $ 0.02 $ 0.05 $ (0.28) Pro forma $ 0.01 $ 0.05 $ (0.28) DILUTED EARNINGS (LOSS) PER SHARE As Reported $ 0.01 $ 0.04 $ (0.28) Pro forma $ 0.01 $ 0.04 $ (0.28)
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 F-27 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 date of options repriced or extended over the value of the old options immediately before modification. All such incremental compensation is amortized over the related vesting period, or expensed immediately if fully vested. The above calculations include 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, 1998 4,542,000 $0.66 to 3.79 $9,511,000 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 5,482,000 0.25 to 3.79 9,695,000 Warrants issued 1,784,000 0.61 to 1.90 2,023,000 Warrants expired/cancelled (4,317,000) 0.61 to 3.79 (9,602,000) Warrants exercised (777,000) 0.25 to 0.69 (413,000) ------------------------------------------------- Balance outstanding at December 31, 2000 2,172,000 0.25 to 2.50 1,703,000 Warrants issued 100,000 0.25 to 0.39 33,000 Warrants expired/cancelled (300,000) 1.00 to 1.25 (362,000) ------------------------------------------------- Balance outstanding at December 31, 2001 1,972,000 $0.25 to 2.50 $1,374,000 =================================================
During 2001, the Company issued warrants to purchase up to 35,000, 50,000 and 15,000 shares of common stock at exercise prices of $0.39, $0.31 and $0.25, respectively. The Company issued the warrants as compensation for services rendered. The estimated value of the warrants was $21,000 and was calculated using the Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 91% to 94%; a risk-free interest rate of 3.1% to 5%; and expected lives of 3 to 5 years. Also during 2001, the Company issued 100,000 shares of common stock in consideration for investor relations services. The stock was valued at $30,000 on the date of issuance and, accordingly, the Company recorded a $30,000 expense. During 2000, the Company issued warrants to purchase 150,000 shares of common stock at an exercise price of $1.00 as compensation for various services rendered. The estimated fair value of the warrants was $25,000 and was calculated using a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 95%; a risk-free interest rate of 6.8%; and expected lives of 1.5 to 2 years. During 2000, 584,000 shares of common stock were issued in connection with the exercise of 777,000 warrants (277,000 warrants at an exercise price of $0.25 and 500,000 warrants exercised cashless into 306,000 shares). 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. F-28 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The Company had an Employee Stock Purchase Plan at its CXR Telcom subsidiary allowing eligible subsidiary employees to purchase shares of the Company's common stock at 85% of market value. During 2001, 2000 and 1999, 900, 1,000 and 5,000 shares, respectively, were issued pursuant to the plan. The Company terminated this plan effective as of July 1, 2001. During the first quarter of 2000, the Company offered to holders of warrants with an exercise price of $1.00 or more and ranging as high as $3.79 the opportunity to exchange their warrants with new warrants for one-half the number of shares at one-half the exercise price of the original warrants. Neither the expiration dates, nor any other terms of the warrants, were changed as a result of this offer. The offer was available to all warrant holders with exercise prices of $1.00 or more including Carmine T. Oliva, the Company's President and Chairman of the Board, and the two other directors. The primary reason for the offer was to reduce the quantity of shares allocated to warrants so that the Company would have sufficient authorized stock for its needs until an increase in the authorized stock could be voted on by the stockholders as part of the year 2000 Annual Meeting of Stockholders. The offers and acceptances were finalized by April 24, 2000. Shares represented by warrants were reduced by 1,384,602 shares. Expense of $65,000 was recorded during year ended December 31, 2000, for the compensation expense for the modification of the warrants. Based on the nature and timing of the original grant of the warrants, the compensation expense was determined by various methods. For warrants issued to employees and directors, compensation expense was determined by the intrinsic value method and by treating the modified warrants as variable from the date of modification in accordance with APB 25 and FIN 44. For warrants issued to non-employees, compensation expense was determined in accordance with FAS 123 by calculating the difference between the fair value of the new warrant and the old warrant at the date of acceptance, with the exception of warrants initially granted pre-FAS 123, in which case the entire fair value of the new warrant was recorded as compensation expense. The estimated fair values of the old and new warrants was calculated using a Black-Scholes pricing model with the following assumptions: no dividend yield; expected volatility of 93%; a risk-free interest rate of 6%; and expected lives ranging from 0.1 to 5 years. As of December 31, 2001, the Company was authorized to issue 50,000,000 shares of common stock. As of that date, the Company had 20,670,703 shares of common stock outstanding and 6,453,955 shares of common stock that could become issuable pursuant to the exercise of outstanding stock options and warrants and conversion of convertible redeemable preferred stock. DIVIDENDS No dividends on the Company's common stock have been paid to date. The Company's line of credit with Wells Fargo Business Credit, Inc. prohibits the payment of cash dividends on its common stock. The Company currently intends to retain future earnings to fund the development and growth of its business and, therefore, does not anticipate paying cash dividends on its common stock within the foreseeable future. Any future payment of dividends on the Company's common stock will be determined by the Company's board of directors and will depend on the Company's financial condition, results of operations, contractual obligations and other factors deemed relevant by the Company's Board of Directors. 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 Electronic Bulletin Board under the symbol "MCTL." F-29 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (11) 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: 2001 2000 1999 ---- ---- ---- Domestic $718,000 $2,658,000 $(3,556,000) Foreign (370,000) (924,000) (514,000) ---------------------------------------------------- Total $348,000 $1,734,000 $(4,070,000) ==================================================== Income tax expense consists of the following: 2001 2000 1999 ---- ---- ---- Current Federal $ 5,000 $ 20,000 $ -- State 5,000 3,000 30,000 Foreign 67,000 8,000 98,000 ---------------------------------------------------- $ 77,000 $ 31,000 $128,000 ==================================================== 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:
2001 2000 1999 ---- ---- ---- Tax at U.S. federal statutory rate $ 118,000 $ 590,000 $ (1,384,000) State taxes, net of federal income tax benefit 5,000 3,000 30,000 Foreign income taxes 67,000 8,000 98,000 Losses with no current benefit -- -- 1,314,000 Permanent differences 54,000 88,000 70,000 Utilization of net operating losses (167,000) (658,000) -- -------------------------------------------------------------- $ 77,000 $ 31,000 $ 128,000 ==============================================================
F-30 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 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:
2001 2000 ---- ---- Deferred tax assets: Allowance for doubtful accounts $ 60,000 $ 14,000 Inventory reserves and uniform capitalization 213,000 312,000 Other accrued liabilities 453,000 387,000 Deferred compensation 182,000 241,000 Research credit carryforwards 224,000 256,000 Alternative Minimum Tax credit carryforwards 135,000 154,000 Net operating loss carryforwards 10,732,000 14,957,000 ------------------------------------ Total deferred tax assets 11,999,000 16,321,000 Valuation allowance for deferred tax assets (11,999,000) (16,321,000) ------------------------------------ Net deferred tax assets $ -- $ -- ====================================
As of December 31, 2001, the Company had a federal net operating loss carryforward of approximately $31,000,000 which expires at various dates through 2021 and a state net operating loss carryforward of approximately $3,000,000 which expires at various dates through 2004. As a result of an Internal Revenue Service audit concluded in 2001, federal net operating loss carryforwards were reduced by approximately $11,687,000. As a result of the merger with XET (see 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-31 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (12) EARNINGS (LOSS) PER SHARE The following table illustrates the computation of basic and diluted earnings (loss) per share (in thousands, except per share amounts):
2001 2000 1999 ---- ---- ---- NUMERATOR: Net income (loss) $ 327,000 $ 1,004,000 $ (4,596,000) Less: accretion of the excess of the redemption value over the carrying value of redeemable preferred stock 11,000 20,000 41,000 -------------------------------------------------- Income (loss) attributable to common stockholders $ 316,000 $ 984,000 $ (4,637,000) ================================================== DENOMINATOR: Weighted average number of common shares outstanding during the period 20,594,000 19,504,000 16,638,000 Incremental shares from assumed conversions of warrants, options and preferred stock 3,188,000 3,523,000 -- -------------------------------------------------- Adjusted weighted average shares 23,782,000 23,027,000 16,638,000 ================================================== Basic earnings (loss) per share $ 0.02 $ 0.05 $ (0.28) ================================================== Diluted earnings (loss) per share $ 0.01 $ 0.04 $ (0.28) ==================================================
The following table shows the common stock equivalents that were outstanding as of December 31, 2001 and 2000 but were not included in the computation of diluted earnings (loss) per share because the options' or warrants' exercise price was greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive, or the effect of the conversion would be anti-dilutive: Number of Exercise Price Shares Per Share ------ --------- Anti-dilutive common stock options: As of December 31, 2001 1,243,324 $0.4600 to $3.4375 As of December 31, 2000 888,924 $1.1250 to $3.4375 Anti-dilutive common stock warrants: As of December 31, 2001 1,149,881 $0.6250 to $2.5000 As of December 31, 2000 1,171,875 $0.7500 to $2.5000 The computation of diluted loss per share for 1999 excludes the effect of incremental common shares attributable to the exercise of outstanding common stock options and warrants because their effect was anti-dilutive due to losses incurred by the Company. See summary of outstanding stock options and warrants in Note 10. (13) COMMITMENTS AND CONTINGENCIES LEASES The Company conducts most of its operations from leased facilities under operating leases that expire at various dates through 2005. The leases generally require the Company to pay all maintenance, insurance and property tax costs and contain provisions for rent increases. Total rent expense, net of sublease income, for 2001, 2000 and 1999, was approximately $1,091,000, $956,000 and $1,454,000, respectively. F-32 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year are as follows: Year Ending December 31, Amount ------------------------ ---------- 2002 $ 785,000 2003 158,000 2004 97,000 2005 1,000 ----------- $1,041,000 =========== 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. During the fourth quarter of 2000, the Company settled two outstanding lawsuits for approximately $90,000 less than the amount previously accrued. Accordingly, the Company reversed a portion of the accruals related to the lawsuits in the amount of $90,000 which were determined to no longer be necessary. Currently, there are no material legal proceedings pending. 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 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, was paid in full in 2000. F-33 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 EMPLOYEE BENEFIT PLANS Effective October 1, 1998, the Company instituted a defined contribution plan ("401(k) Plan") covering the majority of its U.S. domestic 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 $16,000, $21,000 and $31,000 to the 401(k) Plan for the calendar years ended December 31, 2001, 2000 and 1999, respectively. EXECUTIVE MANAGEMENT Effective January 1, 2001, the Company and Carmine T. Oliva, its Chief Executive Officer, entered into a new employment agreement that provides for an annual base salary of $250,000, with annual merit increases, an initial term of five years, two renewal periods of two years each, and severance pay of at least three years' salary during the initial period. Effective July 2, 2001, the Company and Randolph D. Foote, its Senior Vice President and Chief Financial Officer, entered into an employment agreement that provides for an initial annual salary of $130,000, an initial term of three years, two renewal periods of one year each, and severance pay of at least one years' salary. Effective July 2, 2001, the Company and Graham Jefferies, Managing Director of XCEL Corporation, Ltd. and Executive Vice President and Chief Operating Officer of the Company's Telecom Group, entered into an employment agreement that provides for an initial annual salary of 100,000 British pounds (approximately $141,000 at the then current exchange rates), an initial term of three years, two renewal periods of one year each, and severance pay of at least one years' salary. (14) SEGMENT AND MAJOR CUSTOMER INFORMATION 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 networking equipment. The electronic components segment operates in the U.S., European and Asian markets and designs, manufactures and markets digital switches 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 and XCEL Circuits Division ("XCD"), a division of XET Corporation, a wholly-owned subsidiary of the Company. XCEL Etch Tek was offered for sale (see Note 3). XCD is essentially a captive supplier of printed circuit boards to the electronic components segment with total sales to external customers of $127,000, $173,000 and $167,000 for the years ended December 31, 2001, 2000 and 1999, respectively. XCD has been retained and is now included in the electronic components segment. 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, with the exception of XCD which has been included in the current and prior financial information related to the electronic components segment in the accompanying consolidated financial statements. F-34 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based upon profit or loss from operations before income taxes exclusive of nonrecurring gains and losses. The Company accounts for intersegment sales at prices negotiated between the individual segments. The Company's reportable segments are comprised of operating entities offering the same or similar products to similar customers. Each segment is managed separately because each business has different customers and different design and manufacturing and marketing strategies. Selected financial data for each of the Company's operating segments is shown below.
2001 2000 1999 ---- ---- ---- SALES TO EXTERNAL CUSTOMERS: Telecommunications $ 14,777,000 $ 15,658,000 $ 15,666,000 Electronic Components 12,646,000 12,392,000 10,247,000 -------------------------------------------------- $ 27,423,000 $ 28,050,000 $ 25,913,000 ================================================== INTERSEGMENT SALES: Telecommunications $ -- $ -- $ -- Electronic Components -- -- 279,000 -------------------------------------------------- $ -- $ -- $ 279,000 ================================================== INTEREST EXPENSE: Telecommunications $ 158,000 $ 131,000 $ 110,000 Electronic Components 228,000 216,000 75,000 -------------------------------------------------- $ 386,000 $ 347,000 $ 185,000 ================================================== DEPRECIATION AND AMORTIZATION: Telecommunications $ 322,000 $ 528,000 $ 490,000 Electronic Components 279,000 173,000 101,000 -------------------------------------------------- $ 601,000 $ 701,000 $ 591,000 ================================================== SEGMENT PROFITS (LOSSES): Telecommunications $ 450,000 $ 344,000 $ (1,739,000) Electronic Components 2,882,000 3,365,000 1,168,000 -------------------------------------------------- $ 3,332,000 $ 3,709,000 $ (571,000) ================================================== SEGMENT ASSETS: Telecommunications $ 8,317,000 $ 9,901,000 $ 7,960,000 Electronic Components 9,060,000 8,876,000 5,327,000 -------------------------------------------------- $ 17,377,000 $ 18,777,000 $ 13,287,000 ==================================================
F-35 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The following is a reconciliation of the reportable segment revenues, profit or loss and assets to the Company's consolidated totals.
2001 2000 1999 ---- ---- ---- Net Sales - --------- Total sales for reportable segments $27,423,000 $ 28,050,000 $ 26,192,000 Elimination of intersegment sales -- -- (279,000) -------------------------------------------------- Total consolidated revenues $27,423,000 $ 28,050,000 $ 25,913,000 ================================================== Profit (loss) from continuing operations - ---------------------------------------- before income taxes ------------------- Total profit (loss) for reportable segments $ 3,332,000 $ 3,709,000 $ (571,000) Unallocated amounts: General corporate expenses $(2,984,000) (1,975,000) (3,499,000) -------------------------------------------------- Consolidated income (loss) from continuing operations before income taxes $ 348,000 $ 1,734,000 $ (4,070,000) ================================================== Assets - ------ Total assets for reportable segments $17,377,000 $ 18,777,000 $ 13,287,000 Other assets 311,000 707,000 3,202,000 -------------------------------------------------- Total consolidated assets $17,688,000 $ 19,484,000 $ 16,489,000 ================================================== Interest Expense - ---------------- Interest expense for reportable segments $ 386,000 $ 347,000 $ 185,000 Other interest expense 10,000 77,000 226,000 -------------------------------------------------- Total interest expense $ 396,000 $ 424,000 $ 411,000 ================================================== Depreciation and Amortization - ----------------------------- Depreciation and amortization expense for reportable segments $ 601,000 $ 701,000 $ 591,000 Other depreciation and amortization expense 114,000 82,000 190,000 -------------------------------------------------- Total depreciation and amortization $ 715,000 $ 783,000 $ 781,000 ==================================================
F-36 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 A summary of the Company's net sales and identifiable assets by geographical area follows: 2001 2000 1999 ---- ---- ---- Net sales: - ---------- United States $12,461,000 $13,246,000 $ 9,490,000 Japan 1,085,000 941,000 658,000 France 7,848,000 9,118,000 10,958,000 United Kingdom 6,029,000 4,745,000 4,807,000 ------------------------------------------------- $27,423,000 $28,050,000 $25,913,000 ================================================= Long-lived assets: - ------------------ United States $ 422,000 $ 418,000 $ 371,000 Japan 14,000 14,000 16,000 France 186,000 251,000 257,000 United Kingdom 136,000 237,000 190,000 ------------------------------------------------- $ 758,000 $ 920,000 $ 834,000 ================================================= 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. One customer in the electronic components segment accounted for more than 10% of net sales during 2001. (15) 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 and XCEL Circuits Division ("XCD"), a division of XET Corporation, a wholly-owned subsidiary of the Company. 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). XCD is essentially a captive supplier of printed circuit boards to the electronic components segment with total sales to external customers of $127,000, $173,000 and $167,000 for the years ended December 31, 2001, 2000 and 1999, respectively. XCD has been retained and is now included in the electronics components segment. Accordingly, all current and prior financial information related to the circuits segment operations (XCEL Etch Tek, HyComp and XCEL Arnold) has been presented as discontinued operations in the accompanying consolidated financial statements. Summarized results of operations for the discontinued operations for 2001, 2000 and 1999 are as follows:
2001 2000 1999 ---- ---- ---- Net sales $ -- $ 2,257,000 $ 2,388,000 ============================================= Operating income (loss) $ 56,000 $ (212,000) $ (847,000) ============================================= Gain (loss) on sale of discontinued operations $ -- $ (487,000) $ 449,000 =============================================
F-37 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 The net assets and liabilities relating to the circuits segment have been included in net liabilities of discontinued operations in the accompanying consolidated balance sheets and are summarized as follows: 2001 2000 ---- ---- Accounts payable and accrued expenses -- 15,000 -------------------------------- Total liabilities -- 15,000 ================================ Net liabilities of discontinued operations $ -- $(15,000) ================================ (16) NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") finalized FASB Statements No. 141, "Business Combinations," or SFAS 141, and No. 142, "Goodwill and Other Intangible Assets," or SFAS 142. SFAS 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. SFAS 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires upon adoption of SFAS 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in SFAS 141. SFAS 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, SFAS 142 requires that the Company identify reporting units for the purpose of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. SFAS 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of SFAS 142. The Company's previous business combinations were accounted for using the purchase method. As of December 31, 2001, the net carrying amount of goodwill was $2,389,000. Amortization expense related to goodwill during 2001 was $345,000. Currently, the Company is assessing but has not yet determined how the adoption of SFAS 141 and SFAS 142 will impact its financial position and results of operations. In October 2001, the FASB issued FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and, generally, is to be applied prospectively. F-38 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly operations for the years ended December 31, 2001 and 2000 (in thousands, except for per share data).
2001 Mar. 31 June 30 Sept. 30 Dec. 31 ---- ------- ------- -------- ------- Net Sales 7,465 7,083 6,345 6,530 Gross Profit 3,115 3,351 2,492 3,009 Income (loss) from continuing operations 107 54 (281) 391 Income (loss) from discontinued operations -- -- -- 56 Net income (loss) 107 54 (281) 447 Income (loss) available to common shareholder 104 51 (284) 445 Earnings (loss) per share: Continuing operations Basic 0.01 0.00 (0.01) 0.02 Diluted 0.00 0.00 (0.01) 0.02 Discontinued operations Basic -- -- -- 0.00 Diluted -- -- -- 0.00 Net income (loss) Basic 0.01 0.00 (0.01) 0.02 Diluted 0.00 0.00 (0.01) 0.02 2000 Mar. 31 June 30 Sept. 30 Dec. 31 ---- ------- ------- -------- ------- Net Sales $ 5,860 $ 6,828 $ 6,871 $ 8,491 Gross Profit 2,326 2,796 3,791 3,608 Income (loss) from continuing operations (71) 301 1,132 341 Income (loss) from discontinued operations (56) (95) (702) 154 Net income (loss) (127) 206 430 495 Income (loss) available to common shareholder (130) 183 407 544 Earnings (loss) per share: Continuing operations Basic (0.01) 0.02 0.06 0.02 Diluted (0.01) 0.02 0.05 0.01 Discontinued operations Basic 0.00 (0.01) (0.04) 0.01 Diluted 0.00 (0.01) (0.03) 0.01 Net income (loss) Basic (0.01) 0.01 0.02 0.03 Diluted (0.01) 0.01 0.02 0.02
F-39 MICROTEL INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
Additions Balance at Charged to Transfers to Deductions Beginning of Costs and Discontinued Write-offs of Balance at Description Year Expenses Operations Accounts End of Year ----------- ---- -------- ---------- -------- ----------- Allowance for doubtful accounts: Year ended December 31, 2001 $ 111,000 $ 216,000 $ -- $ (101,000) $ 226,000 Year ended December 31, 2000 191,000 47,000 -- (127,000) 111,000 Year ended December 31, 1999 258,000 36,000 6,000 (109,000) 191,000 =========== ========== ============= =========== ========== Allowance for inventory obsolescence: Year ended December 31, 2001 $ 1,169,000 $ 659,000 $ -- $ (676,000) $1,152,000 Year ended December 31, 2000 1,381,000 893,000 -- (1,105,000) 1,169,000 Year ended December 31, 1999 1,760,000 1,145,000 (1,000) (1,523,000) 1,381,000 =========== ========== ============= =========== ==========
F-40 INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------ ----------- 2.1 Merger Agreement dated December 31, 1996 between XET Corporation, XET 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., XET 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., XET 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 XET Corporation and Arnold Circuits, Inc. dated March 31, 1998 (2) 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) 62 2.17 Letter agreement dated October 19, 1998 between the Registrant and Digital Transmission Systems, Inc. (15) 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. (15) 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 XET Corporation, the Registrant, Bryan Fuller, Tama-Lee Mapalo and Etch Tek Electronics Corporation (6) 2.25 Asset Purchase Agreement dated as of July 31, 1995 by and among BNZ Incorporated, Robert Bertrand, and XCEL Arnold Circuits, Inc. (16) 3.1 Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on July 14, 1989 (15) 3.2 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on October 12, 1989 (15) 3.3 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on October 16, 1991 (15) 3.4 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on April 19, 1994 (15) 3.5 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on March 6, 1995 (15) 3.6 Certificate of Amendment of Certificate of Incorporation of the Registrant, as filed with the Delaware Secretary of State on August 28, 1996 (15) 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 (15) 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 (15) 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 (15) 63 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 21, 2000 (15) 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 (15) 3.14 Certificate of Amendment of Certificate of Incorporation of the Registrant as filed with the Delaware Secretary of State on January 22, 2001 (16) 3.15 Certificate of Amendment of Certificate of Designation of the Registrant as filed with the Delaware Secretary of State on January 22, 2001 (16) 3.16 Amendments to Bylaws effective as of June 1, 2001 (17) 10.1 1993 Stock Option Plan (#) (15) 10.2 Employee Stock and Stock Option Plan (#) (9) 10.3 1997 Stock Incentive Plan (#) (10) 10.4 Amended and Restated 2000 Stock Option Plan (#) (18) 10.5 Employment Agreement dated October 15, 1997 between the Registrant and Carmine T. Oliva (#) (15) 10.6 Employment Agreement dated May 1, 1998 between the Registrant and Graham Jefferies (#) (15) 10.7 Credit and Security Agreement dated as of August 16, 2000 by and among XET Corporation, CXR Telcom Corporation and Wells Fargo Business Credit, Inc. (5) 10.8 Revolving Note dated August 16, 2000 in the principal sum of $3,000,000 made by CXR Telcom Corporation and XET 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 XET 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) 64 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, XET Corporation, CXR Telcom Corporation and HyComp, Inc. dated June 23, 1998 (8) 10.16 Security Agreement between Congress Financial Corporation (Western) and XET 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 XET, 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 XET Corporation and P&S Development (14) 10.21 General Partnership Agreement between XET Corporation and P&S Development (14) 10.22 Lease Agreement between XCEL Arnold Circuits, Inc. and RKR Associates (14) 10.23 Letter dated January 26, 2001 from Wells Fargo Business Credit, Inc. confirming the release of Guarantee dated August 16, 2000 (16) 10.24 Employment Agreement dated as of January 1, 2001 between the Registrant and Carmine T. Oliva (#) (16) 10.25 Employment Agreement dated as of July 2, 2001 between the Registrant and Randolph D. Foote (#) (18) 10.26 Employment Agreement dated as of January 1, 2001 between the Registrant and Graham Jefferies (#) (18) 10.27 First Amendment to Credit and Security Agreement dated as of September 29, 2000 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. (19) 10.28 Second Amendment to Credit and Security Agreement dated as of November 29, 2000 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. (19) 10.29 Third Amendment to Credit and Security Agreement dated as of September 20, 2001 by and between CXR Telcom Corporation, XET Corporation and Wells Fargo Business Credit, Inc. (19) 21.1 Subsidiaries of the Registrant (15) 23.1 Consent of BDO Seidman, LLP, Independent Certified Public Accountants 65 - --------------- (#) 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) (15) Incorporated by reference to Amendment No. 1 to Registrant's registration statement on Form S-1 (Registration Statement No. 333-41580) (16) Incorporated by reference to the Registrant's annual report on Form 10-K for the year ended December 31, 2000 (File No. 1-10346) (17) Incorporated by reference to the initial filing of the Registrant's registration statement on Form S-1 (Registration Statement No. 333-63024) (18) Incorporated by reference to Post-Effective Amendment No. 1 to the Registrant's registration statement on Form S-1 (Registration Statement No. 333-63024) (19) Incorporated by reference to the Registrant's interim report on Form 10-Q for the nine months ended September 30, 2001 (File No. 1-10346) 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on this 1st day of April, 2002. MICROTEL INTERNATIONAL, INC. By: /S/ Carmine T. Oliva ----------------------------- Carmine T. Oliva Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - --------- -------- ---- /S/ Carmine T. Oliva Chairman of the Board, President, April 1, 2002 - ------------------------------------ Chief Executive Officer (Principal Carmine T. Oliva Executive Officer) and Director /S/ Randolph D. Foote Chief Financial Officer April 1, 2002 - ------------------------------------ (Principal Accounting and Randolph D. Foote Financial Officer), Senior Vice President and Assistant Secretary /S/ Robert B. Runyon Secretary and Director April 1, 2002 - ------------------------------------ Robert B. Runyon /S/ Laurence P. Finnegan, Jr. Director April 1, 2002 - ------------------------------------ Laurence P. Finnegan, Jr.
67 EXHIBITS FILED WITH THIS REPORT EXHIBIT NUMBER DESCRIPTION - ------ ----------- 23.1 Consent of Independent Certified Public Accountants 68 EX-23.1 3 microtel_ex23-1.txt EXHIBIT 23.1 CONSENT OF 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 and 333-65528) on Form S-8 of our report dated February 25, 2002, relating to the consolidated financial statements and financial statement schedule of MicroTel International, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. /S/ BDO SEIDMAN, LLP BDO SEIDMAN, LLP Orange County, California April 1, 2002 -----END PRIVACY-ENHANCED MESSAGE-----